Forex Education

Psychological Pitfalls

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:21:00 +0000

Here are some additional psychological pitfalls to avoid. Be wary of
depending on others for your success. Most of the people you are
likely to trust are probably not effective traders. For instance:
brokers, gurus, advisors, friends. There are exceptions, but not
many. Depend on others only for clerical help or to support your
own decision-making process.
You may acquire trading methods or systems from others or from
books, but be sure to test them carefully yourself before trading.
Good systems that you can buy come with computer software that
allows comprehensive historical testing.
Don't blame others for your failures. This is an easy trap to fall into.
No matter what happens, you put yourself into the situation.
Therefore, you are responsible for the ultimate result. Until you
accept responsibility for everything, you will not be able to change
your incorrect behaviors.
Stay long-term oriented. Don't adjust your approach based solely on
short-term performance. Through luck, any horrible system can look
great, even for relatively long periods of time. Conversely, the best
systems have frequent losing periods. If you judge a system by

short-term performance, you are likely to reject the best systems
that exist.
Most traders have such an ego investment in their trading that they
cannot handle losses. Several losses in a row are devastating. This
causes them to evaluate trading methods and systems based on
very-short-term performance. Don't start trading a system based on
only a few trades, and don't lose confidence in one after only a few
losses. Evaluate performance based on many trades and multi-year
results.
Don't underestimate the psychological difficulty of successful
trading. Robert Rotella describes the trauma in The Elements of
Successful Trading: "Trading is one of the most stressful endeavors
imaginable. Taking losses day after day with a strategy that, just a
short while ago was working well, can be a terrible experience.
Trading performance can be consistently volatile with good and bad
times highly magnified. The market can batter your psyche and
gnaw at your soul. These bad experiences will never end as long as
you trade. The more successful you are as a trader, the more
money you will lose."
Keep trading in correct perspective and as part of a balanced life.
Trading is emotionally intensive no matter whether you are doing
well or going in the tank. It is easy to let the emotions of the moment
lead you into strategic and tactical blunders.
Don't become too elated during successful periods. One of the
biggest mistakes traders make is to increase their trading after an
especially successful period. This is the worst thing you can do
because good periods are invariably followed by awful periods. If
you increase your trading just before the awful periods, you will lose
money twice as fast as you made it.
Knowing how to increase trading in a growing account is perhaps
the most difficult problem for successful traders. Be cautious in
adding to your trading. The best times to add are after losses or
equity drawdowns.
Don't become too depressed during drawdowns. Trading is a lot like
golf. All golfers, regardless of their ability, have cycles of good play
and poor play. When a golfer is playing well, he assumes he has
found some secret in his swing and will never play poorly again.
When he is hitting the ball sideways, he despairs that he will never
come out of his slump.

Trading is much the same. When you are making money, you are
thinking about how wonderful trading is and how to expand your
trading to achieve immense wealth. When you are losing, you often
think about giving up trading completely. With a little practice, you
can control both emotional extremes. You'll probably never control
them completely, but at least don't let elation and despair cause you
to make unwarranted changes in your approach.
Other common themes of good traders are self-understanding,
balance and self-control. If you can master yourself, you can master
the futures markets.

Elements of a Successful Trading Plan--Manage Risk

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:20:00 +0000

The final cardinal principle of trading overlays all the rest. It is
Manage Risk. This is as crucial as the others because it is by
managing risk that you limit losses and preserve your capital.
The most important element of managing risk is keeping losses
small, which is already part of your trading plan. Never give in to
fear or hope when it comes to keeping losses small. Preventing
large individual losses is one of the easiest things a trader can do to
maximize his chance of long-term success.
Another element of risk is the market you trade. Some markets are
more volatile and more risky than others. Some markets are
comparatively tame. If you have a small account, don't trade big-
money, wild-swinging contracts like the S&P 500 stock index. Don't
be above using the smaller-sized Mid-America contracts to keep
risk in proportion to your capital. Don't feel you have to trade any

market that might make a move. Emphasize risk control over
achieving big profits.
The biggest risks to commodity traders come from surprise events
that move the markets too quickly to exit at their pre-determined
give-up point. While you can never eliminate these risks entirely,
you can guard against them by advance planning. Pay attention to
the risk of surprise events such as crop reports, freezes, floods,
currency interventions and wars. Most of the time there is some
manifestation of the potential. Don't overtrade in markets where
these kinds of events are possible.
Trade in correct proportion to your capital. Have realistic
expectations. Don't overtrade your account. One of the most
pernicious roadblocks to success is greed. Commodity trading is
attractive precisely because it is possible to make big money in a
short period of time. Paradoxically, the more you try to fulfill that
expectation, the less likely you are to achieve anything.
The pervasive hype that permeates the industry leads people to
believe that they can achieve spectacular returns if only they try
hard enough. However, risk is always commensurate with reward.
The bigger the return you pursue, the bigger the risk you must take.
Even assuming you are using a method that gives you a statistical
edge, which almost nobody is, you must still suffer through
agonizing equity drawdowns on your way to eventual success.
It is better to shoot for smaller returns to begin with until you get the
hang of staying with your system through the tough periods that
everyone encounters. Professional money managers are generally
satisfied with consistent annual returns of twenty percent. If talented
professionals should be satisfied with that, what should you be
satisfied with? Surprisingly, disciplined individuals can do better. It is
realistic for a good mechanical system diversified in the best
markets to expect annual returns in the twenty-five to fifty percent
range.
One last thing about creating a trading plan. Don't be enticed into
trading options as a less risky alternative to futures. While the dollar
risk of buying puts and calls may appear lower and more certain, the
probability of long-term success is remote.
Experienced professional traders, such as Larry Williams, agree:
"Options are a very difficult game because you have to do two
things: You have to beat the market and beat the clock. Perhaps
some sophisticated people can trade options. I've been trading

stocks and commodities successfully for over thirty years, but I don't
trade options because it's too tough."
The best way to trade options is to sell them to small speculators.
That's what options professionals do. However, selling options has
more risk and is more difficult than trading futures. Unless you are
well-capitalized and committed to a full-time career as a
professional options player, stick to futures.
Although the commodity markets appear complex from the outside,
making money trading is quite simple. You use an historically
proven plan that trades with the trend, cuts losses short and lets
profits run. You trade your system in a carefully-selected group of
markets. You start with sufficient capital and pay close attention to
managing risk. Richard Dennis made his $200 million following
precisely this kind of trading approach.

Elements of a Successful Trading Plan--The Markets You Trade

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:19:00 +0000

Another trading plan consideration is the markets you trade. There
are about forty futures markets with sufficient liquidity to allow
prudent speculation. However, it is important to select a good
universe of markets that are appropriate for your account size, risk
level and trading style.
It also important that your market universe be diversified. There are
always a number of big market moves every year, but no one knows
in advance where they will be. If you trade a diversified portfolio,
there is a greater chance that you will catch some of the truly big
moves that make for successful trading.
Another consideration in choosing a market to trade is its historical
propensity to have more big trending moves. Since the trend is your
edge in trading, you can maximize your edge by selecting the most
trendy markets. The following are some of the best trending markets
in various trading sectors.
The currencies are the best trending sector. The currencies to trade
are the Swiss Franc, the German Mark, the Japanese Yen and the
British Pound.
Interest rate futures are also good trending markets. T-Bonds
represent long-term interest rates and Eurodollars are for short-term
interest rates.
In the energy complex, Crude Oil, Heating Oil and Natural Gas are
good trading vehicles.

In the food sector, Coffee, Orange Juice and Sugar are
recommended.
In metals, you can trade Gold, Silver and Copper.
In agriculturals, Corn, Oats, Soybeans and Cotton are the best.
Now you have the outline of an overall plan to trade commodities.
The key to success is to test whatever strategy you intend to apply
before you trade with it. Remember that the conventional wisdom
that you read in books is mostly ineffective. When applied
consistently, most trading methods don't work.
You can't test your plan unless it is specific. The rules must be
precise and objective. Having a thoroughly tested plan is crucial to
maintaining the confidence necessary to keep trading the plan
through the inevitable losing periods that every good system and
every good trader must endure.
The reliability of non-computerized testing is highly suspect. Using
computer software that tests a particular approach or a variety of
approaches is preferred. You must learn the correct way to test and
evaluate trading approaches.

Elements of a Successful Trading Plan--Let Profits Run

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:19:00 +0000

The next part of the plan involves a more pleasant alternative: when
to exit a trade that is profitable. The cardinal principle involved is Let
Profits Run. In other words, stay with your profitable trades as long
as possible because the trend is likely to continue and make your
profits even larger.
Again, this is easy to understand but not so easy to do when real
money is involved. The difficulty is that although your profit may
become much larger if you stay with a trade, it may also decrease
and even disappear. Human nature is such that it values a sure
profit much more highly than the probability of a much higher profit.
Thus, traders are inclined to take their profits too soon. This can be
fatal to long-term success because big profits are necessary to
overcome the inevitable collection of small losses.
There is a good way to let profits run while still guarding against the
possibility that prices will turn around and take away much of your

accumulated profits before the trend actually reverses. It is called a
trailing stop. You include in your plan a method for moving an exit
point along some distance behind your trade. As long as the trend
keeps moving in your favor, you stay in the trade. If the market
reverses direction by the amount of your trailing stop, you exit the
trade at that point. You would also offset your trade and reverse
position if the trend reversed.
One way to set a trailing stop is to protect a certain percentage of
the accumulated profit. That will always insure that you keep some
profit on a good trade.

Elements of a Successful Trading Plan--Cut Losses Short

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:18:00 +0000

If you are following market trends rather than trying to anticipate
them, the next important part of the plan is how to exit trades that
don't work out. Here is where the second cardinal principle comes
in. It is Cut Losses Short.
This is another sensible-sounding concept that is much easier to
acknowledge than actually to execute when real money is on the
line. No one wants to exit a trade with a loss. They don't want to
lose money. More importantly, they don't want to admit they were
wrong. You can always think of many reasons to hold on to a losing
trade. You can hope that the market will suddenly turn around and
give you a profit instead of a loss.
This is another example where successful traders have learned to
do the hard thing. If there is one thing consistent in the stories of
how good traders turned themselves around from being bad traders,
it is their attitude about losses. Professional traders accept that
losses are part of the game. Since the markets are mostly random,
the best trading methods will always have numerous losses.
Professionals do not equate losses with being wrong.
It is precisely because correct trading methods invariably generate
many losses that it is important to keep the individual losses small in
relation to the overall size of the account. In order to keep trading,
you must preserve your capital. If you can keep trading in the
direction of the trend, the big profits will come. However, if you take
too many large losses, your capital will be wiped out before you can
enjoy the big profitable trades.
The laws of probability insure that regardless of your approach, you
will inevitably suffer some long strings of consecutive losses. If you

are risking too high a percentage of your account on each trade,
before long one of these unavoidable losing streaks will blow you
away. Keeping losses to about one percent of your account size is
optimal. With smaller accounts, the percentage will have to be
larger. Five percent on one trade is probably the highest prudent
level of risk.
Because of the randomness in commodity price action, you must
allow the market a certain amount of leeway before giving up on a
trade. In general, you must be willing to risk between $500 and
$1,000 to trade most markets. For smaller accounts, the Mid
America Exchange offers trading with smaller sized contracts that
allow you to trade with lower risk.
While there are more sophisticated ways to decide when to exit a
losing trade, getting out after a loss of a predetermined dollar
amount is as good a way as any. The important thing is to respect
your plan. You can place a stop-loss order with your broker that
instructs him in advance to exit a trade if the market hits your loss
limit. You should always do this to guard against inattention or
changing your mind at the crucial moment.

Elements of a Successful Trading Plan--Trade With The Trend

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:18:00 +0000

Trading with the trend is hard to do because a logical give-up exit
point will be farther away, potentially causing a larger loss if you are
wrong. This is a good example of why so few traders are successful.
They can't bring themselves to trade in a psychologically difficult
way.
You can define the concept of trend only in relation to a particular
time frame. When you determine the trend, it must be, for example,
the two-week trend or the six-month trend or the hourly trend. So an
important part of a trading plan is deciding what time frame to use
for making these decisions.
Do you want to be a long-term trader, also called a position trader?
They hold positions for weeks or months. Do you want to be a short-
term trader who holds positions only for a few days? There are even
very short-term traders called day traders. They watch the markets
during the day and always enter and exit their positions on the same
day.
While it is perhaps easier psychologically to keep the time frame
short, the best results come from longer-term trading. The longer
you hold a trade, the greater your profit can be.
Day trading has great attraction because you can start each day
fresh and sleep comfortably every night with no open positions.
However, it is the most difficult kind of trading there is. Here's how
legendary trader Larry Williams describes it: "Day trading is so
stressful. You're going to end up frying your brain. All the day
traders I talk with are losing money. Besides, it's really hard to come
up with profitable day trading systems."
For the greatest chance of success, your time frame to measure
trends should be at least four weeks. Thus, you should only enter
trades in the direction of the price trend for the last four weeks or
more. A good example of a trend-following entry rule would be to
buy whenever today's closing price is higher than the closing price

of 25 market days ago, and sell whenever today's closing price is
lower than the closing price of 25 market days ago.
When you trade in the direction of this long a trend, you are truly
following the markets rather than predicting them. Most
unsuccessful traders spend their entire careers looking for better
ways to predict the markets.

Elements of a Successful Trading Plan--Getting Started

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:17:00 +0000

The first element of any trading plan is the amount of capital you
intend to invest. This is up to you, but you should understand that
there is a direct relationship between the amount of capital you
commit and your probability of success. The more you invest, the
greater is the likelihood that you will make money.
What is the minimum advisable amount to start with? Most
professionals agree that it takes a minimum of $10,000. If you try to
trade with anything less, what happens to you will be luck. You won't
have the capital necessary to apply proper risk management
principles.
An important thing to keep in mind when deciding how much to
commit initially to commodity trading is that the amount you invest
must be "risk capital." Risk capital is defined as money you can
afford to lose without affecting your standard of living. It should also
be money that you feel comfortable risking. Think of your commodity
account as an investment in a business. Many businesses fail.
That's life. Make sure you won't be so afraid of losing money that it
will affect your ability to make correct trading decisions.
The next part of your trading plan involves how you will make your
actual buying and selling decisions. Under what conditions will you
enter trades? When will you exit your trades? What markets will you
trade?
There are four cardinal principles which should be part of every
trading strategy. They are: 1) Trade with the trend, 2) Cut losses
short, 3) Let profits run, and 4) Manage risk. These building blocks
are so basic and important that I have written a whole book about

them. You should make sure your strategy includes each of these
requirements for success.

Learning To Trade Correctly

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:17:00 +0000

One way to learn how to trade correctly is to find a successful trader
and have him or her teach you exactly how they do it. However,
even if you could find such a person and even if they would be
willing to spend the time with you, it would not necessarily make you
a successful trader. You might not have the capital necessary to
trade the way they do. You would definitely not have the years of
experience they had developing their successful approach. You
might not have the personality profile necessary to execute their
style of trading.
Another way to learn is by trial and error. This is the method of
choice for most people although they probably don't realize it. The
trouble with trial and error in futures trading is that you don't always
take a loss when you trade incorrectly and you don't always make a
profit when you trade correctly. Some of the best methods generate
losses more than half the time. You can take many losses in row
applying a very effective system. On the other hand, if you are
lucky, you can makes tons of money trading quite stupidly.
Psychologists call this random reinforcement, and it makes good
trading impossible to learn through trial and error.
The most obvious and practical way to learn how to trade correctly
is to read books. Find the best books by the most respected authors
and the best traders and learn from them. While this may work in
other areas of life, it is more problematic in commodity trading.
One of the few real secrets in commodity trading is that most of
what you read in books about how to trade does not work in the real
world. Even books by respected authors are full of trading methods
that lose money when put to the test. You may find this shocking,
but almost no commodity authors demonstrate the effectiveness of
the methods they advocate. The best you can hope for are some
well-chosen examples or a few cursory tests.
Learning to trade is a combination of being exposed to ideas plus
practical experience watching the markets on a day-to-day basis.
This is not something that can happen in only a few weeks. On the
other hand, you can become a great trader even with only average
intelligence. Professional trader and money manager Russell Sands
describes the makeup of a successful trader: "Intelligence alone
does not make a great trader. Success is equal parts of intellect,

applied psychology, practice, discipline, bankroll, self-understanding
and emotional control."
Furthermore, to be successful you don't have to invent some
complex approach that only a nuclear physicist could understand. In
fact, successful trading plans tend to be simple. They follow the
general principles of correct trading in a more or less unique way.

Separating the Winners and Losers

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:16:00 +0000

A very high percentage of those who try commodity trading
eventually lose money. The ratio of losers could be as high as
ninety-five percent. However, this does not necessarily mean that
your chance of failure is that high. If, before you begin, you identify
correctly the reasons most people lose, you can improve your odds
significantly.
There is a small percentage of full-time professionals and highly
skilled part-time traders who have learned how to trade correctly
and generate consistent profits year after year. It is not impossible
to determine what separates these people from the crowd.
Because trading well is not easy, you must approach the task very
seriously. This is not something to treat as a hobby. Perhaps, first
and foremost, this is what separates professionals from amateurs.
Professionals look at their trading as a business. There are
substantial profits to be made, and they will not just fall into your lap.

Another crucial difference between successful and unsuccessful
traders is that the successful ones have a plan and they follow it.
Considering the amount of money involved and the potential risks, it
is remarkable how few traders actually have any kind of plan for
their trading. They go from trade to trade applying various ideas
they have learned without any consistency and without any testing.
They make decisions based on hot tips, something they read,
today's news. They are acting from emotion rather than using a
proven methodology. While they may not want to admit it, they are
really gambling in the futures markets rather than trading
intelligently.
Trading by emotion in an unstructured way certainly adds fun and
entertainment to the enterprise. Taking positions on instinct is
exciting, especially when they work out . . . as they often do. But in
the end, this kind of trading will lose money.
Good trading is boring because you've thought out your strategy
and tactics in advance. You trade according to a carefully tested
system or method, not from what moves you emotionally that day.
Two psychological traits that separate winners from losers are
patience and discipline. It is not enough to have a carefully tested
trading plan. You must also be able to follow it religiously. This is
not as easy as you may think.
Every experienced trader knows how great the temptation is to stray
from the plan. There is always what seems to be a good reason.
The true professional can resist this temptation and stick to his plan.
He has the patience to wait for his method to signal a trade and not
take trades he may be emotionally attracted to that are outside his
plan. He has the discipline to follow his plan and take all the trades
that it signals even when there appear to be strong reasons to make
an exception.
This may sound easy, but when real money is on the line--your
money--nothing is more difficult. The kind of trading that really works
is emotionally demanding.
It is hard work to create a winning trading plan. It is hard
psychologically to follow the plan after you create it. This is why so
many people fail. Perhaps you have what it takes to be an
exception.

The Truth About the Commodity Markets

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:16:00 +0000

In order to be a successful trader, you must understand the true
realities of the markets. You must learn how the professionals make
money and what is possible. Most traders come into commodity
trading, lose a substantial portion of their capital and then leave
trading without ever having a correct perception of what good
trading is all about.
For many years college professors have argued that the markets
are both random and highly efficient. If this were true, it would be
impossible to gain an edge on other investors by having superior
knowledge or a superior approach.
Professional traders, who make their living trading rather than
studying the markets from afar, have always laughed at these ivory
tower theories. A good example is George Soros, who has made
billions of dollars from trading and is perhaps the greatest trader of
all time. Here is how he responds to these ivory tower academics:
"The [random walk] theory is manifestly false--I have disproved it by
consistently outperforming the averages over a period of twelve
years. Institutions may be well advised to invest in index funds
rather than making specific investment decisions, but the reason is
to be found in their substandard performance, not in the
impossibility of outperforming the averages."
Mathematicians have conclusively shown the financial markets to be
what are called non-linear, dynamic systems. Chaos theory is the
mathematics of analyzing such non-linear, dynamic systems. The
commodity markets are chaotic systems. Such systems can
produce random-looking results that are not truly random. Chaos
research has proved that the markets are not efficient, and they are
not forecastable. Commodity market price movement is highly
random with a small trend component.
Most beginning traders assume that the way to make money is to
learn how to predict where market prices are going next. As chaos
theory suggests, the truth is that the markets are not predictable
except in the most general way.

In his book, Methods of a Wall Street Master, famous trader Vic
Sperandeo, whose nickname is "Trader Vic," warns: "Many people
make the mistake of thinking that market behavior is truly
predictable. Nonsense. Trading in the markets is an odds game,
and the object is always keep the odds in your favor."
Luckily, as Trader Vic suggests, successful trading does not require
effective prediction mechanisms. Good trading involves following
trends in a time frame where you can be profitable.
The trend is your edge. If you follow trends with proper risk
management methods and good market selection, you will make
money in the long run. Good market selection refers to trading in
good trending markets generally rather than selecting a particular
situation likely to result in an immediate trend.
There are three related hurdles for traders. The first is finding a
trading method that actually has a statistical edge. Second is
following it with consistency. Third is consistently following the
method long enough for the edge to manifest itself on the bottom
line.
This statistical edge is what separates speculating from gambling. In
fact, effective trading is actually like the gambling casino rather than
the gambling customer. Professional trader Peter Brandt explains
successful trading in just this way: "A successful commodity trading
program must be based on the simple premise that no one really
knows what the markets are going to do. We can guess, but we
don't know. The best a commodity trader can hope for is an
approach which provides a slight edge. Like a gambling casino, the
trader must earn his profits by exploiting that edge over an extended
series of trades. But on any given trade, like an individual casino
bet, the edge is pretty meaningless."
Unsuccessful and frustrated commodity traders want to believe
there is an order to the markets. They think prices move in
systematic ways that are highly disguised. They hope they can
somehow acquire the "secret" to the price system that will give them
an advantage. They think successful trading will result from highly
effective methods of predicting future price direction. These deluded
souls have been falling for crackpot methods and systems since the
markets started trading.
Prolific futures trading author Jake Bernstein describes how these
desperate traders are victimized: "Futures trading is ultimately very
simple. Any attempt to make trading complex is a smokescreen. Yet

for self-serving reasons an army of greed-motivated promoters try to
make things complicated. Too many market professionals consider
it their mission in life to obfuscate. Why? Because in so doing they
give the appearance that their efforts are scholarly and important.
They create a need for more information, and then they fill it!"
Books on how to trade commodities are famous for showing a few
well-chosen examples where a described prediction method
previously worked. They never show what would have happened if
you had applied the method religiously for many years in numerous
markets. Those who have tested these methods have found that in
the long run almost all of them don't work. Be wary of any trading
method unless you see a detailed demonstration showing that it has
worked for at least five to ten years in a variety of different markets
using exactly the same rules.
The job of the person who wants to trade commodities rationally and
prudently is to ignore the promises of those promoting pie-in-the-sky
prediction mechanisms and concentrate on finding and
implementing a proven, integrated methodology that follows market
trends.

Making A Trade

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:15:00 +0000

Assuming the trader has consulted his price charts, applied his
trading plan's decision-making criteria and decided to make a trade,
how does this actually take place? He will have a trading account
open with a broker. Believing, for example, that the price of Silver
will be going up in the near future, he calls his broker's trading desk,
and the following conversation might occur.

"XYZ Discount Brokerage.
"This is Bruce Babcock. For account number 22656,
buy one December Silver at the market."
"Buying one December Silver at the market. Please hold."
The broker may enter the order into a computer or she may call the
exchange floor directly. In either case, the order goes to the
exchange trading floor in New York City. Once at the broker's desk
on the edge of the trading floor, a runner may take the order to the
trading pit to be filled or a clerk may transmit it to the pit by hand
signals. In the trading pit, a floor broker executes the order with his
fellow floor traders by a combination of shouting and hand signals.
The process is then reversed as the trade price is communicated
back to the customer.
"Hello. You bought one December Silver at 550."
"I would like to enter my stop order. Good 'til cancelled,
sell one December Silver at 540 stop."
“For account number 22656, selling one December Silver
at 540 stop. Good 'til cancelled."
"Thank you."
The second sell order was an instruction to the broker to
automatically offset the trade if Silver declined in price by $500. This
was a prudent step to limit the loss in case price did not go up as
the trader expected. Placing the order with the broker means that
the trader will not have to monitor the market constantly to be sure
the loss does not get too big if price goes down instead of up. The
trader is not guaranteed to limit his loss to exactly $500, but he will
usually be able offset his position fairly close to the requested price.
The trader can offset his position any time before the Silver contract
expires in December. To the extent Silver's price is more than $5.50
an ounce when he offsets, the trader will profit by $50 for each cent.
To the extent Silver's price is less than $5.50 when he offsets, the
trader will lose $50 for each cent.
To do the same trade with less dollar risk, the trader could have
instructed the broker to place the orders at the Mid America
Exchange, where the Silver futures contract is only one-fifth the size
of the regular New York contract. That would have yielded profits
and losses of $10 for each cent rather than $50.

The Trading Process

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:14:00 +0000

Here are some typical steps in the process of making a commodity
trade including the trader's decision-making process and the
procedures involved in actually placing the trade.
In order to make decisions about when to trade commodity futures,
you must have a source of price data. Many daily newspapers carry
some commodity prices in their financial sections. The Wall Street
Journal has comprehensive commodity price listings. Investor's
Business Daily has both price tables and numerous price charts
All experienced commodity traders prefer to look at price activity on
a chart rather than trying to interpret tables of numbers. In financial
analysis, charts are indispensable for quickly grasping the essence
of historical and recent price action.
The typical commodity chart depicts daily price action as a thin
vertical bar which indicates the day's high and low by the top and
bottom of the bar. The opening and closing prices are shown as tiny
dots attached to the left and right side of the bar. A typical daily
price chart can show up to six months of price action this way.
It is easy to change the bar's time frame from days to weeks or
months and thus show from two to twenty years of historical price
action in the same format. For short-term trading you can change
the bar's time frame to hours or even minutes.
Looking at such bar charts enables a trader to see the recent trend
of prices--whether up, down or sideways--in whatever time frame he
chooses. Following the current trend of prices is a cornerstone of
successful trading.
There are a number of ways to obtain the price charts a trader
needs to analyze the markets. You can make your own using graph
paper. This sounds rather primitive, but some experts recommend it
as a good way to put yourself in close touch with price activity and
monitor risk.

Another source of charts is the printed chart service. There are
about half a dozen of these. They typically mail a booklet of
numerous charts covering all the tradeable markets after the
markets close on Friday. There is space on the charts to update
them daily during the following week until next chart book arrives.
These printed chart books normally have a number of indicators
plotted along with the price action and contain a wealth of additional
information.
For computer owners there are many software programs that create
fancy charts on the computer screen. You can input the price data
manually or, via telephone modem, download comprehensive data
after the markets close for the day. Those with larger budgets can
install a small satellite dish and watch price changes in all the
markets nearly instantaneously as they occur. The software creates
charts dynamically on the computer screen as each trade takes
place on the exchanges. You can put many different charts on the
screen and thus watch numerous markets all around the world in
real time. The cost can range from a few hundred to $1,000 a month
depending on the software and the number of exchanges you
subscribe to.
It is easy to believe that computers can make a big difference in
trading success. Vendors of expensive software will tell you that
since other traders, who are your competition, have expensive
computer setups, you need one too. This isn't really true.
Those who can't trade profitably without a computer probably won't
be helped too much by using a computer. It may actually be
detrimental by causing an increase in trading frequency. While a
computer will not make a bad trader into good one, they are fun to
use, and they do make a trader's life easier.
There are two primary analytic methods for deciding when to take a
futures position: fundamental analysis and technical analysis.
Fundamental analysis involves using economic data relating to
supply and demand to forecast likely future price action. Technical
analysis involves analyzing past price action of the market itself to
forecast the likely future price action.
While there are differences of opinion about the relative merits of
the two approaches, almost all successful traders emphasize
technical analysis. There are a number of reasons for this. First and
foremost is the difficulty of obtaining accurate fundamental data.
While various governments and private companies publish statistics
concerning crop sizes and demand levels, these numbers are gross

estimates at best. With the current global marketplace, even if you
could obtain accurate current information, it would still be impossible
to predict future supply and demand with enough accuracy to make
commodity trading decisions.
Technical analysts argue that since the most knowledgeable
commercial participants are actively trading in the markets, the
current price trend is the most accurate assessment of future supply
and demand. If someone is correct that for fundamental reasons,
prices will likely move up strongly in the future, the commercial
participants who have the greatest knowledge and influence on the
markets should certainly be moving the price upward right now. If
price instead is moving down, a lot of very knowledgeable people
must think price in the future will likely be down, not up.
For this reason, almost all successful speculators learn to follow
price action and not try futilely to predict turning points in advance.
They seek to trade in tune with the large participants who move the
markets.
In his classic book, Technical Analysis of the Futures Markets,
famous analyst John Murphy summarizes the rationale for technical
analysis: "The technician believes that anything that can possibly
affect the market price of a commodity futures contract--
fundamental, political, psychological or otherwise--is actually
reflected in the price of that commodity. It follows, therefore, that a
study of price action is all that is required. By studying price charts
and supporting technical indicators, the technician lets the market
tell him which way it is most likely to go. The chartist knows there
are reasons why markets go up and down. He just doesn't believe
that knowing what those reasons are is necessary."

The History of Trading

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:14:00 +0000

Although the first recorded instance of futures trading occurred with
rice in 17th Century Japan, there is some evidence that there may
also have been rice futures traded in China as long as 6,000 years
ago.
Futures trading is a natural outgrowth of the problems of
maintaining a year-round supply of seasonal products like
agricultural crops. In Japan, merchants stored rice in warehouses
for future use. In order to raise cash, warehouse holders sold
receipts against the stored rice. These were known as "rice tickets."
Eventually, such rice tickets became accepted as a kind of general
commercial currency. Rules came into being to standardize the
trading in rice tickets. These rules were similar to the current rules
of American futures trading.
In the United States, futures trading started in the grain markets in
the middleof the 19th Century. The Chicago Board of Trade was
established in 1848. In the 1870s and 1880s the New York Coffee,
Cotton and Produce Exchanges were born. Today there are ten
commodity exchanges in the United States. The largest are the
Chicago Board of Trade, The Chicago Mercantile Exchange, the
New York Mercantile Exchange, the New York Commodity
Exchange and the New York Coffee, Sugar and Cocoa Exchange.
Worldwide there are major futures trading exchanges in over twenty
countries including Canada, England, France, Singapore, Japan,
Australia and New Zealand. The products traded range from
agricultural staples like Corn and Wheat to Red Beans and Rubber
traded in Japan.
The biggest increase in futures trading activity occurred in the
1970s when futures on financial instruments started trading in
Chicago. Foreign currencies such as the Swiss Franc and the
Japanese Yen were first. Also popular were interest rate
instruments such as United States Treasury Bonds and T-Bills. In
the 1980s futures began trading on stock market indexes such as
the S&P 500.
The various exchanges are constantly looking for new products on
which to trade futures. Very few of the new markets they try survive
and grow into viable trading vehicles. Some examples of less than
successful markets attempted in recent years are Tiger Shrimp and
Cheddar Cheese.
Futures trading is regulated by an agency of the Department of
Agriculture called the Commodity Futures Trading Commission. It

regulates the futures exchanges, brokerage firms, money managers
and commodity advisors.

The Risks of Trading

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:12:00 +0000

Before becoming too excited about the substantial returns possible

from commodity trading, it is a good idea to take a long, sober look

at the risks. Reward and risk are always related. It is unrealistic to

expect to be able to earn above-average investment returns without

taking above-average risks as well.

Most people are naturally risk averse. They don't like to take big

risks, especially financial risks. Perhaps you can relate to the point

of view of humorist Will Rogers: "I am not as concerned about the

return on my money as I am about the return of my money."

Commodity trading has the reputation of being a highly risky

endeavor. It is true that a high percentage of traders eventually lose

money. Many people have lost substantial sums. There is a famous

old line about the best way to make a small fortune trading

commodities . . . start with a big one.

However, commodity trading's reputation as a highly risky activity is

somewhat undeserved. Think of yourself walking into a gambling

casino in Las Vegas or Atlantic City. You decide to play roulette.

The table has a $5 minimum bet and a $5,000 limit, which happens

to be your total bankroll. If you place a $5,000 bet on red, you

should not be surprised if you immediately lost your $5,000. On the

other hand, if you made only $5 bets, you could play for a long time

and probably not lose very much at all.

Commodity trading is the same in the sense that the individual is the

one who decides how he wants to operate. He can make large bets

or small ones. One can trade commodities carefully and risk as little

as $100 or $200 on a trade. You could trade a long time this way

and only lose a few thousand dollars. However, most people are not

that patient. The unfortunates who lose big are those who can't

control themselves. They take big risks in an attempt to get rich

quick. Another way to lose big is blindly to turn your money over to

others to trade such as brokers or money managers.

One of my favorite quotes about trading comes from trading

psychology expert Mark Douglas. As he points out, most of us are

not as willing to take financial risks as we think: "Most people like to

think of themselves as risk takers, but what they really want is a

guaranteed outcome with some momentary suspense to make them

feel as if the outcome had been in doubt. The momentary suspense

adds the thrill factor necessary to keep our lives from getting too

boring."

Anyone who is going to try speculation should be fully aware of and

be comfortable with the risks involved. Managing the risks of trading

is a very important part of any trader's success. Although the risks

can be managed, they can never be eliminated. Remember that the

high returns successful speculators can earn are available only

because the speculator is being paid to take risk away from others.

When a commodity trader buys a futures contract, he will lose if the

price declines. His risk is theoretically limited only by the price of the

commodity going to zero. If he sells, he will lose if the price goes up.

The risk is theoretically unlimited because there is no absolute

ceiling on how high the price of the commodity can go.

In practice, however, the trader can offset his position when the

trade is going against him to limit his loss. While a prudent trader

always has a plan to limit his losses when trades don't work, it is not

possible to guarantee a particular loss limit amount. As a practical

matter, however, you can usually limit losses to within a few

hundred dollars of an intended amount. Very often losses are within

$100 of the amount you project. Only when very unusual things

happen suddenly can losses balloon to thousands of dollars more

than you expected.

A good example of this was what happened to many traders in stock

index futures just before the Gulf War started in 1991. In The New

Market Wizards by Jack Schwager, respected money manager

Monroe Trout describes his ordeal: "January 9, 1991 was the day

that Secretary of State James Baker met with the Iraqi ambassador

in an effort to avert the Gulf War. At the time there was a

reasonable degree of optimism going in to the meeting. Addressing

the press after the meeting, Baker began his statement with the

word 'Regrettably.' A wave of selling hit the stock and bond markets.

I lost about $9,500,000, most of it in about ten seconds." Trout was

holding 700 S&P futures contracts at the time.

One of the trading systems I was using during that period was a day

trading system for the S&P. Although on most days that system

didn't trade at all, it was unlucky enough to be in a long position that

morning. I remember watching Baker's news conference and the

S&P price action at the same time in my office. Even though I had a

$500 stop-loss in the market, my system lost $5,500 per contract on

that day's trade because the market's liquidity evaporated so

rapidly.

The S&P stock index is the most expensive market to trade, and

those with accounts less than $25,000 should probably not be

trading it at all. Therefore, this once in-a-decade event would have

cost about twenty percent or less of a reasonably capitalized

account.

Other kinds of surprise situations that can cause unpredicted losses

are freezes, floods, droughts, government currency interventions

and crop reports. With attention and foresight a trader can sidestep

these risky situations. The best way to control unpredictable risks is

to trade conservatively so larger-than-expected losses are still only

a small percentage of the total account.

Another thing to understand about risk in trading is that you cannot

avoid losses by careful planning or brilliant strategy. Numerous

losses are part of the process. In The Elements of Successful

Trading, Robert Rotella puts it this way: "Trading is a business of

making and losing money. Any trade, no matter how well thought

out, has a chance of becoming a loser. Many people think the best

traders don't lose any money and have only winning trades. This is

absolutely not true. The best traders lose a lot of money, but they

eventually make even more over time."

There is no point trading commodities if you cannot handle the

psychological discomfort of making losing trades. While people tend

to take losses personally as a sign of failure, good traders shrug

them off. The best trading plans result in many losses. Because of

the amount of randomness in market price action, such losses are

inevitable.

If I haven't scared you away so far, let's take a closer look at what

successful commodity trading is all about.

Commodity Trading As An Investment Vehicle

noreply@blogger.com (Unknown) — Fri, 16 Jan 2009 17:10:00 +0000

There are many inherent advantages of commodity futures as an

investment vehicle over other investment alternatives such as

savings accounts, stocks, bonds, options, real estate and

collectibles.

The primary attraction, of course, is the potential for large profits in

a short period of time. The reason that futures trading can be so

profitable isleverage.

For instance, if you had a $10,000 futures trading account, you

could trade one S&P 500 stock index futures contract. If you were

going to buy the equivalent amount of common stocks, you would

currently need about $350,000, thirty-five times as much.

Let's say you decided that the stock market was going to go up. You

could invest $350,000 and buy individual stocks equivalent to the

S&P index, or you could buy one S&P futures contract. Buying a

futures contract is the same as betting that the S&P index will go up.

If you had made your move on the first trading day of September,

1996 and held your position for two weeks, your common stock

position would have been worth about $20,000 more than when you

bought it, a gain of about six percent. Not bad for only two weeks. If

you had taken the futures route, however, you would have made the

same $20,000, which would have been a 200 percent gain on the

$10,000 margin required in your futures trading account.

That is an actual example of the tremendous returns you can earn

in a short period of time trading futures. Of course, you can lose

money just as fast if you trade in the wrong direction. Suppose you

had thought the stock market was about to go down and you had

sold a futures contract instead of buying one. If you had valiantly

held it for two weeks, you would have lost $20,000. That's a good

example of why you must exit your trades quickly if they start to

move against you.

Another advantage of futures trading is much lower relative

commissions. Your commission on that $20,000 futures trading

profit would have been only about $30 to $50. Commissions on

individual stocks are typically as much as one percent for both

buying and selling. That could have been $7,000 to buy and sell a

basket of stocks worth $350,000.

While profits can be large in commodity trading, it is not easy to

make consistently correct decisions about what and when to buy

and sell.

Commodity speculation offers an important advantage over such

illiquid vehicles as real estate and collectibles. The balance in your

account is always available. If you maintain sufficient margin, you

can even spend your current profit on a trade without closing out the

position. With stocks, bonds and real estate, you can't spend your

gains until you actually sell the investment.

As you will see, commodity trading is not particularly complicated.

Unlike the stock market where there are over ten thousand potential

stocks and mutual funds, there are only about forty viable futures

markets to trade. Those markets cover the gamut of market sectors,

however, so you can diversify throughout all important segments of

the world economy.

In futures trading, it is as easy to sell (also referred to as going

short) as it is to buy (also referred to as going long). By choosing

correctly, you can make money whether prices go up or down.

Therefore, trading a diversified portfolio of futures markets offers the

opportunity to profit from any potential economic scenario.

Regardless of whether we have inflation or deflation, boom or

depression, hurricanes, droughts, famines or freezes, there is

always the potential for profit trading commodities.

There are even tax advantages to making your money from futures

trading. Regardless of the actual holding period, commodity profits

are automatically taxed as sixty percent long-term capital gains and

forty percent short-term capital gains. The current maximum capital

gains rate is thirty-three percent, somewhat less than the maximum

rate for ordinary income. To the extent that capital gains tax rates

are reduced in the future, commodity traders will benefit. If a

distinction is re-established so that taxes on long-term gains are

lower than on short-term gains, commodity traders will benefit.

Significant Facts About Forex Currency Pairs

noreply@blogger.com (Unknown) — Fri, 21 Nov 2008 08:55:00 +0000

n the instance of the Euro which is the initial currency it is recognized as the base currency whereas the second currency or the dollar is regarded as the counter or quote currency. What it actually means is in case of these two forex currency pairs, if you want to purchase the currency pair, then you have to buy the Euro currency and sell US dollars at the same time.

Complete Comprehension

Hence, to have success when trading in forex currency pairs, you need to have a full and comprehensive understanding about currency pairs especially when going into a forex trade, you must know what currency you are selling or buying. For success in forex currency pairs, you should have a very complete knowledge about the major currencies such as the US Dollar, Euro, German deutshe mark and so on.

For a very long time, the US dollar has been the major currency throughout the world. It was used as a primary currency to assess other currencies that were being traded on forex and because of this all the currencies needed to be quoted in terms of the how it related to the US dollar.

Because all Forex trading deals in foreign currencies and the full extent of such trade is stupendous and ultimately amounts to well over a trillion dollars, to become a success at trading in them requires a full understanding of forex currencies pairs.

Simultaneous Transactions

As elaborated on, traders purchase and sell currencies by exchanging one type of currency to another and in the hopes of turning a profit from doing in the process. The market quotations as far as Forex is concerned, is specified as forex currency pairs which is denoted as the base currency which is then followed by the quote currency.

Amongst the most usual types of currency pairs are the GBP/USD (British pound vs. US dollar), EUR/USD (Euro vs. US dollar) USD/JPY (US dollar vs. Japanese Yen) and USD/CHF or US dollar vs. Swiss franc.

As far as forex currency pairs go, it is common to have the base currency listed first which is then followed by the quote currency or counter. Moreover, the base currency is a single energetic monetary unit, for instance 1 EUR, 1 USD or 1 GBP, and is implied and not shown necessarily.

Forex Trading System: How to Read a Forex Quote

noreply@blogger.com (Unknown) — Fri, 21 Nov 2008 08:55:00 +0000

Forex is an abbreviated name for "foreign exchange." The Forex market is a non-stop cash market where the currencies of nations are bought and sold, typically via brokers. For example, you buy Euros, paying with U.S. Dollars, or you sell Euros for Japanese Yen.

The value of your Forex investment increases or decreases because of changes in the currency exchange rate or Forex rate. These changes often result from economic and political factors, such as the price of oil or political unrest. To better understand how the exchange rate can affect the value of your Forex investment, this article shows you how to read a Forex quote.

Forex quotes are always expressed in pairs. In the following example, your "pair" of currencies are the U.S. Dollar (USD) and the Euro (EUR). The Forex quote, USD/EUR = 265.50, means that one U.S. dollar is equal to 265.50 Euros. The currency to the left of the / (USD in this case) is referred to as base currency and its value is always 1. The currency to the right of the / (EUR in this case) is referred to as the counter currency. In this example, one USD can buy 265.50 EUR, since it is the stronger of the two currencies.

Because the U.S. dollar is regarded as the central currency of the Forex market, it is always treated as the base currency in any Forex quote where it is one of the pairs. Incidentally, the U.S. Dollar is involved in nearly 90% of all Forex transactions.

In this example, your "pair" of currencies are the Japanese Yen (JPY) and the Euro (EUR). The Forex quote, JPY/EUR= 175.10, means that one Japanese Yen is equal to 175.10 Euros. The currency to the left of the / (JPY in this case) is referred to as base currency and its value is 1. The currency to the right of the / (EUR in this case) is referred to as the counter currency. In this example, one JPY can buy 175.10 EUR, since it is the stronger of the two currencies.

The goal of any Forex trading system is to profit from foreign currency movements. This requires adequate training in basic Forex principles, such as performing a Technical Analysis, using Forex charts and Stop/Loss tools, and keeping up-to-date with economic and political events. In a sense, Forex training never ends.

Forex Trading: Currency Exchange Tutorial

noreply@blogger.com (Unknown) — Fri, 21 Nov 2008 08:54:00 +0000

The currency trading tutorial you're about to receive here will give you a basic idea of how things works. However, you must keep in mind that this tutorial is only scratching the surface. The Forex market is complex, fast-paced and requires serious further study if you wish to trade successfully.

Now that we have that disclaimer out of the way, let's begin by looking at the fundamental unit involved in every trade: the 'currency pair'.

What are currency pairs?

Currency pairs are units of 2 currencies involved in a foreign exchange trade. For example, if you want to sell U.S. dollars to buy Euros, you would look at the exchange rate quoted for the EUR/USD currency pair. Or, if you wanted to sell Euros to buy U.S. dollars, you would look at the exchange rate quoted for the USD/EUR currency pair.

You might thinking: “Aren't they the same thing?” Well, they almost are, but you must look at the correct pair, in the correct order, based on the currency being purchased.

There are two reasons for doing this:

First, it is easier to calculate the results of your exchange in terms of how much of the base currency you can purchase with your 'quote' currency. Your base currency is the currency you intend to buy, and the quote currency is the currency you intend to sell in exchange for the base.

When quoting an exchange rate, your broker will list the base currency first in the pair, and the quote currency second.

This means that when you see a pair like EUR/USD, you are seeing the cost of 1 Euro in U.S. Dollars. An exchange rate quote of EUR/USD = 1.4436 means that 1 Euro costs $1.4436 in U.S. Dollars.

Likewise, the USD/EUR pair indicates the cost of 1 U.S. Dollar in terms of Euros. An exchange rate of USD/EUR = 0.6834 would mean that 1 U.S Dollar costs 0.6834 Euro.

The second reason for looking at the correct buy/sell ordered pair is that you'll want to know the difference between the 'bid price' (exchange rate) and the 'ask price' (what the market makers want for the currency).

The difference between bid price and ask price make up what is known as 'the spread'. Forex traders are subject to spreads when opening or closing trades in the buying position.

A Guide to Desiphering Forex Quotes

noreply@blogger.com (Unknown) — Fri, 21 Nov 2008 08:54:00 +0000

Learning to read forex quotes can be a challenge. They present different information than the standard common stock quotes with which most folks are familiar. Should you determine, after spending plenty of time building a forex trading strategy, that you are ready to enter the forex trading market, then you need to make sure that you know how to properly read the foreign exchange trading quotes.

The first part of the quote lets the forex trader know which currency is involved. The nation listed first is referred to as the base currency. This means the trader currently holds that currency and he is using it to buy the quote currency, sometimes called the trade currency. For example, a quote that reads USD/JPY means that the forex trader currently holds United States Dollars and wants to trade them for Japanese Yen. Forex quotes always begin this way, with the two currencies involved forming what's called the cross.

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

The second part of forex quotes that a person needs to pay attention to is the pricing portion of the quote. To continue the example from above, if the quote reads USD/JPY=117.57, then the trader knows that for every $1 (USD) he trades, he will get 117.57 Japanese Yen (JPY) in return. While that may seem really simple, there are a few more details of these quotes that a forex trader needs to take note of before making the trade.

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

Following the initial line of the quote, which contains the two currencies that form the cross and the exchange rate, is another line of information. This is probably more familiar to common stock traders. Bid prices and ask prices, which make up an integral part of forex quotes, function in forex much the same way. The bid price is the price at which a trader can sell the currency or in other words, that is the price that people are willing to pay for it. The buy price is what a trader will have to pay if he wants to buy the currency. There is usually a difference between the bid and the buy numbers, but it is seldom substantial.

Things to Know to Deal With Foreign Currency Exchange

noreply@blogger.com (Unknown) — Fri, 21 Nov 2008 08:53:00 +0000

The main purpose of the foreign currency exchange market is to make money but it is different from other equity markets. There are various technical terminologies and strategies a trader must know to deal with currency exchange. This article will give an insight into the normal operations in the foreign currency exchange market.

In the Currency Exchange market the commodity that is traded is the foreign currency. These foreign currencies are always priced in pairs. The value of one unit of a foreign currency is always expressed in terms of another foreign currency. Thus all trades incorporate the purchase and sale of two foreign currencies at the same time. You have to buy a currency only when you expect the value of that currency to increase in the future. When it increases in value, you have to purchase the currencies you have bought to make your profit. When you buy or sell a currency then the trade is called open trade or in open position and can be closed only when you sell or buy an equivalent amount of currency.

You must also understand how the currencies are quoted in the currency exchange market. They are always quoted in pairs as USD/JPY. The first currency is the base currency and the second one is the quote currency. The quote value depends on the currency conversion rates between the two currencies under consideration. Mostly the USD will be used as based currency but sometimes euro, pound sterling is also used.

The profit of the broker depends on the bid and the ask price. The bid is the price the broker is ready to pay to buy base currency for exchanging the quote currency. The ask is the price the broker is ready to sell the base currency for exchanging the quote currency. The difference between these two prices is called the spread which determines the profit or loss of the trade.

The bid and ask prices are quoted in five figures. The spread is measured in pip which is defined as the smallest change in price based on the current conversion rates of the currencies under consideration. For USD/JPY if the bid price is 136.50 and ask price is 136.55 then spread is 5 pips and you have to recover the five pips from your profit.

Margin used in the foreign currency exchange terminology refers to the deposit that a trader makes to his account to cover any losses expected in the future. A high degree of leverage is supplied by the brokers to traders for currency exchange. The ratio is 100:1 normally. The brokerage system will calculate the funds required for the current trade and will check for the availability of margin before executing any trade.

Making Sense of Forex Quotes and Pips

noreply@blogger.com (Unknown) — Fri, 21 Nov 2008 08:51:00 +0000

Forex quotes are always listed in pairs, these quotes reflect the exchange rates of the currencies. These pairs look like this: GBP/USD = 1.9714. The currency listed first is known as the base currency (being the base of the trade), the second is called the counter, or quote currency.

All well and good, but what do these numbers mean? The value of the pair is a ratio of one unit of the base currency to it's equivalent in the quote currency. Supposing that you expect the value of the base to rise against the quote, buy the base currency and sell the quote currency, and vice versa. As an illustration, say that the value of the Euro (EUR) is expected to rise against that of the US Dollar (USD). In this case, buying Euros and selling US Dollars at the same time is what you would normally do. This is called going long.

Further, take the Forex quote CHF/USD = 0.8944 as an example. Say that the Swiss Franc (CHF) is expected to fall as compared to the US Dollar (USD). You would sell US Dollars and buy Swiss Francs - this would be going short.

Now, in an actual Forex trading situation, the exchange quotes will be listed at two slightly differing prices, for instance: EUR/USD = 1.7420/1.7425. The left quote is the Bid price, the right is the Asking price. The difference between these is call a Bid/Ask spread, or just Spread for short. The Bid price is the price you can sell your currency for, while the Ask price is the price at which you can purchase the currency.

This spread means that if you were to buy a great deal of currency, then sell it before there had been any change in the relative values of the two currencies, you would lose money on the trade, but the dealer would make money from the trade. A Forex dealer makes their money from the Ask/Bid Spread. They are in a good position, as they stand to make money whether or not you do well with your trade.

Forex quotes are typically quoted to four decimal places - for example:

USD/EUR = 0.6793
EUR/GBP = 0.7468
GBP/CHF = 2.2041
CHF/AUD = 1.0095

The exception to this rule, at least among the major currencies, is the Japanese Yen (JPY) . If the Yen is being quoted, then the Forex quotes are just to two decimal places, as in these examples:

USD/JPY = 109.32
EUR/JPY = 160.95

This is due to the value of the Japanese Yen being only about one hundredth of the value of one U.S. dollar.

A change of 1 in the last decimal place in a quote is named a Pip. this is the smallest amount by which the relative values of two currencies will change. Normally, a Forex brokers commission (the Ask/Bid Spread) will be somewhere between 2 and 5 Pips.

A movement of 20 to 50 Pips is a typical shift in the value of a quoted pair on any given day of Forex trading. The market can sometimes experience greater volatility though, with much larger movements being seen. In November 2007, there were some bigger shifts in the relative values of the US Dollar (USD) and the UK Pound (GBP), when the change in relative value of the two currencies was as much as 200 Pips on some days.

Usually, the daily changes in the Forex market are very small - so trading with very large amounts of money is the way to go if you are to make a sizable profit.

Let's say that the Euro (EUR) is expected to rise against the U.S. Dollar (USD). Based on this, you buy 100 Euros at a quote of EUR/USD = 1.4720/1.4725. A hundred Euros would cost you $147.25. If the Euro rises fifty Pips against the dollar the quote is now EUR/USD = 1.4770/1.4775.

Currency Exchange Agencies in the UK

noreply@blogger.com (Unknown) — Fri, 21 Nov 2008 08:51:00 +0000

Traditionally it was the High Street Bank that was used to transfer currency abroad. Their reputation was second to none and generation after generation used them to Transfer Money Abroad. However in our competitive world we have seen Building Societies command more of the banking market by issuing 'bank accounts'; and also Currency Brokers who originally were formed to transfer large amounts of currency in moments for the Forex Trade Market, have now engulfed the transfer of large funds by being able to beat the processing costs of High Street Banks.

Currency Brokers as do High Street Banks buy their Foreign Currency at wholesale prices. But the one redeeming factor in the brokers favour is the percentage of profit added to each deal. The banks tend to add between 3% to 4%; whereas the Currency Broker will add up to 1%.

For the unsuspecting client this can be all confusing. When the High Street Banks are offering 0% commission why aren't they the best option? There isn't a simple explanation other than saying that over the past 4 decades a commission payment for the transfer of currency has been the normal process. The High Street Banks play heavily on this factor; as I may say do some Currency Brokers.

But ... What we need to establish is what will our money get us when transferred? Forget the 0% commission or any other special offer ... it is the bottom line that counts. If we have £100,000 what will we get?

For those who read this article and have their reservations about using a currency broker allow me to give you a few examples:

Currency Exchange Case Study - In September 2007 Jason and Helen wanted to buy an Apline ski home in Austria. The property was valued at £295,000. They hadn't gone to the bank as they had both heard that the banks weren't always the best choice. A broker will be fully aware of what the banks charge at what rates they work with: Barclays on this day was working with an exchange rate of ¬1.35 / £1; the broker on the other hand could get ¬1.38 / £1. Using Barclays, Jason and Helen would have received ¬398,250; whereas the broker actually secured him ¬407,100 which has a difference of ¬8,850 (£6,400).

Currency Exchange Case Study - In August 2007 there was Ellie from Southampton, she was buying a property in Almeria, Spain. Her transfer was for a villa at £325,000; a superb 5 bedroom villa with sea views. Her bank had frightened her with the exchange rate, so she decided to look elsewhere; fortunately she came to a Currency Broker's website. She was offered an exchange rate of ¬1.39 / £1; we were able to offer ¬1.41 / £1. This meant had she continued with the bank Ellie would have realized ¬451,750 - however fortunately the broker service could manage ¬458,250; saving Jayne ¬6,500 (£4,600)

Currency Exchange Case Study - Paul and Debbie from Bootle in Cheshire had taken 9 months to purchase a villa in Pescara in the Abruzzo region of Italy for ¬650,000; January 2008. Sadly when a house purchase takes so long there can be fluctuations in the currency rate, and on this occasion it wasn't in Paul and Debbie's favour. So it became even more important to save on the currency exchange. Had they gone to a bank they would have paid ¬8,100 more than what they paid a Currency Broker. They successfully managed to save them £6,090.

I hope that showing these examples have helped in your understanding. Do not be afraid to get a quote from an Online Currency Broker; they can provide testimonials should you be concerned.

Each and every step of the process is done through a traditional bank; and account is setup for each transaction and such transaction history can be supplied should you need it.

Forex Secrets. Delusion No1. Forex Currency Rate and Economic Factors Impact on Exchange Rate

noreply@blogger.com (Unknown) — Fri, 21 Nov 2008 08:51:00 +0000

The delusion conceptually propounds that intraweek and intraday FOREX currency quotes movement is governed by either improvement or by deterioration of the state’s economic situation. But in reality, even in case the actual Forex news are superior to the estimated one, the FOREX quotes up/down movement is of 50/50 probability.

This statement is thoroughly important. Once the job of Forex trader is gambling on FOREX exchange rates differential (FOREX pairs up/down movement), the following is to be realized to obtain faultless profit:

FOREX pairs pricing mechanism (say at point X where you are completing the market analysis)

Factors imparting growth/decline to FOREX rates (up/down from point X).

Thus, having understood the FOREX ratesfactors effective at the extra-exchange (book-maker) FOREX market and the given currency motive factors, a trader must possess distinct knowledge of whether to buy or to sell the given currency pair.

So, what are these factors?

FOREX student suggest unambiguous interpretation of factors responsible for the price formation and the fluctuations there of:

Forex rate constitutes a demand-supply balance for a given goods (currency).

Any violation of this balance, (for instance, in case where the estimated news is in disagreement with the issued official one), results in the FOREX rates reciprocation in chase of a new demand-supply balance. Poor demand brings about decline in a certain currency rate, with a high demand leading to the growth of the latter. The situation continues as long as the currency buy/sell demand comes to balance at another level or at another point.

Referring to the B. Williams (“Trading Chaos 2” Chapter 1 “The market is what you are thinking of it”):

Each world market is dedicated to distribute or share limited amount of something… among those desirous to obtain it most of all. The market affects it by way of finding out and identifying the exact price? Underlying the buyer’/sellers’ power absolute equilibrium point.

The above point is readily established by stock, futures, bonds, FOREX and options markets, be it either via an open auction or by virtue of a computerized facility. Markets spot this point prior to any misbalance being detectable by You or by me or even by traders at the exchange floor.

With this scenario holding true – and it really does – we are in position to jump at certain simple yet important conclusions as regards the information being circulated through the market and enjoying doubtless acceptance”.

Thomas Demark was more laconic in “Technical analysis - an emerging science”:

“Price movement is governed by demand and supply. Should demand exceed supply, there’s a price rally and if visa versa, there’s a price decline. All economists do share these underlying principles”.

Hence, the role of fundamental analysis for FOREX market is readily apparent.

In scholar fiction one will discover roughly the following explanation, persistently wandering from book to book, from site to site and suggesting attaining successful trading at FOREX market by way of scrutinizing the country’s economic fundamental data, viz. by tracking the factors reflective of the country’s economy condition as below:

State economy condition dynamics indicators (GDP, trade & payments balance, current account, industrial production, etc. It is knowledge, that the higher the above indicators – the faster the economic and the currency price growth);

Stock indices, via average arithmetic index of the country’s securities market condition and dynamics. E.g.: 0.3% daily DJI growth in the USA means that this certain day the shares of 30 leading US companies, being pictured by DJU, went 0.3% more expensive. By similarity, DAX30 is the major German index, incorporating the price of shares of the country’s 30 leading companies.

The country’s interest rate, since the higher the rate, the greater number of investors is eager to invest into the country’s economy and hence into national currency strength.

Rate of inflation (the higher the rate, the quicker the National Bank will hike the interest rate). With this assumption, the CPI constitutes a key factor.

Money supply growth in domestic market, which fact brings about the inflation, leading to the interest rate hike.

The country’s gold and currency reserve assets.

Variation dynamics correlation of: balances of payment, trade balance, state budget, gross domestic product (GDP), etc.

Trade and industry dynamics (industrial production, industrial orders, DGO, capacity utilization, retail sales, etc.)

Construction statistics (construction spending, new home sales, housing under construction, building permits, etc.)

Labor statistics (unemployment rate, new jobs, etc.)

Society investigations (consumer confidence, consumer sentiment, purchase managers and service managers sentiment, etc.)

To be considered additionally are the country’s political stability and tranquility (clearly, any political, natural and other cataclysms are sure to turn investors nervous making them withdraw the investments from the country, thus weakening its national currency). And with the currency being the national economy derivative, changes in economic data will inevitably result in the above currency rate movement.

Conclusions:

Progress in economy results in the currency exchange rate rally.

Decrease in economic indicators leads to the national currency rate decline.

To sum it up, critical economic and political news (whose calendar is issued in advance and is familiar to any trader) constitute a standing factor giving rise to misbalance and causing the currency rate fluctuations.

In anticipation of important economic and political news FOREX pair crawl to the rates as inspired by the estimates (“rumored trade”), whereas upon actual news there occurs a pulse motion of FOREX pairs in accordance with the scheme below;

Forex rate grows if actual news are better than the estimated one;

Forex rate declines if actual news are worse than the estimated one.

The Burgeoning Foreign Currency Exchange Market

noreply@blogger.com (Unknown) — Fri, 21 Nov 2008 08:50:00 +0000

The Foreign Exchange market (Forex) is truly the largest exchange in the world. The amount of dollars traded on the Forex market on a daily basis is in the trillions. Most of this currency trading takes place between between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. However, individual traders are starting to get in the mix, using internet discount brokers such as Etrade to participate in the currency exchange market.

There is no central exchange or meeting place for the Forex. All trading is done over computer networks between traders in different parts of the world. Also, unlike the stock market, the foreign exchange market is open 24 hours per day, because it is a global market. A trader in Hong Kong may be exchanging currency with a trader in Australia while an American trader is sleeping.

There are several different markets within the Forex exchange system. First, there is the spot market. The spot market deals with trades that are based on the current values of currencies. One person trades a certain amount of currency with another trader in exchange for an equivalent amount of a different foreign currency. Spot trades take two days for settlement.

The other two types of foreign exchange markets are the forward and futures markets. In the forward market, the buyer and seller agree on an exchange rate and a transaction date is set for a specific time in the future, at which point the trade is executed regardless of what the rates are at that time. On the futures market, futures contracts are bought and sold based upon a standard contract size and maturity date. Futures trades take place on public commodities markets.

A currency quote is listed differently from a stock quote. Stocks are quoted in terms of price per share. Currency exchange prices are listed as either a direct quote or an indirect quote. A direct quote uses the domestic currency as the base and the foreign currency as the quote. An indirect quote works the exact opposite way.

So, if you were to view a quote in an American newspaper that said USD/JPY = 75, that would be a direct quote and would mean that $1 of U.S. currency is equal to 75 Japanese yen. If that same quote appeared in that same American newspaper and was listed as JPY/USD = 0.013, that would be an example of an indirect quote.

As with stock prices, currency exchange prices have a bid and ask spread. The current bid is the amount of foreign currency that someone is willing to spend in order to buy $1 U.S. base currency. The ask is the amount of foreign currency that someone is demanding in order to be willing to sell $1 U.S. base currency.

The Forex markets are generally considered to be less volatile than then stock market because within the course of a trading day, it is highly unlikely for the value of a single currency to move all that much. With equities, it is not uncommon for a trader to buy a stock, and then a negative press release causes the stock to lose considerable value within a day or even a couple of hours. Sometimes, however, the Forex can be volatile. If there is a significant economic or political development with a certain country, the currency of that country can lose value quickly.

There is a higher degree of liquidity on the currency exchange then there is on the stock exchange because the currency exchange is open 24 hours per day and because the very nature of currency exchange is to bet on when certain currencies will go up or down; so, it is easy to sell your position in a certain currency even when the value of that money is going down. A plummeting stock is more difficult to unload, but not impossible.

The Trillion Dollar Currency Exchange Market

noreply@blogger.com (Unknown) — Fri, 21 Nov 2008 08:50:00 +0000