Risk and Reward in Forex

Risk and Reward in Forex

Traders have no business trading if risk/reward analysis is not at the top of their concerns. If a trader has no idea of the potential profit return on any given trade relative to the initial risk of taking the trade at all, his long-term profitability is in question.
Of course, for every trader, the best case scenario would be to minimize the first and maximize the second. But how do you get a handle on the potential reward in any investment and the risk you might be taking on?
Technical analysis – what’s popularly called charting – can help traders evaluate both risk and reward. The technical indicators used to read the charts will give you the simplest kind of picture you can get of a currency’s performance.
Simply by placing your support and resistance and by looking at the past performance of a currency you can get a record of its closing price over time. Once all of the elements are in place for an analysis, you can calculate your pips difference and verify, depending on the trend of the market, if you will make more profit or loss and if it is after all worth the position.
For example, if the market is in a bullish situation, you need to have a higher pips difference between your buy-stop order and your resistance price than between your support price and your buy-stop order so that your reward will be maximize and your risk will be minimize.
In each case, upside (bullish) or downside (bearish), the tools of technical analysis will tell you important things about risk and reward. Don’t trade without them.

How to manage your risk in forex

How to manage your risk

Risk Management

Once you have the facts it is decision time. You can choose to do nothing or seek to reduce the exposures or to hedge them in whole or in part. The unforgivable sins are to fail to consider the risks or fail to act on any decisions.
The risk culture of your business is critical and must be established at the most senior level. Above all it calls for honesty. Too often individuals are criticized for decisions that, at the time, were in tune with the organization’s perceived appetite for risk. But it is never easy to set down effective guidelines and the range of exposures for even a simple transaction can be extensive.
For example, an exporter needing to borrow to finance a sale in foreign currency may have to consider counterparty credit risk, funding risk and interest rate risk. The permutations are endless and the costs of hedging transactions to reduce or eliminate every possible exposure could potentially swallow any profit from a deal.
While losses are likely to be quantitative, the potentially infinite number of risk combinations means that the skills needed to make good decisions are usually qualitative. Even a computer programmed to consider every conceivable permutation of risks needs to be told what level of exposure is acceptable. Any program is only as good as the parameters and data fed into it by people who have themselves been conditioned by experience.
But what of the improbable, the wholly unexpected or the never-seen-before?
Effective risk management requires thinking the unthinkable. This does not in any way lessen the great value of the many sophisticated risk-management systems available. The problems come if people start to think of them, and the models they are based on, as infallible.
It is also common for the development of control systems to come after any new risk-related products. Be careful not to bet the business until the exposure is known. To be in business you must make decisions involving risk. However sophisticated the tools at your disposal you can never hope to provide for every contingency. But unpleasant surprises should be kept to a minimum.
 

Ask yourself...
1- Can the risks to your business be identified, what forms do they take and are they clearly understood - particularly if you have a portfolio of activities?
2 - Do you grade the risks faced by your business in a structured way? 

3 - Do you know the maximum potential liability of each exposure? 

4 - Are decisions made on the basis of reliable and timely information?

5 - Are the risks large in relation to the turnover of your business and what impact could they have on your profits and balance sheet?
6 - Over what time periods do the risks exist? 7 - Are the exposures one-off or are they recurring?
8 - Do you know enough about the ways in which you exposures can be reduced or hedged and what it would cost including the potential loss of any upside profit?
9 - Have trading and risk-management functions or decisions been adequately separated? Where to place stops
 

We stop out of a trade when we no longer want to hold onto that particular position. The question that arises is: WHY do we want to get out of that trade?
There can be 2 reasons for stopping out of a trade. EITHER the market tells us that our intrinsic View or Directional Assessments itself was wrong. OR we stop out of a trade (even if we still believe in our basic Bullish or Bearish reading) because we think we can establish another position at a better level than the previous one.
The effort should be to choose a meaningful SL which is neither too close to the entry to get activated soon after entry (only to have the market go back in the original direction thereafter), nor so far away from the entry that we have no time or space left for follow up action.
The difficult part about the paragraph above is that it requires us to have a Trading Plan or Strategy and to choose our Entry much more carefully than we tend to do, in accordance with that plan.
Follow through action required we come back to the reasons for wanting to stop out. In the first case, when our directional reading has been proved wrong, we should look to enter into a trade in the opposite direction - a case of Stop-and-Reverse (SAR). It needs to be pointed out here that it is NOT necessary to SAR at the same instance and level all the time. If you are an intra-week (or longer) trader, you can enter into a reverse trade after stopping out of the original trade, allowing yourself time to reformulate your strategy.

Books in forex

Beige Book - District banks have been printing summaries of the economic conditions in their districts since 1970. Initially this “Red Book” was prepared for policymakers only and was not intended for public consumption. It was made public in 1983. To mark this change, the color of the cover was changed and the publication became known as the Beige Book. The Beige Book is released two weeks prior to each FOMC meeting eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its district through reports from bank and branch directors and interviews with key businessmen, economists, market experts, and other sources. The Beige Book summarizes this information by district and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis. The report is primarily seen as an indicator of how the Fed might act at its upcoming meeting

Green Book - The green book is prepared by staff members at the Board of Governors five days in advance of an FOMC meeting. It presents the staff’s interpretations on several economic and financial variables and is divided into two parts. The first part of the green book describes and interprets significant developments in U.S. economic activity, prices, interest rates, flows of money and credit, and the international sector that have occurred in recent months or quarters. This section also presents forecasts of a number of variables for the next six to eight quarters. The second section of the green book provides additional information on recent developments. It describes trends in employment, production, and prices and the factors influencing them. This section also includes sector-by-sector analyses, commenting on such areas as housing, motor vehicle production, inventories, and spending by federal, state, and local governments. It reviews a range of developments in domestic financial markets, including credit patterns for banks, other financial intermediaries, non-financial businesses, and consumers. Finally, international developments are reviewed, with commentary on trade statistics, international financial transactions, foreign exchange markets, and
economic activity in a number of foreign countries.
 

Blue Book – A day after the green book, the FOMC members receive the blue book. All blue books present the Board staff’s view of monetary and financial developments for the few months surrounding the meeting in question. Each book first reviews recent developments in policy variables, including the Federal Funds rate, reserve measures, and the monetary aggregates. The blue book also presents two or three alternative policy scenarios for the upcoming inter-meeting period. The blue books written for the February and July meetings contain two extra sections to assist the Committee in its preparation for the Humphrey-Hawkins testimony. The first of these sections provides longer term simulations, covering the next five or six years. This section also offers estimates of how different assumptions about factors such as fiscal policy, the equilibrium unemployment rate, or the speed of adjustment to changed inflationary expectations would affect the predicted outcome. The second additional section in the February and July blue books sets out alternative annual ranges for growth of the monetary aggregates.
 

Red Book - Published every Tuesday, this report presents the detail sales of some 30 US stores produce the previous week and compared to the previous month. It is always a forecast which counts for the request of the households but a rather volatile measurement taking into consideration the more or less significant months for the detail business.
Durable goods order – The durable goods orders reflect the new orders placed with domestic manufacturers for immediate and future delivery of factory hardwoods. Orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders. The data not only provides insight to demand for things like refrigerators and cars, but also business investment going forward. If companies commit to spending more on equipment and other capital, they are obviously experiencing sustainable growth in their business. Increased expenditures on investment goods set the stage for greater productive capacity in the country and reduce the prospects for inflation. It tells investors what to expect from the manufacturing sector, a major component of the economy and therefore a major influence on their investments.

Existing home sales – Number of previously constructed homes with a closed sale during the month. Existing homes (also known as home resales) are a large share of the market than new homes and indicate housing market trends. This provides a gauge of not only the demand for housing, but the economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Even though home resales don’t always create new output, once the home is sold, it generates revenues for the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items home buyers might purchase. In a more specific sense, trends in the existing home sales date carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.
 

Factory orders – Dollar level of new orders for manufacturing durable goods and nondurable goods. It gives more complete information than durable goods orders which are reported one or two weeks earlier in the month. The orders data show how busy factories will be in coming months as manufacturers work to fill those orders. This report provides insight to the demand for not only hard goods such as refrigerators and cars, but nondurables such as cigarettes and apparel. In addition to new orders, analysts monitor unfilled orders, an indicator of the backlog in production. Shipments reveal current sales. Inventories give a handle on the strength of current and future production. All in all, this report tells investors what to expect from the manufacturing sector, a major component of the economy and therefore a major influence on their investments.
 

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. Investors need to closely track the economy because it usually dictates how investments will perform. The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. GDP components like consumer spending, business and residential investments and price (inflation) indexes illuminate the economy’s undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.
Housing starts – Housing starts measure the number of residential units on which construction is begun each month. Home builders don’t start a house unless they are fairly confident it will sell upon or before its competition. Changes in the rate of housing starts tell us a lot about demand for homes and the outlook for the construction industry. Furthermore, each time a new home is started, construction employment rises and income will be pumped back into the economy. Once the home is sold, it generates revenues for the home builder and a myriad of consumption opportunities for the buyer. Refrigerators, washers and dryers, furniture and landscaping are just a few things new home buyers might spend money on, so the economic “ripple effect” can be substantial especially when you think of it in terms of a hundred thousand new households around the country doing this every month. Trends in the housing starts date carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies. Commodity prices
such as lumber are also very sensitive to housing industry trends.

IFO Business Climate in industry and trade – The IFO Business Climate Index is a widely early indicator for economic development in Germany. Every month the IFO Institute surveys more than 7,000 enterprises in west and east Germany on their appraisals of the business situation (good/ satisfactory/poor) and their expectations for the next six months (better/same/worse). The replies are weighted according to the importance of the industry and aggregated. The percentage shares of the positive and negative responses to both questions are balanced and a geometric mean is formed from the balances divided according to east and west Germany. The series of balances thus derived are linked to a base year (currently 1991) and seasonally adjusted.
 

Import and export prices – The prices of goods that are brought in the United States but produced abroad and the prices of goods sold abroad but produced domestically. These prices indicate inflationary trends in internationally traded products. Changes in import and export prices are a valuable gauge of inflation here and abroad. Furthermore, the data can directly impact the financial markets such as bonds and the dollar. Inflation leads to higher interest rates and that’s bad news for stocks as well. By monitoring inflation gauges such as import prices, investors can keep an eye on this menace to their portfolio.
 

Industrial production and capacity utilization – The Index of Industrial Production is a chain- weight measure of the physical output of the nation’s factories, mines and utilities. The capacity utilization rate reflects the usage of available resources. Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. Industrial production show how much factories, mines and utilities are producing. Since the manufacturing sector accounts for one-quarter of the economy, this report has a big influence on market behaviour. The capacity utilization rate provides an estimate of how much factory capacity is in use. If the utilization rate gets too high (above 85%) it can lead to inflationary bottlenecks in production. The Federal Reserve watches this report closely and sets interest rate policy on the basis of whether production constraints are threatening to cause inflationary pressures.
 

International Trade – Measures the difference between imports and exports of both tangible goods and services. The level of the international trade balance, as well as changes in exports and imports, indicate trends in foreign trade. Changes in the level of imports and exports, along with the difference between the two (the trade balance) are a valuable gauge of economic trends here and abroad. Furthermore, the data can directly impact all the financial markets, but especially the foreign exchange value of the dollar. Imports indicate demand for foreign goods and services here and the US exports show the demand for US goods in overseas countries. The dollar can be particularly sensitive to changes in the chronic trade deficit run by the United States, since this trade imbalance creates greater demand for foreign currencies. This report gives a breakdown of US trade with major countries as well, so it can be instructive for investors who are interested in diversifying globally. For example, a trend of accelerating exports to a particular country might signal economic strength and
investment opportunities in that country.

Institute for Supply Management (ISM) – Formerly known as the NAPM. Change was effective in January 2002. ISM is a composite diffusion index of national manufacturing conditions. Readings above 50% indicate an expanding factory sector. Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic date like the ISM, investors will know what the economic backdrop is for the various markets. The ISM gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provides insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report which helps it to determine the direction of interest rates when inflation signals are flashing in these data.
 

Jobless Claims – A weekly compilation of the number of individuals who filed for unemployment insurance for the first time. This indicator, and more importantly, its four-week moving average, portends in the labor market. Jobless claims are an easy way to gauge the strength of the job market. The fewer people filling for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy. Nearly every job comes with an income which gives a household spending power. Spending greases the wheels of the economy and keeps it growing, so the stronger the job market, the healthier the economy. By tracking the number of jobless claims, investors can gain a send of how tight the job market is. If wage inflation threatens, it’s a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events. The lower the number of unemployment claims, the stronger the job market is, and vice versa.
 

Leading Indicators – A composite index of ten economic indicators that typically lead overall economic activity. Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the index of leading indicators, investors will know what the economic backdrop is for the various markets. The index of Leading Indicators is designed to predict turning points in the economy such as recessions and recoveries. Incidentally, stock prices are one of the leading indicators in this index.
Money supply – The monetary aggregates are alternative measures of the money supply by degree of liquidity. Changes in the monetary aggregates indicate the thrust of monetary policy as well as the outlook for economic activity and inflationary pressures. The monetary aggregates (know individually as M1, M2 and M3) used to be all the rage a few years back because the data revealed the Fed’s (tight or loose) hold on credit conditions in the economy. The Fed issues target ranges for money supply growth. In the past, if actual growth moved outside those ranges it often was a prelude to an interest rate move from the Fed. Today, monetary policy is understood more clearly by the level of the federal funds rate. Money supply fell out of vogue in the nineties, due to a variety of changes in the financial system and the way the Federal Reserve conducts monetary policy. The Fed is working on some new measures of money supply, and given the way economic indicators ebb and flow in popularity, don’t be surprised if the monetary aggregates make a comeback in the future.

New home sales – The number of newly constructed homes with a committed sale during the month. The level of new home sales indicates housing market trends. This provides a gauge of not only the demand for housing, but the economic momentum. People have to be feeling comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as new home sales, investors can gain specific investment ideas as well as broad guidance for managing a portfolio. Each time the construction of a new home begins, it translates to more construction jobs, and income which will be pumped back into the economy. Once the home is sold, it generates revenues for the home builder and the realtor. Trends in the new home sales data carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.
 

Nonfarm Payroll – The employment situation is a set of labor market indicators. The unemployment rate measures the number of unemployed as a percentage of the labor force. Nonfarm payroll employment counts the number of paid employees working part-time and full-time in the nation’s business and government establishments. The average workweek reflects the number of hours worked in the nonfarm sector. Average hourly earnings reveal the basic hourly rate for major industries as indicated in nonfarm payrolls. This is without a doubt the economic report that move the markets the most. The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they’re getting paid and how many hours they are working. These numbers are the best way to gauge the current state and future direction of the economy. They also provide insight on wage trends, and wage inflation is high on the list of enemies for the Federal Reserve. By tracking the jobs data, investors can sense the degree of tightness in the job market.
 

Personal Income – Personal income is the dollar value of income received from all sources by individuals. Personal outlays include consumer purchases of durable and nondurable goods and services. The income and outlays data are another handy way to gauge the strength of the economy and where it is headed. Income gives households the power to spend and/or save. Spending greases the wheels of the economy and keeps it growing. The consumption (outlays) part of this report is even more directly tied to the economy, which we know usually dictates how the markets perform. Consumer spending accounts for two-thirds of the economy, so if you know what consumers are up to, you’ll have a pretty good handle on where the economy is headed. Needless to say, that’s a big advantage for investors.
 

Philadelphia Fed Survey – A composite diffusion index of manufacturing conditions within the Philadelphia Federal Reserve district. This survey is widely followed as an indicator of manufacturing sector trends since it is correlated with the ISM survey and the index of industrial production. The Philly Fed survey gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on market behaviour. Some of the Philly Fed sub-indexes also provide insight on commodity prices and other clues on inflation.

Purchasing Managers Index (PMI) - The National Association of Purchasing Managers (NAPM), now called the Institute for Supply Management, releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders. It is divided into manufacturing and non-manufacturing sub-indices.
 

Producer Price Index (PPI) – PPI is a measure of the average price level for a fixed basket of capital and consumer goods paid by producers. The PPI measures price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output. Inflation at this producer level often gets passed through to the consumer price index (CPI). The relationship between inflation and interest rates is the key to understanding how data like the PPI influence the markets and your investments.
Retail Sales – Retail sales measure the total receipts at stores that sell durable and nondurable goods. Retail sales not only give you a sense of the big picture, but also the trends among different types of retailers. Perhaps auto sales are especially strong or apparel sales are showing exceptional weakness. These trends from the retail sales date can help you spot specific investment opportunities, without having to wait for a company’s quarterly or annual report.
 

Retail Prices Index (RPI) - The RPI is the UK’s principal measure of consumer price inflation. It is defined as an average measure of change in the prices of goods and services brought for the purpose of consumption by the vast majority of households in the UK. It is complied and published monthly. Once published, it is never revised. RPI includes date on food and drink, tobacco, housing, household goods and services, personal goods and services, transport fares, motoring costs, clothing and leisure goods and services. Measures of inflation are vital tools for economists, business and government. The Bank of England’s Monetary Policy Committee sets UK interest rates on the basis of a target figure for inflation set by Chancellor of the Exchequer. Wage agreements, pensions and change in benefit levels are often linked directly to the RPI. Utility regulators impose restrictions on price movements based on the RPI.
 

Trade Balance - The balance of trade is a statement of a country’s trade in goods (merchandise) and services. It covers trade in products such as manufactured goods, raw materials and agricultural goods, as well as travel and transportation. The balance of trade is the difference between the value of the goods and services that a country exports and the value of the goods and services that it imports. If a country’s exports exceed its imports, it has a trade surplus and the trade balance is said to be positive. If imports exceed exports, the country has a trade deficit and its trade balance is said to be negative.
The balance of trade sometimes refers to trade in goods only. The term should not be confused with the balance of payments, which is a much broader statement of international monetary flows, including not only trade in goods and services, but also investment income flows and transfer payments. A positive or negative balance may simply reflect a change in the relative cost of domestic products compared with international prices. For industries that rely heavily on exports, like the auto sector, a positive balance of trade may reflect a higher international demand, which can mean more jobs in that industry.

Unemployment rate - Percentage of employable people actively seeking work, out of the total number of employable people determined in a monthly survey by the Bureau of Labor Statistics. An unemployment rate of about 4% - 6% is considered “healthy”. Lower rates are seen as inflatio- nary due to the upward pressure on salaries; higher rates threaten a decrease in consumer spen- ding.

Trade Intervals in Forex

Trade Intervals

The chart software will list, for each interval, an open price, a low price, a high price and a close price. The open price is the price at the beginning of the period. The low price is the lowest price achieved during the period while the high price is the highest price achieved during the period. The close price is simply the last price achieved during the period.
You can choose the time interval that you would like to trade under. Possibilities are: 1 minute, 5 minutes, 15 minutes, 30 minutes, 60 minutes, 4 hours, daily and week.
The larger the time interval is, the wider the price movement will be. For example, you should expect to see a higher price gain from a trade entered using daily charts than you would normally see when using 15 minutes charts. The daily chart based trade may take weeks or even months to run its course On the other hand, the 30 minutes charts will have higher profits then the 15 minutes charts. However, you can get more profits in trading more trades using the 15 minutes charts.

Types of Forex Orders

Types of Forex Orders

Market Order – An order where you can buy or sell a currency pair at the market price the moment that the order is processed.
Example: If you are looking to place an order for JPY when the dealing price is 104.00/05, a market order will request to buy JPY at 104.00 or will request to sell JPY at 104.05.
 

Entry order – An order where you can buy or sell a currency pair when it reaches a certain price target. In theory, this can be any price. You can set an entry order for the low price of a time period or the high price of a time period.
“I want to buy this currency pair at a certain price, if it never reaches that price, I don’t want to purchase the pair”.
The entry order allows you to choose a price and place an order to buy at that price.
 

Stop Order - An order that becomes a market order when a particular price level is reached and broken. A stop order is placed below the current market value of that currency.
 

Example: If you have an open buy JPY position, which you bought at 104.00 and you want to set a stop order in case JPY’s value starts to depreciate (to stop your loss). Since the JPY’s currency appreciates when the dealing rate moves from 104.00 closer to parity with the USD (102 JPY/ 1USD), a movement in the opposite direction would necessitate a stop order. For instance, you could set a stop order rate to sell JPY at 103.50, thus closing your position at a 50-pip loss.
 

Limit Order - An order that becomes a market order when a particular price level is reached. A limit order is placed above the current market value of that currency.
 

Example: If you have an open buy JPY position, which you bought at 104.00, and you want to set a limit order to protect your profit, you would set a limit order at a number, which indicates that JPY has appreciated, such as 104.5. When the market reaches 104.5, your position will automatically be closed, resulting in a 50-pip gain.

OCO Order – One Cancels Other. An order placed so as to take advantage of price movement, which consists of both a Stop and a Limit price. Once one level is reached, one half of the order will be executed (either Stop or Limit) and the remaining order canceled (either Stop or Limit). This type of order would close your position if the market moved to either the stop rate or the limit rate, thereby closing your trade, and, at the same time, canceling the other entry order.
 

Example: If you have an open buy JPY position, which you bought at 104.00, and you want to set a limit and a stop order, you could place an OCO order. If your OCO limit rate was 103.5 and OCO stop rate was 104.50, once the market rate reaches 103.5, the original JPY position would be closed and the stop rate would be canceled.
 

If Done Order – If Done Orders are supplementary orders whose placement in the market is contingent upon the execution of the order to which it is associated.

Major currencies of Forex

Major currencies

US Dollar – The United States dollar is the world’s main currency – a universal measure to evaluate any other currency traded on Forex. All currencies are generally quoted in US dollar terms. Under conditions of international economic and political unrest, the US dollar is the main safe-haven currency, which was proven particularly well during the Southeast Asian crisis of 1997-1998.
As it was indicated, the US dollar became the leading currency toward the end of the Second World War along the Bretton Woods Accord, as the other currencies were virtually pegged against it. The introduction of the Euro in 1999 reduced the dollar’s importance only marginally.
The other major currencies traded against the US dollar are the Euro, Japanese Yen, British Pound and the Swiss Franc.

Euro – The Euro was designed to become the premier currency in trading by simply being quoted in American terms. Like the US dollar, the Euro has a strong international presence stemming from members of the European Monetary Union. The currency remains plagued by unequal growth, high unemployment, and government resistance to structural changes. The pair was also weighed in 1999 and 2000 by outflows from foreign investors, particularly Japanese, who were forced to liquidate their losing investments in euro-denominated assets. Moreover, European money managers rebalanced their portfolios and reduced their Euro exposure as their needs for hedging currency risk in Europe declined.
 

Japanese Yen – The Japanese Yen is the third most traded currency in the world; it has a much smaller international presence than the US dollar or the Euro. The Yen is very liquid around the world, practically around the clock. The natural demand to trade the Yen concentrated mostly among the Japanese keiretsu, the economic and financial conglomerates. The Yen is much more sensitive to the fortunes of the Nikkei index, the Japanese stock market, and the real estate market.
 

British Pound – Until the end of the World War II, the Pound was the currency of reference. The currency is heavily traded against the Euro and the US dollar, but has a spotty presence against the other currencies. Prior to the introduction of the Euro, both the Pound benefited from any doubts about the currency convergence. After the introduction of the Euro, Bank of England is attempting to bring the high U.K. rates closer to the lower rates in the Euro zone. The Pound could join the Euro in the early 2000’s, provided that the U.K. referendum is positive.
 

Swiss Franc – The Swiss Franc is the only currency of a major European country that belongs neither to the European Monetary Union nor the G-7 countries. Although the Swiss economy is relatively small, the Swiss Franc is one of the four major currencies, closely resembling the strength and quality of the Swiss economy and finance. Switzerland had a very close economic relationship with Germany, and thus to the Euro zone. Therefore, in terms of political uncertainty in the East, the Swiss Franc is favored generally over the Euro.
Typically, it is believed that the Swiss Franc is a stable currency. Actually, from a foreign exchange point of view, the Swiss Franc closely resembles the patterns of the Euro, but lacks its liquidity. As the demand for it exceeds supply, the Swiss Franc can be more volatile than the Euro.
The Canadian Dollar and the Australian Dollar are also part of the currencies traded on the Forex market but do not count as being part of the major currencies due to their insufficient volume and circulation. They can only be traded against the US Dollar.
 

Canadian Dollar - Canada decided to use the dollar instead of a Pound Sterling system because of the ubiquity of Spanish dollars in North America in the 18th century and early 19th century and because of the standardization of the American dollar. The Province of Canada declared that all accounts would be kept in dollars as of January 1, 1858, and ordered the issue of the first official Canadian dollars in the same year. The colonies that would come together in Canadian Confederation progressively adopted a decimal system over the next few years

Australian Dollar - The Australian Dollar was introduced in February 14, 1966, not only replacing the Australian Pound but also introducing a decimal system. Following the introduction of the Australian Dollar in 1966, the value of the national currency continued to be managed in accord with the Bretton Woods gold standard as it had been since 1954. Essentially the value of the Australian Dollar was managed with reference to gold, although in practice the US dollar was used. In 1983, the Australian government «floated» the Australian dollar, meaning that it no longer managed its value by reference to the US dollar or any other foreign currency. Today the value of the Australian Dollar is managed with almost exclusive reference to domestic measures of value such as the CPI (Consumer Price Index).

Benefits of Online Investing - Forex

Benefits of Online Investing

Online trading has caused a major paradigm shift in investing. At the turn of the millennium, there are over 6 million online investment accounts, up from 1.5 million in 1997. As a result, start-up firms now compete directly with financial institutions to serve investors in the new Economy, and the clear winner is the customer. The competition between the brick and mortar institutions and the Internet-based companies has dramatically lowered the costs of investing, and empowered the individual investor to take control of their own investment strategy.
On-line trading will revolutionize the currency markets by making it accessible to the small and medium sized investor. For the first time, these investors have the ability to execute transactions of between $100,000 and $10,000,000 at the same prices the Interbank market offers for deals well over $10,000,000. This benefits both those who wish to speculate on the direction of the currency markets for profit, as well as the money manager or corporate treasurer looking to hedge against unwanted exposure to future price fluctuations in the currency markets.
 

Benefits of Trading FX on the Internet
• Deal directly from live price quotes • Instantaneous trade execution and confirmation • Fast and efficient execution of deals • Lower transaction costs • Real-time profit and loss analysis • Full access to market information
Deal directly from live price quotes
Very few on-line brokers are able to offer their clients real-time bid/ask quotes, which facilitates instantaneous deal execution - no missed market opportunities. Real-time prices also allow investors to compare an on-line broker’s dealing spread with that of other pricing services, to ensure they are receiving the best possible price on all their Forex transactions.
Many on-line Forex brokers require their clients to request a price before dealing. This is disadvantageous for a number of reasons, primarily because it significantly lengthens the execution process from just a few seconds to possibly as long as a minute. In a fast paced market, this could make a significant difference in an investor’s profit potential. Also, some of the more unscrupulous brokers may use the opportunity to look at an investor’s current position. Once they have determined whether the investor is a buyer or a seller, they ‘shade’ the price to increase their own profit on the transaction.
Instantaneous trade execution and confirmation
Timing is everything in the fast-paced Forex market. On-line trades are executed and confirmed within seconds, which ensures that traders do not miss market opportunities. Even the incremental extra time it takes to complete a transaction over the phone can mean a big difference in profit potential.

Lower transaction costs
Simply, executing trades electronically reduces manual effort, thereby lowering the costs of doing business. On-line brokers are then able to pass along the savings to their client base.
Real-time profit and loss analysis
The fast-paced nature of the Forex market compels traders to execute multiple trades each day. It is vital for each client to have real-time information about their current position in order to make well-informed trading decisions.
 

Full access to market information
Access to timely and relevant information is critical. Professional traders pay thousands of dollars each month for access to major information providers. However, the very nature of the Internet affords users free access to reliable market information from a variety of sources, including real- time price quotes, international news, government-issued economic indicators and reports, as well as subjective information such as expert commentary and analysis, trader chat forums etc.
Benefits of Forex Trading vs. Equity Trading
• 24 hour trading • Liquidity • 50:1 Leverage to 400:1 Leverage • Lower transaction costs • Equal access to market information • Profit potential in both rising and falling markets

24-hour trading
The main advantage of the Forex market over the stock market and other exchange-traded instruments is that the Forex market is a true 24-hour market. Whether it’s 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading Forex so that investors can respond to breaking news immediately. In the currency markets, your portfolio won’t be affected by after hours earning reports or analyst conference calls.
Recently, after hours trading has become available for US stocks - with several limitations. These ECNs (Electronic Communication Networks) exist to bring together buyers and sellers when possible. However, there is no guarantee that every trade will be executed, nor at a fair market price. Quite frequently, stock traders must wait until the market opens the following day in order to receive a tighter spread.

Liquidity
With a daily trading volume that is 50 times larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Investors can always open or close a position, and more importantly, receive a fair market price.
Because of the lower trading volume, investors in the stock market and other exchange-traded markets are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.
50:1 Leverage to 400:1 Leverage
Leveraged trading, also called margin trading, allows investors in the Forex market to execute trades up to $250,000 with an initial margin of only $5000. However, it is important to remember that while this type of leverage allows investors to maximize their profit potential, the potential for loss is equally great. A more pragmatic margin trade for someone new to the FX markets would be 5:1 or even 10:1, but ultimately depends on the investor’s appetite for risk. On the other hand, a 100:1 leverage would be the foremost suggested margin trading to use for the best risk and reward return.
Lower transaction costs
It is much more cost efficient to invest in the Forex market, in terms of both commissions and transaction fees.
Commissions for stock trades range from a low of $7.95-$29.95 per trade with on-line brokers to over $100 per trade with traditional brokers. Typically, stock commissions are directly related to the level of service offered by the broker. For instance, for $7.95, customers receive no access to market information, research or other relevant data. At the high end, traditional brokers offer full access to research, analyst stock recommendations, etc.
In contrast, on-line Forex brokers charge significantly lower commission and transaction fees. Some, like FCStone FX, charge LOW fees, while still offering traders access to all relevant market information.
In general, the width of the spread in a FX transaction is less than 1/10 as wide as a stock transaction, which typically includes a 1/8 wide bid/ask spread. For example, if a broker will buy a stock at $22 and sell at $22.125, the spread equals .006. For a FX trade with a 5 pip wide spread, where the dealer is willing to buy EUR/USD at .9030 and sell at .9035, the spread equals .0005.
Equal access to market information
Professional traders and analysts in the equity market have a definitive competitive advantage by virtue of that fact that they have first access to important corporate information, such as earning estimates and press releases, before it is released to the general public. In contrast, in the Forex market, pertinent information is equally accessible, ensuring that all market participants can take advantage of market-moving news as soon as it becomes available.

Profit potential in both rising and falling markets
In every open FX position, an investor is long in one currency and short the other. A short posi- tion is one in which the trader sells a currency in anticipation that it will depreciate. This means that potential exists in a rising as well as a falling FX market. The ability to sell currencies wi- thout any limitations is one distinct advantage over equity trading. It is much more difficult to establish a short position in the US equity markets, where the Uptick rule prevents investors from shorting stock unless the immediately preceding trade was equal to or lower than the price of the short sale.
Currency pairs
The currencies are always traded in pairs. For example, EUR/USD, which means Euro over US dollars, would be a typical pair. In this case, the Euro, being the first currency can be called the base currency. The second currency, by default USD, is called the counter or quote currency.
As mentioned, the first currency is the base, therefore in a pair you can refer the amount of that currency as being the amount required to purchase one unit of the second currency.
So, if you want to buy the currency pair, you have to buy the EURO and sell the USD simulta- neously. On the other hand, if you are looking forward to sell the currency pair, you have to sell the EURO and buy the USD.
The most important thing to understand in a currency pair, or more precisely in a Forex tran- saction, is that you will be selling or buying the same currency.

Players in the Forex Market

Players in the Forex Market

Central Banks - The national central banks play an important role in the (FOREX) markets. Ultimately, central banks seek to control the money supply and often have official or unofficial target rates for their currencies. As many central banks have very substantial foreign exchange reserves, their intervention power is significant. Among the most important responsibilities of a central bank is the restoration of an orderly market in times of excessive exchange rate volatility and the control of the inflationary impact of a weakening currency.
Frequently, the mere expectation of central bank intervention is sufficient to stabilize a currency, but in case of aggressive intervention the actual impact on the short-term supply/demand balance can lead to the desired moves in exchange rates.
If a central bank does not achieve its objectives, the market participants can take on a central bank. The combined resources of the market participants could easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 with the European Exchange Rate Mechanism (ERM) collapse and 1997 throughout South East Asia

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Banks - The Interbank market caters to both the majority of commercial turnover as well as enormous amounts of speculative trading. It is not uncommon for a large bank to trade billions of dollars daily. Some of this trading activity is undertaken on behalf of corporate customers, but a banks treasury room also conducts a large amount of trading, where bank dealers are taking their own positions to make the bank profits.
The Interbank market has become increasingly competitive in the last couple of years and the god- like status of top foreign exchange traders has suffered as equity traders are again back in charge. A large part of the banks’ trading with each other is taking place on electronic booking systems that have negatively affected traditional foreign exchange brokers

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Interbank Brokers - Until recently, foreign exchange brokers were doing large amounts of business, facilitating Interbank trading and matching anonymous counterparts for comparatively small fees. With the increased use of the Internet, a lot of this business is moving onto more efficient electronic systems that are functioning as a closed circuit for banks only.
The traditional broker box, which lets bank traders and brokers hear market prices, is still seen in most trading rooms, but turnover is noticeably smaller than just a few years ago due to increased use of electronic booking systems.
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Introduction
 

Commercial Companies - The commercial companies’ international trade exposure is the backbone of the foreign exchange markets. A multinational company has exposure in accounts receivables and payables denominated in foreign currencies. They can be protected against unfavorable moves with foreign exchange. That is why these markets are in existence. Commercial companies often trade in sizes that are insignificant to short term market moves, however, as the main currency markets can quite easily absorb hundreds of millions of dollars without any big impact. It is also clear that one of the decisive factors determining the long-term direction of a currency’s exchange rate is the overall trade flow.
Some multinational companies, whose exposures are not commonly known to the majority of market, can have an unpredictable impact when very large positions are covered.
Retail Brokers - The arrival of the Internet has brought us a host of retail brokers. There is a numbered amount of these non-bank brokers offering foreign exchange dealing platforms, analysis, and strategic advice to retail customers. The fact is many banks do not undertake foreign exchange trading for retail customers at all, and do not have the necessary resources or inclination to support retail clients adequately. The services of such retail foreign exchange brokers are more similar in nature to stock and mutual fund brokers and typically provide a service-orientated approach to their clients.
 

Hedge Funds - Hedge funds have gained a reputation for aggressive currency speculation in recent years. There is no doubt that with the increasing amount of money some of these investment vehicles have under management, the size and liquidity of foreign exchange markets is very appealing. The leverage available in these markets also allows such a fund to speculate with tens of billions at a time. The herd instinct that is very apparent in hedge fund circles was seen in the early 1990’s with George Soros and others squeezing the GBP out of the European Monetary System.
It is unlikely, however, that such investments would be successful if the underlying investment strategy was not sound. It is also argued that hedge funds actually perform a beneficial service to foreign exchange markets. They are able to exploit economical weakness and to expose a countries unsustainable financial plight, thus forcing realignment to more realistic levels.
Investors and Speculators - In all efficient markets, the speculator has an important role taking over the risks that a commercial participant hedges. The boundaries of speculation in the foreign exchange market are unclear, because many of the above mentioned players also have speculative interests, even central banks. The foreign exchange market is popular with investors due to the large amount of leverage that can be obtained and the liquidity with which positions can be entered and exited. Taking advantage of two currencies interest rate differentials is another popular strategy that can be efficiently undertaken in a market with high leverage. We have all seen prices of 30 day forwards, 60 day forwards etc, that is the interest rate difference of the two currencies in exchange rate terms.

History of the Forex

History of the Forex

Money, in one form or another, has been used by man for centuries. At first it was mainly Gold or Silver coins. Goods were traded against other goods or against gold. So, the price of gold became a reference point. But as the trading of goods grew between nations, moving quantities of gold around places to settle payments of trade became cumbersome, risky and time consuming. Therefore, a system was sought by which the payment of trades could be settled in the seller’s local currency. But how much of buyer’s local currency should be equal to the seller’s local currency?

The answer was simple. The strength of a country’s currency depended on the amount of gold reserves the country maintained. So, if country A’s gold reserves are double the gold reserves of country B, country A’s currency will be twice in value when exchanged with the currency of country B. This became to be known as The Gold Standard. Around 1880, The Gold Standard was accepted and used worldwide.
During the first WORLD WAR, in order to fulfill the enormous financing needs, paper money was created in quantities that far exceeded the gold reserves. The currencies lost their standard parities and caused a gross distortion in the country’s standing in terms of its foreign liabilities and assets.
After the end of the second WORLD WAR the western allied powers attempted to solve the problem at the Bretton Woods Conference in New Hampshire in 1944. In the first three weeks of July 1944, delegates from 45 nations gathered at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. The delegates met to discuss the postwar recovery of Europe as well as a number of monetary issues, such as unstable exchange rates and protectionist trade policies.
During the 1930s, many of the world’s major economies had unstable currency exchange rates. As well, many nations used restrictive trade policies. In the early 1940s, the United States and Great Britain developed proposals for the creation of new international financial institutions that would stabilize exchange rates and boost international trade. There was also a recognized need to organize a recovery of Europe in the hopes of avoiding the problems that arose after the First World War.
The delegates at Bretton Woods reached an agreement known as the Bretton Woods Agreement to establish a postwar international monetary system of convertible currencies, fixed exchange rates and free trade. To facilitate these objectives, the agreement created two international institutions: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). The intention was to provide economic aid for reconstruction of postwar Europe. An initial loan of $250 million to France in 1947 was the World Bank’s first act.
Under the Bretton Woods Exchange System, the currencies of participating nations could be converted into the US dollar at a fixed rate, and foreign central banks could convert the US dollar into gold at a fixed rate. In other words, the US dollar replaced the then dominant British Pound and the parities of the world’s leading currencies were pegged against the US Dollar.
The Bretton Woods Agreement was also aimed at preventing currency competition and promoting monetary co-operation among nations. Under the Bretton Woods system, the IMF member countries agreed to a system of exchange rates that could be adjusted within defined parities with the US dollar or, with the agreement of the IMF, changed to correct a fundamental disequilibrium in the balance of payments. The per value system remained in use from 1946 until the early 1970s.
The United States, under President Nixon, retaliated in 1971 by devaluing the dollar and forcing realignment of currencies with the dollar. The leading European economies tried to counter the US move by aligning their currencies in narrow band and then float collectively against the US dollar.

Fortunately, this currency war did not last long and by the first half of the 1970’s leading world economies gave up the fixed exchange rate system for good and floated their currencies in the open market. The idea was to let the market decide the value of a given currency based on the demand and supply of the currency and the economic health of the currency’s nation. This market is popularly known as the International Monetary Market or IMM. This IMM is not a single entity. It is the collection of all financial institutions that have any interest in foreign currencies, all over the world. Banks, Brokerages, Fund Managers, Government Central Banks and sometimes individuals, are just a few examples.
This is very much the present system of exchange of foreign currencies. Although the currency’s value is dependent on the market forces, the central banks still try to keep their currency in a predefined (and highly confidential) fluctuation band. They accomplish this by taking one or more of various steps.
The International Trade Organization that had been planned in the Bretton Woods Agreement could not be realized in the form initially envisaged - the US Congress would not endorse it. Instead, it was created later, in 1947, in the form of the General Agreement on Tariffs and Trade, which was signed by the US and 23 other countries including Canada. The GATT would later become known as the World Trade Organization. In recent years, the two international institutions created at Bretton Woods the World Bank and the IMF have faced a major challenge in helping debtor nations to get back on stable financial footing.

The Euromarket
A major catalyst to the acceleration of Forex trading was the rapid development of the Eurodollar market; where US dollars are deposited in banks outside the US. Similarly, Euromarkets are those where assets are deposited outside the currency of origin. The Eurodollar market first came into being in the 1950s when Russia’s oil revenue - all in dollars - was deposited outside the US in fear of being frozen by US regulators. That gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government imposed laws to restrict dollar lending to foreigners. Euromarkets were particularly attractive because they had far less regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euromarkets a beneficial center for holding excess liquidity, providing short-term loans and financing imports and exports.
London was, and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London’s convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euromarket.
© 1st Forex Trading Academy 2004
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Introduction
Important dates in the Forex History
Early 20th Century
Only in the 20th century paper money start regular circulation. This happened by force of legislation, the efforts of central banks to manage money supplies, and government control of gold supplies.
Within a country, this fiat money is as good as any other form. Internationally, it is not. International trade has always demanded a money standard accepted everywhere.
Gold and silver provided such a standard for centuries. An official Gold Standard regulated the value of money for about a century, prior to the start of World War I in 1914.
1929
The dollar has been perceived as more of a has-been, due to the Stock Market Crash and the subsequent Great Depression.
1930
The Bank for International Settlements (BIS) was established in Basel, Switzerland. Its goals were to oversee the financial efforts of the newly independent countries, along with providing monetary relief to countries with temporary balance of payments difficulties.
1931
The Great Depression, combined with the suspension of Gold Standard, created a serious diminution in foreign exchange dealings.
World War II
Before World War II, currencies around the world were quoted against the British Pound. World War II crashed the Pound. The only country unscarred by the war was the US. The US dollar became the prominent currency of the entire world.
1944
The United National Monetary and Financial Conference at Bretton Woods, New Hampshire discussed the financial future of the post-war world. The major Western Industrialized nations agreed to a «pegging» of the US Dollar, which in turn was pegged at $35.00 to the troy ounce of gold. The future was designed to be stable, in part due to the tight governmental controls on currency values. The US dollar became the world’s reserve currency.
1957
The European Economic Community was established.
© 1st Forex Trading Academy 2004
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Introduction
1967
At the IMF meeting in Rio de Janeiro, the Special Drawing Rights (SDRs) were created. SDRs are international reserve assets created and allocated by the IMF to supplement the existing reserve assets.
1971
The Smithsonian Agreement, reached in Washington, D.C., had a transitional role to the free floating markets. The ranges of currencies fluctuations relative to the US dollar were increased from 1 percent to 4.5 percent band. The range of currencies fluctuating against each other was increased up to 9 percent. As a parallel, the European Economic Community tried to move away from the US dollar block toward the Deutsche Mark block, by designing its own European Monetary System.
In the summer of 1971, President Nixon took the United States off the gold standard, and floating exchange rates began to materialize.
1972
West Germany, France, Italy, the Netherlands, Belgium and Luxembourg developed the European Joint Float. Member currencies were allowed to fluctuate within 2.25 percent band (the snake), against each other and 4.5 percent band (the tunnel) against the USD.
1973
The Smithsonian Institution Agreement and the European Joint Float systems collapsed under heavy market pressures. Following the second major devaluation in the US dollar, the fixed-rate mechanism was totally discarded by the US Government and replaced by The Floating Rate.
1978
The International Monetary Fund officially mandated free currency floating.
1979
The European Monetary System was established.
1999
January 1st, 1999, the Euro makes its official appearance within the countries members of the European Union.
2002
January 1st, 2002, the Euro becomes the only currency and replaces all other twelve national currencies within the European Union and Monetary Market: Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, Netherlands, Austria, Portugal and Finland.
© 1st Forex Trading Academy 2004
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Introduction
TODAY
Today, supply and demand for a particular currency, or its relative value, is the driving factors in determining exchange rates.
Decreasing obstacles and increasing opportunities, such as the fall of communism and the dramatic growth of the Asian and Latin American economies, have created new opportunities for investors.
Increasingly vast amounts of foreign currencies began flowing into other countries banks.

How to use Indicators in Forex

 How to use Indicators in Forex

Using Indicators to Identify Trends

You've probably heard the expression "the trend is your friend" - but what does it mean? If your trend takes a sudden counter-move and your trailing stop activates at a loss, it's natural to ask yourself: how can you be sure the next trend will be more friendly?

Confirm the trend is real

Using technical indicators in combination can help ensure a potential trend has staying power - a good habit for all kinds of technical trading, but especially in forex. Currencies tend to move in trends naturally due to long-term macroeconomic factors and short-term international capital flows. All of this makes it that much harder to see a trade-able trend that will last.

Trendlines

From a trader's perspective, a trend is a predictable price response at levels of support or resistance that change over time. Trendlines mark these levels, with support acting as the "floor" and resistance as the "ceiling". When prices break through either of these levels, that signals a trend for that movement to continue.

It's easy to draw perfect trendlines on historical charts - but harder to be right when the trend is still developing. Still trendlines help focus your attention on finding support and resistance levels, the first step to identifying a new trend.

Start by drawing trendlines over longer timeframes (daily or weekly charts) and then carry them forward into shorter timeframes (hourly or 4-hourly). That way you'll highlight the most important support and resistance levels first and not lose the major trend development by chasing a short-term, minor one.

Directional Movement Indicator (DMI)

Developed by J. Welles Wilder, the DMI minimizes the guesswork in spotting trends and helps confirm trendline analysis.

The DMI system has two parts:

•ADX (average directional movement index). If the ADX reading is above 20, that indicates a "real" or sustainable trend. The ADX also measures the trend's strength: the higher the ADX, the stronger the trend.

•The ADX also provides an early indicator of a trend's end. When it drops from its highest level, it may be time to exit the position and wait for a fresh signal from the the DI+/DI-.

•DI+ and DI- lines. When DI+ crosses up through DI-, that's considered a buy sign. When the opposite happens, that's usually a sell sign.

Wilder recommends following the "extreme point rule" to confirm the signals. Note the extreme point for that period in the direction of the crossover (the high if DI+ crosses up over DI-; the low if DI- crosses up over DI+). Only if that extreme point is breached in the subsequent period is a trade signal confirmed.

Many traders use the parabolic indicator along with the ADX to identify a trend's end. The parabolic indicator follows the price action but accelerates its own rate of increase over time and in response to the trend. The parabolic continually closes in on the price, and only a steadily accelerating price rise (the essence of a trend) will prevent the price from falling below the parabolic, signaling an end to the trend.

Trading short-term

The methods above can be used for short-term decision making, even in markets that are trading sideways - a "trendless" market.

However, if you're trading short-term, don't ignore the big picture entirely. There's no point in trying to ride a short-term trend that is counter to the larger trend.

How can I be professional in Technical Analysis in Forex

How can I  be professional in Technical Analysis in Forex

Technical analysis attempts to forecast future price movements by examining past market data.

Most traders use technical analysis to get a "big picture" on an investment's price history. Even fundamental traders will glance at a chart to see if they're buying at a fair price, selling at a cyclical top or entering a choppy, sideways market.

Most technical analysts make a few key assumptions:

• All market fundamentals are reflected in price data. Moods, differing opinions, and other market fundamentals need not be studied.
• History can repeat itself, often in regular, fairly predictable patterns. These patterns, generated by price movements, are called signals. A technical analyst's goal is to uncover a current market's signals by examining past market signals.
• Prices move in trends. Technical analysts believe price fluctuations are not random and unpredictable. Once an up, down or sideways trend has been established, it usually will continue for a period.

Get in and get out - at the right time

Traders rely on price charts, volume charts and other mathematical representations of market data (called studies) to find the ideal entry and exit points for a trade. Some studies help identify a trend, while others help determine the strength and sustainability of that trend over time.

Technical analysis can add discipline and minimize emotion in your trading plan. It can be hard to screen out fundamental impressions and stick with your entry and exit points as planned. While no system is perfect, technical analysis helps you see your trading plan more objectively and dispassionately.

Price chart types

Bar charts

The most common type of chart showing price action. Each bar represents a period of time - a "period" as short as 1 minute or as long as several years. Over time, bar charts can show distinct price patterns.

Candlestick Charts

Instead of a simple bar, each candlestick shows the high, low, opening and closing price for that period of time it represents. Candlestick patterns provide greater visual detail as they develop.

Point & Figure Charts

Point & figure patterns resemble bar chart patterns, except Xs and Os are used to mark changes in price direction. Point & figure charts make no use of time scale to associate a certain day with a certain price action.

Technical Indicator Types

Trend

Trend indicators smooth price data out, so that a persistent up, down or sideways trend can be easily seen. (Examples: moving averages, trend lines)

Strength

Strength indicators describe the intensity of market opinion on a certain price by examining the market positions taken by various market participants. Volume or open interest are the basic ingredients of strength indicators.

Volatility

"Volatility" refers to the magnitude of day-to-day price fluctuations, whatever their directional trend. Changes in volatility tend to anticipate changes in prices. (Example: Bollinger Bands)

Cycle

Cycle indicators indicate repeating market patterns from recurrent events such as seasons or elections. Cycle indicators determine the timing of a particular market pattern. (Example: Elliott Wave)

Support/Resistance

Support and resistance describes the price levels where markets repeatedly rise or fall and then reverse. This phenomenon is attributed to basic supply and demand. (Example: Trend Lines)

Momentum

Momentum indicators determine the strength or weakness of a trend as it progresses over time. Momentum is highest when a trend starts and lowest when the trend changes.

When price and momentum diverge, it suggests weakness. If price extremes occur with weak momentum, it signals an end of movement in that direction. If momentum is trending strongly and prices are flat, it signals a potential change in price direction. (Example: Stochastic, MACD, RSI) 

Price charts help traders identify trade-able market trends - while technical indicators help them judge a trend's strength and sustainability.

If an indicator suggests a reversal, confirm the shift before you act. That might mean waiting for another period to confirm the same indicator's signal, or checking out another indicator. Patience will help you read the signals accurately and respond accordingly.

Types of Moving Averages

One of the most widely used indicators, moving averages help traders verify existing trends, identify emerging trends, and view overextended trends about to reverse. As the name suggests, these are lines overlaid on a chart that "average out" short-term price fluctuations, so you can see the long-term price trend.

A simple moving average weighs each price point over the specified period equally. The trader defines whether the high, low, or close is used, and these price points are added together and averaged, forming a line.

A weighted moving average gives more emphasis to the latest data. It smoothed out a price curve, while making the average more responsive to recent price changes.

An exponential moving average weighs more recent price data in a different way. An exponential moving average multiplies a percentage of the most recent price by the previous period's average price.

Finding the best moving averages and period for your pair

It can take a while to find the best combination of moving average and period length for your currency pair. The right combo will make the trend you're looking for clearly visible, as it develops. Finding that optimal fit is called curve fitting.

Usually traders start by comparing a few time frames for their moving averages over a historical chart. Then you can compare how well and how early each time frame signaled changes in the price data as they developed, then adjust accordingly.

When you've found a moving average that works well for your currency pair, you can consider this as a line of support for long positions or resistance for short positions. If prices cross this line, that often signals a currency is reversing course. Here's an example:

Longer-term moving averages define a trend, but shorter-term MAs can signal its shift faster. That's why many traders watch moving averages with different time frames at once. If a short-term MA crosses your longer-term MA, it can signal your trend is ending - and time to pare back your position.

Stochastic

Stochastic studies, or oscillators, help monitor a trend's sustainability and signal reversals in prices. Stochastic come in two types, %K and %D, measured on a scale from 0 to 100. %K is the "fast", more sensitive indicator, while %D is "slow" and takes more time to turn.

Stochastic studies aren't useful in choppy, sideways markets. In these conditions %K and %D lines might cross too frequently to signal anything.

Relative Strength Index (RSI)

Like stochastic, RSI measures momentum of price movements on a scale of 0 to 100.

Always confirm RSI signals with other indicators. RSI can remain at lofty or sunken levels for a long time, without prices reversing course. All that means is that a market is quite strong or weak - and likely to stay so for a while.

Adjust your RSI to the right time frame for you. A short-term RSI will be very sensitive and give out many signals, not all of them sustainable; a longer-term RSI will be less choppy. Try to match your RSI time frame to your own trading style: short-term for day traders, longer-term for position traders.

Divergences between prices and RSI may suggest a trend reversal. Of course, make sure you confirm your signals before acting.

Bollinger Bands

Bollinger Bands are volatility curves used to identify extreme highs or lows in price. Bollinger Bands establish "bands" around a currency's moving average, using a set number of standard deviations around the moving average. Creator Jon Bollinger recommends the following:

Touching a high or low band doesn't necessarily mean an immediate trend reversal. Bollinger Bands adjust dynamically as volatility changes, so touching the band just means prices are extremely volatile. Use Bollinger Bands with other indicators to determine the trend's strength.

Fibonacci Retracements

Fibonacci retracement levels are a sequence of numbers discovered by the noted mathematician Leonardo da Pisa in the 12th century. These numbers describe cycles found throughout nature; technical analysts use them to find pullbacks in the currency market.

After a significant price move, up or down, prices often "retrace" most or all of the original move. As prices retrace, support and resistance levels often occur at or near the Fibonacci Retracement levels. For currencies, that means retracements usually happen at 23.6%, 38.2%, 50% or 61.8% of the previous move. 

Forex Quotes

Reading a foreign exchange quote is simple if you remember two things:

      1. The first currency listed is the base currency
      2. The value of the base currency is always 1.

As the centerpiece of the forex market, the US dollar is usually considered the base currency for quotes. When the base currency is USD, think of the quote as telling you what a US dollar is worth in that other currency.

When USD is the base currency and the quote goes up, that means USD has strengthened in value and the other currency has weakened. Rising quotes mean a US dollar can now buy more of the other currency than before.

Majors not based on the US dollar

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). For these pairs, where USD is not the base currency, a rising quote means the US dollar is weakening and buys less of the other currency than before.

In other words, if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening.

Cross currencies

Currency pairs that don't involve USD at all are called cross currencies, but the premise is the same.

Bids and asks

Just like other markets, forex quotes consist of two sides, the bid and the ask:

The BID is the price at which you can SELL base currency.
The ASK is the price at which you can BUY base currency.

What's a pip?

Forex prices are often so liquid, they're quoted in tiny increments called pips, or "percentage in point". A pip refers to the fourth decimal point out, or 1/100th of 1%.

For Japanese yen, pips refer to the second decimal point. This is the only exception among the major currencies.

How to Calculate your Profits and Loss in Forex ?

How to Calculate your Profits and Loss in Forex ?

It is important to learn in Forex How to Calculate your Profits and Loss in Forex 

So, we decided to share with this helpful lesson about it

To illustrate an FX trade, consider the following two examples.

Let's say that the current bid/ask for EUR/USD is 1.4616/19, meaning you can buy 1 euro for 1.4619 or sell 1 euro for 1.4616.

Suppose you decide that the Euro is undervalued against the US dollar. To execute this strategy, you would buy Euros (simultaneously selling dollars), and then wait for the exchange rate to rise.

So you make the trade: to buy 100,000 Euros you pay 146,190 dollars (100,000 x 1.4619). Remember, at 2% margin (50:1 leverage), your initial margin deposit would be approximately $2,923 for this trade.

As you expected, Euro strengthens to 1.4623/26. Now, to realize your profits, you sell 100,000 Euros at the current rate of 1.4623, and receive $146,230

You bought 100k Euros at 1.4619, paying $146,190. Then you sold 100k Euros at 1.4623, receiving $146,230. That's a difference of 4 pips, or in dollar terms ($146,190 - 146,230 = $40).

Total profit = US $40.

Now in the example, let's say that we once again buy EUR/USD when trading at 1.4616/19. You buy 100,000 Euros you pay 146,190 dollars (100,000 x 1.4619).

However, Euro weakens to 1.4611/14. Now, to minimize your loses to sell 100,000 Euros at 1.4611 and receive $146,110.

You bought 100k Euros at 1.4619, paying $146,190. You sold 100k Euros at 1.4611, receiving $146,110. That's a difference of 8 pips, or in dollar terms ($146,190 - $146,110 = $80)

Total loss = US $80.

Advises to low your Taxes

Did you asked yourself this Question

What I Can do to Lower  Taxes ?.

One of the sections that I teach in the two-day real estate class is dedicated to tax strategies related to real estate. Although no investing decisions should be made based strictly on the tax consequences, it is a very important component. So one of the first things I would suggest you do is make sure you have a professional tax advisor that understands all of the different elements of your business, investing and personal finances.

Here are a few tips as we approach the end of 2010.

PLEASE MAKE SURE YOU SEEK THE ADVICE OF YOUR TAX ADVISOR REGARDING ANY OF THESE SUGGESTIONS.

If you're looking for additional deductions and expenses related to your business, here are few that you might consider making before the end of 2010.

Business Equipment: The Small Business Jobs Act of 2010 has increased the expensing of some capital assets. When you buy business equipment, you usually deduct the purchase price over several years. Section 179 of the tax code allows small businesses to take full depreciation in the year of the purchase, known as expensing. For 2010, you can expense up to $500,000 worth of equipment (about double the previous allowed limit). To get the deduction for this tax year, the equipment must be operating by December 31.

Cost of Education: To maintain or improve skills required in your current business.

Charitable Contributions: You can either donate cash or other items. Under the new Pension Protection Act, you will need a written receipt for all charitable donations. Many charities now accept credit cards. This allows you to make and deduct the donation this year but pay for it in 2011.

Convert to a Roth IRA: For 2010 only, taxpayers have the opportunity to defer income realized from converting a traditional IRA to a Roth IRA. They can spread that income over the 2011 and 2012 tax years. You don't have to use this special rule, though. If you expect to be in a higher marginal tax bracket in 2011 and 2012, you might want to elect to have all the income generated by a Roth conversion included in your 2010 income and pay the resulting taxes.

Re characterize a Roth Conversion: What if a Roth conversion you made earlier in 2010 wasn't a tax-wise decision? You can undo the Roth conversion by re characterizing the transaction, thus changing the account back to a traditional IRA. There may be other requirements.

Pr-pay Property Taxes: Re-pay (some or all) of 2011 taxes.

Make an extra mortgage payment: The extra interest you pay will be added to this year's mortgage interest by your lender, increasing your itemized deductions.

Medical expenses: You can take a deduction for medical expenses exceeding 7.5% of your adjusted gross income (AGI).

Max out your retirement savings: Contributions to retirement plans reduce your taxable income. A contribution to your IRA can be $5000, or, if over 50 years old, $6000 and you have up to April 15, 2011 to make the contribution for 2010.

Boosting your deductions is a great way of lowering your tax liability; you may also want to consider the income side of your taxes. Here are a couple of suggestions.

Defer income if possible: If you are self-employed or a business owner, you might elect to invoice customers in January so you don't have to include that income in 2010. Keep in mind that it may only make sense to defer income if you think you will be in the same or lower tax bracket next year.

Sell losing investments to offset capital gains: You can lower capital gains by selling securities that have lost money. Losses offset gains dollar for dollar and losses in excess of your gains can be deducted, up to $3000 dollars per year.

I strongly believe that success in business and investing starts with planning. I have witnessed many friends, family and students that have been surprised on April 15th by a tax burden they weren't prepared for, simply because of a lack of knowledge and planning.

Once again, please make sure that you contact your tax adviser to evaluate how these suggestions can best serve you.

The diffrences bwtween Bounce and Break in Forex

Bounce and Break in Forex are the most important terms in Forex world.

Many people do not know Bounce or Break

If you have been reading the Lessons from the Pros for any time now, or if you have graduated from an Online Trading Academy course, you know that to execute trades, we rely on supply and demand levels. The biggest question that most traders face when determining whether to enter a trade is whether the price will bounce or break a level. Fortunately, there are certain clues that may help you determine whether or not to take action and the direction of that action.

First of all, let me state that I am a proponent of trading bounces of supply and demand rather than chasing breakouts. If you read most trading books, they are filled with examples of breakout trades. However, how many people do you know that have become rich from trading after reading a book? The truth is that many if not most breakout trades tend to fail. I'm sure you will now flood me with email examples of breakout trades that netted great gains in the markets. But for every successful breakout, I can find at least six failures.

We want to trade with the highest probability and should stick to those trades that tend to work out more often. Besides, most breakouts turn into bounce trades to shake out weak investors who don't know how to set stops properly. Patience allows us to enter with a more favorable price.

So, what are the clues to look for to determine a bounce or break of supply or demand levels?

1. Look to the candles. If you are seeing small candles, this indicates lack of momentum, and when this occurs near these levels, it is hard for price to break through. Large candles could mean momentum to carry through a level. However, there are exceptions.
2. Topping tails on candles indicate selling pressure. Seeing this on candles near supply makes for reversals much of the time. Bottom tails near demand also indicate this as well.
3. Volume is a major indicator. To break out to new levels, you would expect to see increasing volume to carry you through. Be careful, a spike in volume could be capitulation and a reversal sign.
4. The markets and sectors confirming. The markets and sectors have a large influence on the direction of individual stocks. Watch them for leadership or confirmation.

Using The Forex Currency Trading System

You should pay more attention to many different factors when you are considering to use the Forex currency trading system. Fortunately, today there are many different simulation games that can be played that use the real quotes in them, but allow people to practice making the trades without risking their own money. Since there are so many different features to learn and tools to learn how to use, such as the Forex currency converters, it is a great idea to try the system out and get familiar with it before risking a lot of money on the market. The benefit of using the Forex currency trading system is that the people can use the system without having to use a broker or other professional that takes a cut of the profit. The bad thing about using the system is that the person has to learn on his own and it takes time to learn the ins and outs of the system.

Things to Learn

One of the first things that the people have to learn about the Forex currency trading system is how to read the quotes. There are pairings that are used in the quotes and the first one is the base currency and the other one is the quote currency. There is a spread between them which is indicative of whether that trade is one that should be done at that point in time.

Most of the time, when using the Forex currency trading system, a person will buy a pairing at a certain time because they think that the market in a certain economy is going to go up or down depending on the current political situation there. They then have to wait for a period of time to see what the market does and then they can decide if it is time to cut their losses or to sell and make their profit.

The second thing to learn is just that – they need to learn when it is profitable to buy and sell and what all of the numbers mean. They need to learn the exchange rates and spreads that happen in the Forex currency trading system so that they can make wise decisions with their money. They need to learn how to place orders in the system and what it means that an order is still open. They also need to learn when it is wise to close an order and how to calculate profit or loss.

There is also the need to learn margin calculations as well as interest rate calculations. They will need to learn what currency hedging is and how it is beneficial to them in the Forex currency trading system.

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