The Forex Nitty Gritty

When one trades the Forex Market one’s Forex trading strategy has to do with small and medium market moves of the day. Forex trading software is designed to read the moves of the Forex market and give the Forex trader a much better than average chance of making money by buying or selling one side of a currency pair. Underlying the market moves and corrections that allow one to make money with a Forex trading strategy is the question of whose money in any trading pair will eventually be worth more.

This seems like stating the obvious. However, it’s not just the currency trader working with a given currency pair that moves the Forex market. An Australian ship owner paying in dollars to have a ship built in China is very interested in the eventual state of the USD/AUD currency pair while the ship builder will be more interested in the state of the Yuan versus the dollar. A Japanese company paying Saudi Arabia for oil in dollars will be interested in the eventual state of the USD/JPY currency pair.

Big players often hedge their bets by buying or selling within a currency pair as part of a Forex trading strategy in order to protect themselves against loss caused by a shift in the relative value of the given currency pair. Banks will intervene in the markets favoring one side of a currency pair or the other.

It’s the big money and the state of nations’ economies that drive the eventual values within all currency pairs. It is the psychology of where the value of money is going in a given nation that drives currency pairs. The Forex trading strategy of trying to anticipate where a given currency pair will be is affected by that psychology about the value of money, purchasing power, and eventual power of nations.

Forex trading in the USD’s various currency pairs is often tied up in guessing where the economy of the United States will be in a few years. Big money trying to hedge bets will sometimes take the Forex market up or down with no apparent Forex trading strategy as seen by the day trader. However, for the long term a particular buy or sell of the US dollar may be a perfectly sane Forex trading strategy.

The long term investor is interested in the eventual value of money while the day trader is interested in increments of the day.

Regarding the eventual value of money some of us can recall when 90 percent of the world’s gold reserves were stored in Fort Knox Kentucky. The economic power of the USA compared to the devastated economies of most of the industrial world was phenomenal. That situation was never going to last. Much of the bleating about the loss of US buying power as the dollar slides chooses not to recognize the fact that people all over the world are willing to work for a little money. Those with less are willing to work for less to get a start and those who are well to do will pass on low paying jobs.

India and China with their large, lower paid, labor pools will catch up to Japan, the USA, and Europe in industrial production, technology, and wealth. The relative value of the currency pairs represented here will reflect that. The question is, how fast?

The day trader still trades increments. However, an appreciation of the big picture always helps you be there when a big player starts a big move in the Forex market.

On the internet one sometimes finds Forex tips. What are Forex tips? Our belief is that Forex tips are little bits of someone else’s Forex strategy from their Forex trading. The world of Forex trading is a fairly transparent place so it is not as though someone has privileged information. Rather, someone else has done their Forex trading homework and has a Forex strategy. Our suggestion is that you forgo Forex tips from others and develop your own Forex strategy.

One of the problems with tips, whether for stocks or Forex trading, is that they are only useful for a short time and that short time may have expired by the time you get the tip. Someone’s Forex tips derive from their homework and their development of a Forex strategy. When market volume is such and such and when the news is such and such then a given set of indicators can be read in a given way. This distills down to concrete Forex tips to trade a given currency pair within a given range for the day. However, if all of the big traders know this, then Forex trading for the day will move out of the given range and following the Forex tip will only lose you money.

Forex tips are often an accurate subset of someone’s successful Forex strategy. A better thing to do with Forex tips is to study them. Come to understand the Forex strategy behind the Forex tips you see. Then incorporate the Forex tips, or their rationale, into your own Forex strategy. Then you will find that the Forex tips you read are in line with your own Forex strategy and your own Forex trading. However, you will be doing your Forex trading in line with your Forex strategy at the right time and not when the market has moved beyond the narrow confines of another’s Forex tip.

Another use of Forex tips is as a learning tool. When you see Forex tips or when you find yourself giving someone else Forex tips, follow up and see if the Forex tips worked and for how long in active Forex trading. In auditing your trading results there are process audits and results audits. In a process audit you look back to see if you followed your own Forex strategy in your Forex trading. In a results audit you look back to see where you were successful in Forex trading and where you were not. If you diverged from your Forex strategy it will show up in your process audit. If your Forex strategy is at fault it will show up in your results audit.

Follow Forex tips the same way. Do simulation trading using Forex tips and see if they work. Then you can file them under “mistakes I did not make” or add them to your own Forex strategy.

Our Forex tip for the day is that you should be continually auditing your Forex trading results and your Forex strategy. Our hope for the day is that your Forex trading becomes more and more successful.

The economies of Japan and the United States are closely linked. Each nation has investments in the other country and each nation sells products to the other. Over the years Japan has traditionally been a buyer of US treasury debt. At times this has been Japan’s strategy to keep the value of the dollar high so that Japanese products will be more attractive. At times, such as now, Japan’s central bank will intervene in the currency markets and buy dollars to help stabilize exchange rates. When trading USD/JPY it is wise to be aware of this relationship and how it affects exchange rates.

Changes in the USD/JPY exchange rate ripple through all Forex trading. Traders typically watch for signs of how comfortable the Federal Reserve and Japan’s central bank are with the USD/JPY exchange rate. Having a good sense of the comfort level is relative to the current USD/JPY exchange rate will help you when the market starts to move and you need to decide whether to scalp on the way up or down or ride the trend to a big win.

Other aspects of the USD/JPY exchange rate in Forex trading are that Japan has to import virtually all of the raw materials for its industry and all of its oil. The United States, on the other hand, although it imports a lot of oil, produces most of what it needs and has immense supply of coal. The USA also has mineral resources not found in Japan. Rising oil prices hurt both countries and both currencies but the USD/JPY exchange rate tends to favor a more valuable dollar when energy prices go up.

US agriculture is the USA’s largest exporter and Japan is a major customer. Japan has a large number of small farms that are highly subsidized. Politics in Japan affect the subsidies and duties on imported food. Thus the USD/JPY exchange rate is related to the amount and price of food exported from the USA to Japan.

When Forex trading the USD/JPY currency pair it may at times be more favorable to be trading when the Japanese market is open in order to take advantage of news breaking during the Japanese news cycle which can drive the exchange rate.

As virtually all economies are working their way through and out of the recession one of the Forex trading issues with the USD/JPY currency pair is which economy will recover faster. Currently experts are predicting a slightly faster US recovery through the end of 2010. Thus the USD/JPY exchange rate should favor the dollar. However, the USA is a huge buyer of Japanese products so a more prosperous USD will increase Japan to USA exports and Japanese prosperity. Exploiting a “window of opportunity” in the next few months may be a wise Forex trading strategy for the USD/JPY currency pair.

As with all Forex trading being prepared leads to better results. If you are going to trade USD/JPY then you need to follow the exchange rate and the news and events that cause it to change.

Forex trading is a business. You need capital. You need to have the tools of the trade. You need to have the expertise the use your Forex trading capital and Forex trading tools and you need the patience and good judgment to apply what you know to trade the Forex market successfully.

In Tom Wright’s book The Right Stuff the author shows us the heroic risks that the early test pilots and astronauts were willing to take. The combination of skills, knowledge, and guts required of these individuals is referred to as “the right stuff.”

Forex trading is, like test flying, a solitary business. There is lots of technology involved in trading the Forex market and Forex trading takes a level of skill to be successful. Like test flying, Forex trading is done alone. Only one person sits at the trading station, you.

In The Right Stuff the author notes that Chuck Yeager, the prototype of test pilots often cautioned others regarding the dangers of a given airplane maneuver and then would comment, “But, it can be done.” Left unspoken was that you need “the right stuff” to accomplish the task.

The heroic aspect of test pilot work drives them to take the risks involved. However, a large part of “the right stuff” is years of learning, practice, testing, and retesting.

Forex trading takes “the right stuff.” Trading the Forex market, developing and staying true to a Forex strategy, and getting up at 2 AM to trade the London market when most of the rest of the USA is sound asleep takes “the right stuff.”

As heroic as Yeager and the rest were, they were engaged in the business of being test pilots. Those who did not do their homework, did not hone their skills, did not keep up with new information, ended up memorialized as photos on the wall of the bar outside Edwards Air Force Base.

“Past performance is not indicative of future results.” Does this look familiar? “Forex trading involves substantial risk of loss and it is not suitable for all investors,” is another Forex market caution. “Leveraged trading magnifies profits and losses,” they say regarding Forex trading.

You may not crash in the desert in Forex trading but you can lose your life savings in an afternoon. It takes the right stuff to develop, maintain, and improve your Forex strategy. It takes the right stuff to sit alone at four in the morning trading the London Forex market. If you have a successful Forex trading session in the Forex market, no one is going to take your photo next to your airplane. Forex trading, like being a test pilot or astronaut, is a business, and the more you learn, the better your judgment, and the more successful you will be.

In the end remember that having the right stuff requires that you earn it by learning, practicing, and changing course when conditions warrant. Then, when you have a successful session when others lost their shirts you can say that you would not necessarily recommend Forex trading to everyone but, with the right stuff, it can be done.

Forex scams used to proliferate on the web like fish do at sea. Happily, these days the conditions are a bit better, but the fraud industry is still working at full capacity, and crooks are never far away if you suffer the misfortune of letting your guard down for even a short time. Victims of fraud are not stupid people, but they are a bit more relaxed about their money than they should be. Here we provide you a list of a few things about which you should never be easy-going if you have any intention of forex trading. To have any experience with forex analysis, you need some forex prudence, and here’s what you must do to acquire it.

Choose the Regulated Brokers

Forex brokers operate online, often in different nations, and usually you have remarkably little control over what they do with your money. Your best friends in these conditions are the authorities who will supervise them in your place, and ensure that they are adhering to the ethical standards and principles expected from financial businesses. In the same sense, it is a good idea to choose brokers that are regulated in developed, strong, first world nations with well-established regulatory institutions. Despite all its shortcomings, you should prefer that your broker is regulated in the U.S., and not Belize or the Bermudas.

Do Not Entrust your Funds to Strangers

This should be fairly obvious, but a lot of trusting individuals fall victim to fraudsters after handing their wealth over without asking questions. That is an exceptionally unfortunate situation, but let’s not underestimate the persuasive powers of crooks. They make a living, earn their bread from lying, and it is natural that ordinary people are fooled by their illusory, stealthy methods.

Do Not Act on Rumors

From time to time, offers of managed accounts pop-up on the web and elsewhere offering up to 100 percent returns per month on a forex or commodity account. Since the top-secret methods of these money managers must be protected at all costs, you’re expected to close your eyes, plug your ears, and pinch your nose and hand over your cash without asking questions. Maybe you’ll make massive profits, maybe not. But more often that not, all you do is regret your folly in the aftermath. So, don’t act on rumors, advertisements, or empty promises about unlimited wealth.

Ask Questions

Do you ever have worries about your broker? Call them, question them. Do you feel unsafe about your partner? Contact them, face them with your worries. Do not be timid, it’s your money at stake.

 Be Sensible

If something is too good to be true, it probably isn’t true. Keep this as your maxim, and you’ll have a sure shield against fraudsters.

It’s not hard to avoid crooks and thieves online. But you do need to be aware. And you can ensure that you stay way beyond the reach of the fraudsters net by reaching for and perusing the best forex broker reviews on the net, as well.

Forex trading is more than trading the United States dollar as part of a currency pair. Forex trading includes trading all major and minor currencies from the pound sterling to the South African Rand.

The most commonly traded currencies are as follows:

United States Dollar  USD
Euro     EUR
Yen     JPY
British Pound   GBP
Swiss Franc    CHF
Canadian Dollar   CAD
Australian Dollar   AUD

These are referred to in Forex trading as major currencies.

Two less traded currencies are the New Zealand Dollar, NZD, and the South African Rand, ZAR. In theory you could trade any pair of currencies in the world. However, as a practical matter this is not the case. You need market size and volume to make a successful business of trading. Otherwise you are investing in a currency and hoping that you can find a buyer when you want to sell.

If you choose to buy the currency of a small country you may not find a buyer when you want to get out. You can always find a buyer for Euro, dollars, and yen, at the current price.

For the technical trader it may not make any difference which currency pair one trades and whether one trades the US dollar or does cross currency trading. However, for one who is more knowledgeable of currencies and national economies outside of the USA it may make more sense to trade Yen versus Pound sterling, for example. Also, cross currency trading in a currency pair from the same part of the world may make more sense as the nations will likely be trading partners. For example, Australia is a supplier of raw materials to China, Singapore, Japan, India, and other Asian nations. If you are interested in or know more about those economies, then trading in those currency pairs in cross currency trading will make more sense than trading dollars and Euros.

Be aware, however, that the margins in Forex trading are thin and if the relative values of two Eastern Hemisphere currencies change relative to each other they will immediately change in relation to all other world currencies too. Whatever currency pair you trade is interconnected with all other currency pairs. The problems you might run into with cross currency trading in minor currency pairs is volume and liquidity. As Forex trading software is more accurate at high volumes it may be wise to only do cross currency trading of minor currency pairs when the volume is sufficient to provide the liquidity you need for successful Forex trading.

Also, be aware that Forex trading in the Japan market may involve more local currencies so, if your Forex trading involves trading in Asian currency pairs, especially cross trading in these currency pairs, you may want to trade the Japan market where you might expect more volume and more accurate predictions from your Forex trading software.

Whether your Forex trading involves minor currency pairs, cross currency trading, or sticking to trading the dollar versus the Euro or Yen, all of the same admonitions apply. Do your homework, keep focused, and avoid the pitfalls of falling prey to market psychology.