The Forex Nitty Gritty

Experienced Forex traders trade where the money is. In learning how to trade Forex, following the example of those with experience can be profitable. So, what are the most popular Forex trades today?

On the spot market, according to the 2010 Triennial Survey, the most heavily traded bilateral currency pairs were:

EUR-USD, 28%
USD-JPY, 14%
GBP-USD, 9%

The USD was used in 84.9% of trades compared to 39.1% for the Euro, 19% for the Yen, and 12.9% for the Pound Sterling. What are the most popular Forex trades today? See the following chart, which gives us a breakdown by currency involvement in all trades. The sum comes to 200% as there are two currencies in every trade.

What are the most popular Forex trades today and why? As the preceding table shows the US dollar, Euro, Yen, and Pound Sterling totals come to 175.2%. These are the major currency pairs. Forex traders trade these currencies because they trade in hold volume and high liquidity. They have lower buy to ask spreads than all of the remaining currencies so they trade with lower overhead. Technical trading algorithms work better with high liquidity and volume making technical analysis more effective with these currency pairs. As Forex technical strategies work better with these currency pairs these pairs are more attractive to technical traders.

Since the introduction of the Euro in 1999 it has risen steadily as a fraction of foreign currency trading. Part of these has to do with the steady erosion of the dollar and the slow but steady increasing use of the Euro, Yen, and Pound sterling instead of the dollar as the currency of international transactions. What is the Forex market today and what will it be tomorrow. So long as there is international trade there will be a need for Forex. As the long term dominance of the USD falls, traders will likely engage in more trades with the Euro, Yen, and Pound versus other currencies. For today, however, to trade non European currencies a trader typically has to trade a currency versus the dollar and then the dollar versus the second currency. Thus, the dollar remains a popular currency because it is the conduit through which other currency trades must pass.

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How to enter profitable trades in Forex is entirely possible. Forex traders make their livings buying and selling foreign currencies. How to enter profitable trades in Forex depends, however, upon a number of factors. These are the knowledge base, skill set, availability, discipline, and trading strategy of the individual trader. In addition the availability of an outside information source is important to help the trader direct his attention to the most potentially lucrative trading opportunities in foreign exchange trading. How to trade Forex successfully starts with learning the basics of how the foreign exchange market works. It progresses to knowledge of the types of economic and political factors that drive currency values. Thereafter the trader needs to develop the skills that allow him to trade efficiently. This includes buying the appropriate hardware and software, setting up a trade station, and learning how to execute trades. How to enter profitable trades in Forex includes knowing how to limit risk. Therefore the trader will want to learn how to set trading stops with each trade. And, there is more to how to enter profitable trades in Forex.

No matter how knowledgeable and skilled a trader is he will not reap profits in sideways moving markets. In other words, if a trading pair always moves up and down together, compared to other currencies, there will be no profit to be made in trading the pair. As events dictate there will almost always be more action and volatility in some currency pairs than in others. Major currency pairs tend to have higher liquidity and volume. As such they may be safer to trade than many minor pairs or major to minor pairs. Deciding where to trade can be as important as the skill set one brings to the trade station. This is where Forex services can help the trader. Having someone continually scan the breaking news and Forex trading action across all currency pairs can alert the trader immersed in scalping profits from one situation. He will be able to extract himself from one situation and invest his trading capital in the next. Forex technical strategies are often more successful in one type of trading situation than anther. Technical analysis is typically more accurate when volume is high. How to enter profitable trades in Forex is often more about being in the right trading pair at the right time than in extremely precise trading tactics.

How to enter profitable trades in Forex may be difficult if you are a part time trader. In Forex trading the Euro, for example, the trader may miss out on trading opportunities because he is at his day job when important news is released. For the occasional trader options are useful as are limit orders. Ideally a trader will watch the rise of one currency versus the other and adjust his stops along the way. However, if he expects a large one way move in prices he may profit by simply setting reasonable limits and accepting the results. We are not suggesting any specific strategy in asking how to enter profitable trades in Forex. The trader needs to develop his own strategy and do his own analysis and follow up. However, a more comprehensive view Forex trading is usually better than a narrow one and doing your homework tends to pay off in the end.

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As political tension rose in Egypt recently the dollar went on a rally. This is the dollar as a safe haven currency. The risk of traffic through the Suez Canal being affected by chaos in the ancient nation made Europeans worry and the Euro go down. Factors influencing the EUR/USD pair currently include the ongoing debt concerns on the continent. That situation by itself profits the dollar as a safe haven currency. However, recent concern that Egypt would melt down into chaos and Islamic extremism brought the dollar as a safe have currency to the fore again. Despite the many legitimate concerns about the US economic recovery and the effect of massive debt on the long term value of the dollar the dollar, for many is the best of choices when economic and political times become worrisome.

Along with the dollar, the Yen and Swiss franc are considered safe currency refuges in times of trouble. Why is the Swiss franc and why is the Yen considered a safe haven currency? All of the safe haven currencies are from countries with stable economic and, especially, political systems. All have their economic problems as virtually no one made it through the recent market crash unscathed. However, the long term relative stability of the USA, Switzerland, and Japan make each of them a safe refuge in times of instability elsewhere. Because Switzerland is in Europe, but not in the EU, it shares some of the concern about stability in Egypt. Thus we see the Yen as well as the dollar as a safe haven currency in this situation. Recent news tells us that President Mubarak is stepping down in response to massive public demonstrations. The situation seems to have resolved itself in the short term without violence. However, foreign affairs experts comment that Egypt has a long way to go to re-establish its political systems after thirty years of semi-dictatorial rule by Mubarak. The other concern than affects the dollar as a safe haven currency is that Egypt, under Mubarak, has been an island of international stability for three decades. There has been no further war with Israel.

How to trade Forex successfully is typically to engage the market during times of economic volatility. It is the old blood in the streets argument about buying stocks. The problem for the currency trader is to use his crystal ball to anticipate the outcome of the situation in Egypt, for example, and anticipate the movement of various currencies in response to world events. Using the dollar as a safe haven currency may be the best way to preserve capital during uncertain times. It is however, best to seek a safe haven early, before the price of the dollar is bid up by everyone else seeking the dollar as a safe haven currency. Then, when things are ready to improve, selling your dollars for temporarily depressed currencies can be profitable. Typically, traders will rely upon fundamentals for their long term projections. If, for example, they believe that the Euro will resolve its long term debt concerns and that Egypt will put its house together they will use the short term drop in the Euro to buy and then hold as world events remedy themselves.

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As demonstrators face down tanks in the streets of Cairo, the US dollar has been rising against the Euro. Egypt and the Euro are, in fact, both on the front page of the news. The Euro had been recovering from a series of slides due to ongoing sovereign debt problems on the continent. Factors credited with the most recent fall of the Euro include the unrest on Europe’s flank and the fact that the European Central Bank seems unlikely to raise interest rates. The two factors have sent investors back to the Swiss franc, dollar and Yen. The fact that the European Central Bank will probably not raise interest rates in the near future is the common news in Forex markets that traders rely on. The news from Cairo could be substantially different. What happens in Egypt and the Euro value over time are strongly connected. The downward direction of the Euro due to sovereign debt problems on the continent could become second page news if Egypt dissolves into chaos. For thirty years Hosni Mubarak has been president of Egypt. He has continued to comply with the peace treaty that his assassinated predecessor, Anwar Sadat, signed with Israel. He has been successful in suppressing Islamic extremism in his country, at least on the surface. However, the price has been high in terms of lost individual liberties and an increasingly dictatorial regime. Despite the high price of stability at home in Egypt the regime of Hosni Mubarak has helped stabilize the region for more than a quarter of a century.

The news from Egypt and the Euro are tied for a number of reasons. Although Europe receives a large portion of its oil and natural gas from the Russia and the former Soviet republics it is still dependent upon oil from the Middle East. The Suez Canal is a lifeline for energy as well as an essential trade route. A severe political upheaval in Egypt could threaten Europe’s energy supply and access to foreign markets for trade. Add a Suez Canal shutdown to the debt problems plaguing the EU and Forex trading the Euro could become very active. Two approaches present themselves to the Forex trader in trading the Egypt and the Euro situation. One is to day trade the ups and downs of the Euro while keeping a close eye on the news out of Egypt. The other approach is to trade options on the Euro. As the Swiss franc, Yen and US dollar seem to be the designated safe haven currencies in this situation the trader could buy calls on Swiss francs, dollars or Yen with Euros and, if worst comes to worst, execute the contracts and buy francs, dollars or Yen with devaluated Euros after the fall. Likewise the trader can buy puts on dollars, Swiss francs, or Yen with Euros. Because of the symmetry of Forex trading this is the same trade.

In trading Egypt and the Euro, the above is a method for how to short the Euro in anticipation of a fall. Unlike simply selling Euros and buying them later, however, options trading the Euro protects the trader against the effects of Egypt reaching a peaceful solution to its political dilemma. Mr. Mubarak has had to deal with political strife before and has always survived. Egypt and the Euro may well both survive current circumstances. A peaceful solution is not impossible and, if that happens, the Euro could well benefit. As always our suggestion is not that the trader sell Euros or buy options but that the trader studies such situations with an eye toward learning how to profit in trading foreign currency.

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