The Forex Nitty Gritty

Is Euro Zone debt resolution on the horizon? If so how will Forex markets react? The good news is that the majority of Euro Zone countries have agreed to strict austerity measures and debt talks between Greece and its private creditors are progressing. However, the ever so slow progress towards Euro Zone debt resolution always seems to take two steps forward and one backward. The downward direction of the Euro may or may not be ready to reverse. Currency traders always keep fundamentals in mind and these may, finally, be improving. However, market sentiment is something else. Currency traders as well as investors in stocks, commodities, and real estate have been pretty beaten up over the last couple of years in persistently volatile markets. As the Euro Zone gets its act together, will market sentiment coalesce to create a stronger Euro? Or, will the likelihood of a mini recession due to fiscal discipline scare investors and currency traders alike and result in a continuing decline of the Euro.

Traders who wish to trade the Euro, as well as the US dollar, Chinese Yuan, and a number of other currencies will want to keep in mind that everyone is printing money as a remedy to debt, unemployment, and reduced trade numbers. Forex trading and economic news are always intertwined. However, part of the currency trading puzzle is less obvious. As an example, US treasuries are selling at historically low interest rates. It turns out that a major buyer of US treasuries is the US Federal Reserve. This is part of the so called Bernanke Doctrine. Fed chairman Bernanke is considered one of the world’s experts on the causes of the Great Depression. He is applying measures meant to avoid the same sort of devastating economic contraction as happened in the 1930’s. His measures will tend to keep credit flowing, keep interest rates low, and steadily devalue the US dollar. A major aspect of this is that the Fed used recently printed money to buy US treasuries and to purchase other assets. The European Central Bank is following a similar course and China is said to be financing internal construction projects the same way. A Forex trader will see two forces in motion in the case of Euro Zone debt resolution as well as the US economic recovery, more jobs and currency devaluation.

On one hand traders will review how to invest in Euro and on the other hand those seeing the printing presses run at full speed will continue to consider how to short the Euro. Both approaches may be successful but, if so, it will be a matter of timing. In the short term a policy tailored after the Bernanke doctrine coupled with fiscal discipline may well lead to a timely Euro Zone debt resolution. However, a Euro Zone debt resolution purchased by virtue of the printing press will devalue the Euro over time. Then, the third aspect is that a cheaper Euro will make European products more competitive and lead to a stronger European economy and a rebound of the Euro. Forex traders need to stay tuned in to the evolving Euro Zone debt resolution in order gain profits.

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Currency traders concerned about the uncertainty of the markets have stayed home in large numbers during the last month resulting in low foreign currency trading volume. Figures released by US banks that trade foreign currencies show a distinct reduction in revenue due to decreased Forex trading. What does generally reduced foreign currency trading volume mean for the individual Forex trader? Does reduced foreign currency trading volume change how to trade Forex? First of all remember that traders are not staying out of the market because volume is low. They are staying out of the market because they think that the market too volatile, especially in trading the EUR/USD, EUR/YEN, EUR/CHF and other currency pairs that include the Euro. Nevertheless, Forex technical strategies work best in high trading volume and high liquidity. So, to a degree we might be seeing a domino effect. Traders watching the fundamentals leave the market because of confusing reports about resolution of the European debt crisis. Then technical traders leave the market because trading volume is low. This sort of thing could become a vicious circle of cause and effect leading to ever lower foreign currency trading volume.

However, the fundamentals in Europe will eventually change. The situation is driven by the fact that debt instruments in various nations of the PIIGS group (Portugal, Italy, Ireland, Greece, and Spain) are coming due. In Greece, especially, the problem is acute as creditors are demanding severe austerity measures in return for debt forgiveness and debt extension. The value of Greek government notes has fallen drastically. The concern of the Forex markets is that if the Greek government defaults on its debts there will be a ripple effect throughout the EU and even the world. Greece could be forced to withdraw from the EU. The situation will resolve itself for good or for ill. At some point the fundamentals will become less chaotic and less vague and trading of the Euro will pick up again. The downward direction of the Euro will probably stop. Because the majority of trading in Forex markets involves the US dollar an increase in foreign currency trading volume will include the USD. The US dollar could fall versus the Euro in an EU recovery. Traders bullish on the Euro could prosper in such a situation.

There is a sort of fatigue that sets in when markets are constantly chaotic, hard to predict, and unprofitable. Lack of profit and perceived potential for profit is often more important in driving down foreign currency trading volume than the specifics of trading themselves. Forex traders work with a trading strategy. Successful traders back test their results. When they are not making profits and do not understand why, the better choice is to sit on the sidelines until things become more clear. Many traders who stay in the market in such situations use options. For example in trading options on the falling Euro a trader might buy calls on the Euro with dollars. If the debt crisis resolves itself well the Euro will rise and the trader will profit. If the situation worsens the trader has limited his risk to the cost of the options contract.

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Recently, slower than expected European growth led to a fall in the Euro. Slower than expected European growth is not the only factor that is weighing on the Euro, however. The European sovereign debt dilemma continues well into its second year. The so called PIIGS crisis involves the threat of government default on debts in Portugal, Ireland, Italy, Greece, and Spain. Greece has taken up most of the news on this subject and recently agreed to extreme austerity measures in return for continued loans from European central banks and independent investors. Portugal has required bailout loans as has Ireland. Most recently Italy was in the news and analysts suggested that if support for Italian debt was not forthcoming that default on Italian bonds could be contagious with many governments defaulting on national debt. Thus the Euro has been up and down over the last two years. The growth of the EU economy has been a positive point in supporting the Euro and now the report of slower than expected European growth has hit the Euro at a bad time. How does the trader succeed at predicting Forex trends in such situations?

For that matter, what does slower than expected European growth have to do with Forex traders? First of all slower growth is still growth. Germany’s economy grew by a percent in the last quarter and overall Euro Zone growth was 2 percent in the last quarter. The concern of many is that the recovery from the recession is cooling off. Chinese industrial production has been off as has been production in North America. Traders looking to the medium to long term are trying to decide which currencies will prosper and which will falter if the world goes into a so called double dip recession. The Swiss franc is at all-time highs and has the Swiss central bank concerned about Swiss currency reserves, whose value is falling in relation to their own currency. In this complex situation it is of interest that despite the downgrade of US debt by the Standard and Poor’s credit rating agency that last week’s auction of US treasuries saw substantial demand and a fall in interest rates to levels not seen for more than two years. The Euro, like the dollar, is a major world currency and is the currency of the first or second largest economy, depending upon whether the US or Europe is in first place. The currency is very like never going to collapse. However, when those in charge of the economies of great nations do not show leadership, as with the dallying over the Greek bailout or the extension of the US debt ceiling it upsets markets.

It would seem that the combination of debt dilemmas and slower than expected European growth have caused a short term change in pricing. It does not, at the current time, imply a long term fall in the Euro. Traders are well advised to watch the next reports of European growth as well as the painfully slow resolution of the PIIGS debt crisis to see how this combination of factors affects Forex trading the Euro.

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With increased Forex volatility profits can rise for traders who are tuned in to the foreign currency market. The world is a chaotic place today with political unrest across North Africa and the Middle East, outright civil war and NATO intervention in Libya, and the devastating earthquake and tsunami that recently hit Japan. At such times Forex volatility profits the prepared. Volatility comes from uncertainty. Successful trading comes from a firm knowledge of the fundamentals of the currencies that one trades and a clear view of market direction so far as technical analysis will supply it. How to trade Forex at times like this is often to buy call or put options in Forex pairs. However, whether one is trading Forex directly or through options Forex volatility profits those who do their homework, develop their trading skills, use a well thought out trading plan, and stay in touch with the market.

How to enter profitable trades in Forex is the same at all stages of volatility. Forex volatility profits come because there are typically more trading opportunities in the inefficient markets that arise when war, economic chaos, and natural disasters stalk the world. Today in North Africa and the Middle East whole societies have taken their cue from the peaceful demonstrations that forced Egyptian president and strongman Hosni Mubarak from office. Syria has just rescinded a generations-long state of marshal law and closed down a secret court. In Yemen demonstrations continue and there is unrest in the oil rich state of Saudi Arabia. Not only does the price of oil flinch at the prospect of increasing civil unrest in this oil rich region but the value of the Euro, Pound Sterling, and Swiss franc can be affected by the prospect of a disruption of oil supplies and more civil war on Europe’s flank. Forex volatility profits may be very possible as events unfold.

How to build a trading plan for Forex during times of high market volatility is to start long before the market becomes volatile. Successfully trading in high volume and volatility requires knowledge of both fundamentals and technical market factors. It requires that the trader develop the necessary skill set to execute trades in a timely manner, preserve investment capital, and find the most profitable currency pairs to trade. For example, trading the Australian dollar versus the Yen, Canadian dollar, or US dollar will make less sense when there is trouble on the doorstep of Europe than trading the pound, Swiss franc, or Euro versus one of the dollars or the Yen. Forex volatility profits will most typically come from situations where one currency is stable or profits from a situation while another is damaged. One can scan the various trading pairs for price movement or use a Forex service for alerts in finding the pairs with the most price movement. It will be up to the trader how to do this. Time spent finding the right pair can pay for itself in increased profits. Time saved by subscribing to an alert service may be even more profitable.

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Forex is the worldwide currency exchange market, also known as the foreign exchange market, “fx” for short. This is an over-the-counter electronic trading market for the major worldwide currencies. It offers easy entry to the average public trader and fairly low margin requirements.

However, this low margin and high leverage is also the #1 risk and cause of loss among novice Forex traders. Misuse of leverage is the Forex cardinal sin. In the article below I’m going to explain the new leverage rules, and show you exactly how to take advantage of it! To give you even more I put together this Free Forex Toolkit with an entire video section dedicated to using the new leverage rules to consistently profit…GET IT HERE.

What do we mean by low margin and what is leverage? Well basically this means that you can control a huge amount of a currency in the Forex market with a very small cash outlay. The normal stock and index options that we trade at BigTrends.com represent 100 shares of stock — you pay a premium to control/own this option. For example, in the stock option market you may be able to control the right to buy 100 shares of IBM for $500 — this is an example of leverage. However, the leverage in Forex is much greater than this in most cases … but so is the risk.

We only have to look at the recent housing market crash to see an example of where leverage and low margin caused massive losses among individual investors. People across the world were buying houses and properties beyond their means and with very little cash down. Many of these were speculative, greedy bets on a continued sharp rise in housing prices — which knowledgeable, experienced traders such as ourselves knew wouldn’t continue forever. They weren’t bad homeowners; they simply misused leverage.

The huge amount of potential leverage and low margin requirements in fx trading is similar to this. The latest rules allow Forex leverage for 50:1 on major currencies and 20:1 on minor currencies. Some brokers may still be able to offer 100:1 leverage. What this means is that a trader can often control millions of dollars of a currency proposition with a very small cash outlay. When novice traders allow emotions such as greed and fear to rule their trading, they often end up on the losing end of large leveraged bets.

Thanks for reading, and I’ve got a lot more where that came from! While I write my next article get my Free Forex Toolkit that will put your Forex trading on the right track!

Article compliments of Scott Downing, Director of Research at BigTrends.com

To learn how to trade Forex online there are a number of steps. First of all the trader will need to understand how foreign exchange markets work. Then the trader will need to sign up with a Forex broker. To trade online he will need trading software that is compatible with that of the broker. He will need computer hardware, a trade station, and a fast internet connection capable of moving the large amounts of data needed for online trading. After setting up a brokerage account, buying hardware, and choosing online software the trader will begin to learn how to trade Forex online using simulation trading on his trade station. It will also be wise to consider an online tutorial to help learn how to trade Forex online. The trader will choose a currency pair or pairs to trade and will begin to learn the economic and central banking factors that drive the relative prices of the two currencies in the pair. To set up a successful Forex trading system the trader will need to be thorough in reviewing every aspect of Forex trading. To learn how to trade Forex can be the start of a lifetime of success in the Forex markets for the trader who does his homework and applies what he learns.

How to trade Forex online has a technical aspect which is the software and hardware involved. How to trade Forex online has a purely nuts and bolts aspect as well. This aspect will, in the end, prevail in determining if the trader makes money or not trading Forex. Foreign exchange is traded currency to currency. A trader simply buys one currency with the other. By following fundamental and technical factors in the currency market the trader will attempt to do what traders do, buy low and sell high. The currency market in major currency pairs, such as when Forex trading the Euro versus the US dollar, does not necessarily fluctuate all that much. However, the leverage offered in trading Forex can allow the astute trader to profit from even small variations in a currency pair throughout the day. For a trader to successfully learn how to trade Forex online he will need to learn the ins and outs of his chosen currency pair. Forex is traded virtually around the clock as the major markets in London, New York, and Tokyo span the globe. However, the degree of interest in a given currency pair may vary from market to market, especially for minor currency pairs.

Understanding the Forex markets is not just learning fundamentals of the currencies involved. It is very much a case of understanding group psychology. Just like all other markets the Forex market can respond to rumor and fast breaking news. Traders will attempt to correct their positions based on new fundamentals. However, the market will commonly overshoot and correct again. This sort of volatility, whether day long or just for minutes, is where an astute trader can profit by reading the technical signs of the market, buying or sell appropriately, and then exiting the position before the market corrects back. Before entering the market for real the trader will learn how to trade Forex online through simulation so as to learn how the market reacts and corrects. By doing so and developing a strong Forex strategy the trader will most successfully learn how to trade Forex online.

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Learning the forex trading basics is paramount to a very successful trading.  The Foreign Exchange also referred to as the FOREX is the largest financial market in the world, with a volume in excess of four trillion dollars per day.  It amounts to more than four times the stock and futures market put together.

Forex trading is the buying and selling of two currencies at the same time.  Currencies are traded through brokers and are traded in pairs, for example, the GBP/USD, EUR/USD, and USD/JPY.

Unlike other financial markets, for example the New York Stock Exchange or the London Stock Exchange, forex market has no physical location or a central exchange.  The market is run electronically, within a network of banks, continuously over a 24 hour period.

Not until recently the Forex market is dominated by big banks and financial institutions.  The banks also engage several million dollars to trade.  Recently, forex trading has been made easy because of the advent of the internet online trading firms.  These firms are now able to offer trading accounts to retail traders.

Before you start trading, it is advisable to learn forex trading rudiments first.  This will prepare you very well for the task ahead. For you to start trading all you need are a complete set of computer, high speed internet connection and amount of money you are willing to start trading. You must however go through a Forex broker before you start.

The advantages of Forex trading over Futures or commodity trading are many.  Forex trading is available 24hours a day. You do not pay commission in most cases. You have up to 400:1 leverage, price certainty and guaranteed limited risk.

I have been really surprised by the ignorance that is shown by the various traders. They buy some of the cheap online trading robots to trading on their behalf. Some of these robots succeed while most of them have failed. This is because of the fact that these robots have been simulated to do trading in backward trend. There has been a lack of forex education among the traders. Traders use these robots and in their garb they miss out on the strategies that are available free in the market. These strategies have been successfully used by the traders and have stood the tests of time.

As far as the forex education is concerned you can learn by using the many strategies like the one given by Richard Dennis. In this strategy he gave a plan to the group of trainees and they made millions out of it. This strategy is known as the turtle rules. The newbie’s were told to have confidence in this strategy and the result that the group gave after two weeks of trading was beyond anyone’s imagination. Over a period of 4 years the same group made money to the amount of $200 million and afterwards the strategy has been a part of the forex folklore.

This strategy is still available on the internet and is free of cost. But its effectiveness has been reduced due to the ever changing parameters of the market and its increasing volatility. This strategy is very easy to understand and once you have read it you will get to know what a standard strategy should be like. The money management rules of this strategy are excellent and have been admired by the various trade market bigwigs. In this strategy you are bound to loose out more trades than you are going to win but the wins will be more heavier than the losses leading to staggering benefits, which should be the aim of market strategy. A little forex education about the market strategies can do a lot of good for your trading business.

Fear is always a major problem for anyone wishing to trade forex online. No one knows what the market is going to do in the next instance, and trying to deal with this major unknown in our calculations can cause us to become stressed while applying our trading decisions. On the other hand, experience, and the consensus of traders shows that scared money cannot win. To help you deal with this long-term problem so that you can see immediate improvements to your trading results, we have compiled a few items of good advice which you can consult when fear is reducing your profitability.

1. State your goals, and be disciplined in their application

If you find yourself in the middle of the market action, observing many things going on with no idea on what to do, chances are high that you’ll perceive fear when taking any action. The best way of dealing with this problem is knowing what you want from the market. Have clear goals in your trading activity, and apply them with vigorous discipline. If the market conditions do not suit your expectations, simply refuse to take risks. That will allow you to avoid the impact of fear, and to concentrate on the practical aspect of trading without worrying about your capability.

2. Understand that losing is a natural part of a successful trading career

What is the trader afraid of? The losses that can be suffered in even the worst type of trading is limited to a small amount of money. You’ll not lose your life or family, unless you act foolishly and risk much more than you should. Otherwise, losing is a natural part of trading in forex. There has never been a credible and successful trader who made the claim of never losing. The good thing is that you are very much allowed to suffer losses in trading provided that you minimize them with proper money management methods, and prudent risk controls. The motto is to “cut losses short”, not to “avoid losses at all costs”. A trading career with no losses would be a paper trading career. No risk means no reward.

3. Read about the successes of past traders, educate yourself

A good way of boosting your confidence is learning about the experiences and backgrounds of past traders and understanding that they were human beings just like you. No great genius or wonderful education is necessary in trading, but prudence, patience, and commitment are indispensable to a successful trading career. By reading about the successes and failures of past traders, you can improve your understanding of the correct approach to trading, which can only be beneficial.

4. Recognize that there’s no luck or magic to trading, if you do the right thing, success will naturally follow

It is also crucial to understand that trading involves not one drop of luck. And there’s no place for magical trading strategies that will always deliver profits and no or very few losses. This expectation is simply against the basic principles of the trading game, and should be avoided at all costs. Trading is all about managing losses and misfortunes effectively, and you can never do so running after the Holy Grail, or awaiting for your luck to let you ride rainbows to El Dorado. Once you achieve this attitude, and remove the superstitions in your life, in time you’ll get rid of the fear of bad luck and realized losses as well.

5. Trade only when you want, in a relaxing, unstressed environment

To avoid fear in your trading time, ensure that the room where you pursue your activity is comfortable, away from stress and noise as much as possible. Listening to music is advised against, as that detracts from concentration, and increases emotional intensity, while in trading the goal is always to eliminate emotional pressures as much as possible.

Certainly it’s possible to overcome fear and panic in trading. But to achieve this goal, you need to follow a plan with discipline and consistency. To learn forex online, you need good sources. And to apply the lessons learnt, you need a committed and strong drive for success. With such an attitude, it is only a matter of time before all obstacles, including the fear factor, are eliminated on your path to profitability.

How difficult is it to make money trading the Forex market? How much time does it take to actually be able to make a living trading the Forex market? These and other important aspects of trading are to be discussed in this article.

Trading the Forex market has many benefits over other financial markets, among the most important are: superior liquidity, 24hrs market, better execution, and others. Traders and investor see the Forex market as a new speculation or diversifying opportunity because of these benefits. Does this mean that it is easy to make money trading the Forex Market? Not at all.

Forex brokers agree that 90% of traders end up losing money, 5% of traders end up at break even and only 5% of them achieve consistent profitable results. With these statistics shown, I don’t consider trading to be an easy task. But, is it harder to master any other endeavor? I don’t think so, consider musicians, writers, or even other businesses, the success rates are about the same, there are a whole bunch of them who never got to the top.

Now that we know it is not easy to achieve consistent profitable results, a must question would be, Why is it that some traders succeed while others fail to trade successfully in the Forex market? There is no hard answer to this question, or a recipe to follow to achieve consistent profitable results. What we do know is that traders that reach the top think different. That’s right, they don’t follow the crowd, they are an independent part of the crowd.

A few things that separate the top traders from the rest are:

Education: They are very well educated in the matter; they have chosen to learn every single and important aspect of trading. The best traders know that every trade is a learning experience. They approach the Forex market with humility, otherwise the market will prove them wrong.

Forex trading system: Top traders have a Forex trading system. They have the discipline to follow it rigorously, because they know that only the trades that are signaled by their system have a greater rate of success.

Price behavior: They have incorporated price behavior into their trading systems. They know price action has the last word.

Money management: Avoiding the risk of ruin is a primary subject to the best traders. After all, you cannot succeed without funds in your trading account.

Trading psychology: They are aware of every psychological issue that affects the decisions made by traders. They have accepted the fact that every individual trade has two probable outcomes, not just the winning side.

These are, among others, the most important factors that influence the success rate of Forex traders.

We know now that it is not easy to make money trading the Forex market, but it is possible. We also discussed the most important factors that influence the rate of success of Forex traders. But, how much time does it take to have consistent profitable results? It is different from trader to trader. For some, it could take a life time, and still don’t get the desired results, for some others, a few years are enough to get consistent profitable results. The answer to this question may vary, but what I want to make clear here is that trading successfully is a process, it’s not something you can do in a short period of time.

Trading successfully is no easy task; it is a process and could take years to achieve the desired results. There are a few things though every trader should take in consideration that could accelerate the process: having a trading system, using money management, education, being aware of psychological issues, discipline to follow your trading system and your trading plan, and others.