The Forex Nitty Gritty

In a world where long term investment in stocks no longer promises healthy returns, or any return on investment for that matter, many have taken to day trading of stocks. We make the argument for trading Forex versus stocks. Rather than following as many as hundreds of individual stocks in the stock markets of the world, in Forex trading you can follow four major currency pairs in the Forex market. Because of high liquidity and volume in Forex trading of the major technical trading software may be more accurate allowing for predictable returns.

Just like investing in the stock market or day trading stocks Forex trading has its risks as well as its rewards. The ability to leverage investments always enhances the opportunity for profit and increases the possibility of loss. That having been said there are a number of advantages of Forex versus stocks. Sophisticated software allows one to trade the Forex market and profit from its high volume and substantial market trends.

In Forex versus stocks trading the Forex market allows for greater leverage than in day trading of stocks. Leverage of up to four hundred to one is possible. However, with this great of leverage you need to be well practiced with your software and knowledgeable about how much great a position to take and what your stop losses and profit targets are in Forex trading.

Waiting for a big market move and scalping during high volume can be very profitable in Forex trading.

Although understanding all of the facets of nations’ economies and the interactions of currency pairs is pretty complex the number of items that you can deal in is more simple in the Forex market than, for example, the US stock market where there are up to eight thousand NSYE and NASDAQ stocks to trade.

If you stick with major currency pairs in Forex trading you can deal only with the US dollar, the Japanese Yen, the Euro, the British Pound and the Canadian or Australian dollars. In all cases trading the US dollar against one of the other major currencies limits the number of options available and makes Forex trading, to a degree, simpler.

Because of the huge size of the Forex market no one entity can exercise overwhelming control. Thus in Forex versus stocks you will not see a “takeover bid” of the Euro by the Pound or the Yen by the Dollar. The Forex market is huge, liquid, and to a large degree more predictable. National currency values go up and down with economies, monetary policy, and the like. These are clearly visible to those who pay attention and do their homework.

Because of the liquidity of Forex trading you can make profits trading a currency pair and turn right around and reinvest in the next buy or sell. Markets are open from London to the USA to Japan over almost 24 hours. When there is action in the markets you can be there to make a profit in the Forex market. Like any skill Forex trading takes time to develop but you can practice simulation trading to your hearts content while you learn the basics and then the more advanced aspects of the Forex market.

The world economy is recovering and successful Forex trading needs to take note of a few things that will affect the Forex markets. Economists are starting to complain that the Federal Reserve has not raised interest rates. These economists claim that persistently low interest rates will distort the Forex market by keeping the dollar unrealistically low. The price of gold, oil, and other currencies is dropping at valued by the dollar and those holding US debt are getting angry. Forex trading in this market could be quite profitable.

The Dow Jones Industrial Average went over 10,000 demonstrating another sign of economic recovery. Gold, oil, and many other commodities are rising. The other side of the coin is that the dollar is falling in relation to these commodities. Producers of these commodities are prospering and their currencies will rise in the Forex market.

Recent oil news is of new oil finds in Africa in both Uganda and Sierra Leon. As India and China, especially, ramp up their industrial capacity the price of new found oil will go up. The Yuan and Rupee will be supported by the increasing prosperity of each economy and Forex trading will favor these currencies over the dollar. The question is, as always, when and how much.

Regarding interest rates a “correction” by the Federal Reserve will abruptly increase the value of the dollar on Forex markets. Forex trading will see a rapid value change and those who anticipate the Forex market change will prosper. Those who jump the gun will probably do well to have a very rapid exit strategy.

Oil, interest rates, and Forex trading are joined. The value of money is in its ability to buy goods and services. The anticipated value of money is in the predictable prosperity of those who produce and sell goods and services. Forex trading is inevitably tied to economics, monetary policy, availability of raw materials, and successful business practice. Oil, interest rates, and Forex relate in direct and reciprocal manners depending upon which currency you are looking at in the Forex market.

The persistence of very low interest rates tends to fuel financial speculation which means that many in the Forex markets have already anticipated a rise in interest rates. The economists will call this a distortion of the value of the dollar. In Forex trading this is how the system operates. Like a transparent stock market system the fact that many, many buyers and sellers are interacting throughout the day gives us the fairest valuation of the various currencies in the Forex Market. Of course, when the Federal Reserve does, or does not, raise interest rates the dollar will go up or down in Forex trading settling into a new fairest consensus value in relation to other currencies.

Likewise with oil prices, gold prices, and the like, the market drives prices and the Forex market adjusts currency values accordingly. Staying in touch with current market forces and monetary policy provides the opportunity for profit in Forex trading.

It is more than likely that you’ve heard the term Forex recently – it is quickly becoming one of the hottest trading options in today’s markets. This trend is likely to continue, but it is also important to consider trading foreign currencies for several reasons.

Several years past, brokers and large banks controlled the foreign exchange market. Today, the “little guys” are in the mix — and currency trading has almost doubled (from $1.9 trillion to nearly $3 trillion) in a very short period of time (that’s the same as the average turnover in the markets each day — a 50% increase in turnover).

Is Forex trading for me?

Forex markets are more stable and will follow trends, despite what may be happening in the traditional stock, commodity, and bond markets; additionally they are very liquid.

With that liquidity there is also constant volatility – and it is the volatility that creates the opportunity to profit from those trends. The bigger the risk, the greater the potential profit.

Stock markets are likely to be subjected to another major fall, and are regularly plagued with problems. The uncertainty in the stock markets is preventing them from taking any specific direction, or establishing a trend. Currencies are always being traded, and thus always bear a trend of some sort, so there is no worrying about bull and bear markets when trading in the Forex markets.

Moreover, the financial upheaval occasioned by the credit crisis and the overwhelming government responses means investing or trading in the stock markets will inevitably change – but these same events opened up even bigger opportunities in the Forex markets.

Understand, like any other trading Forex trading has its risks – and frankly, the majority of people come to the Forex markets with a completely wrong approach. The present economic and financial conditions make this an optimal time to jump into Forex trading, provided you do it right.

Bill Poulos, with more than 35 years as a trading veteran and Forex educator, has recently come out with a brand new video focused on the correct approach to Forex trading.

The average trader begins Forex trading with a focus on the notion of getting rich quick. But they are made very poor.

Bill will teach you how to properly trade Forex: first and foremost, to consider the risks; and second, to generate a profit. It’s totally turning the Forex community on its head.

Click on this link to a free video, and see if you agree:
http://www.theforexnittygritty.com/private-forex-training

The Wall Street Journal has a video wherein Treasury Secretary Timothy Geithner answers questions submitted by the Digg online community but asked by the WSJ interviewer. The questions had an angry town hall forum flavor to them but when Geithner answered a question about raising the mandatory federal deficit limit past $12 Trillion he did not blink. The days of Senator’s Everett Dirkson’s ironic comment, “A billion here, a billion there, pretty soon you are talking real money,” are long gone, unless you substitute trillion. So, what does this sort of monetary policy mean for the Forex market and Forex trading?

The dollar will go up, go down, or stay the same in relation to other currencies over the next years. However, there will always be swings along the way wherein lies Forex trading opportunity. It is the Forex expectation that drives the Forex market and trading in currency pairs.

When the previous Federal Reserve chairman, Alan Greenspan testified before congress the stock and currency markets reacted immediately to any voice inflection that implied a change in interest rates or modification of the federal deficit. Forex trading, likewise, responded to the Forex expectations.

Although the current Federal Reserve chairman, Ben Bernanke, is new on the job and not a legend yet, like Greenspan, his words still drive Forex and market expectations. Knowing when the Federal Reserve chairman will testify or when the Federal Reserve announces rates changes will mean you are ready to trade your chosen currency pair as the news comes out and Forex expectations are modified. Currency pairs will adjust and you can make your profit during the ensuing high trading volume.

The US economy is not going to collapse despite the huge addition to the Federal Deficit. In fact, if you believe Geithner and Bernanke, economic collapse may have been staved off by keeping credit markets open with the substantial amount of money poured into the system. The Forex expectation may well be a long term decrease in the purchasing power of the dollar and a long term decrease in the value of the dollar in relation to other currencies. However, no one knows how fast that will happen, or if it will. Forex trading profits are made as much by the contrarians as by those who follow the herd’s Forex expectations.

Forex trading still gets down to having a sense of what the currency markets are about and concrete knowledge of the currencies in which one trades. Then Forex trading has to do with your Forex expectations and how you read and anticipate the Forex expectations of the bulk of other Forex traders.

In the interview mentioned above Geithner is very critical of tax cuts in the face of enhanced benefits in Medicare and Social Security. He makes the point that the bailout money spent earlier this year needed to happen to avert economic collapse. If one’s Forex expectation is that Geithner and the rest of those formulating economic policy in the USA are serious about fixing things then we can expect to see them start to nibble away at the federal deficit. If that happens then Forex expectations will change and folks will start to buy dollars instead of selling dollars.

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.

Money is being made again as the recession shows signs of abating. The news tells us that the likes of Goldman Sachs, who needed a cash infusion from the government, have paid off their loan and are making substantial amounts of money. What does this increased business success mean for Forex trading in the Forex markets?
 
For Forex trading in the Forex markets there are two issues, volume and direction. As the world’s economies become more active again we can expect to see an increase in trading in the currency markets. In addition, the world economy will sort itself out after the recession and strong economies will see their currency strengthened and weak economies will see their currency weakened in the currency markets.

As China tries to diversify its currency assets by selling dollars we may see a drop in the dollar versus other currencies in the currency markets. The Forex market volume may go up on this basis. On the other hand, if the dollar gets weaker then US exports are strengthened and the dollar will rebound on the Forex markets.

If international banking and brokerage houses bases in the USA are making money does that mean the dollar will appreciate? To the extent that foreign investors see part of their investments turned in US based salaries we may see a small blip on the trading screen but a fractional improvement in corn and wheat exports will do substantially more.

The more likely result of more business activity will be an increase in activity on the currency markets with each individual Forex market dependent upon both bilateral trade and investments as well as how that currency market pair relates to other gaining or failing currencies.

The coming months will likely be busy and interesting in the Forex markets. We have talked before about trading with the overall trend as a means of making a small additional profit each day. However, with the possibility of substantially more volume and, perhaps, volatility, simply following the major Forex market moves will possibly be sufficient.

Remember that just because more money is moving in and out of the Forex markets you do not need to trade larger volumes in your Forex trading in the Forex market. More volume may also involve more volatility as the world economies sort themselves out. Thus you will always want to have a reserve to cover unexpected reversals as well as unanticipated opportunities.

If you do your homework, have your Forex trading plan in place, and see the right signals you will want to have enough cash ready to take advantage of a dramatic change in the Forex market. That will not happen if you strap yourself for cash with every trade, get caught short, and are busy trying to recoup your currency market losses just as opportunity knocks.

Opportunities come and go in Forex. Do your homework. Practice your Forex plan. Be ready when market volatility, volume, and direction provide you with the chance to cash in on all of your preparation work and investment.

Yes, you will trade day by day, hour by hour and minute by minute in the Forex market. So, your Forex strategy is the short term fluctuation that will make you money, not the long term trend. Right? Maybe. Inflation is likely to set in as economies confront the huge amounts of debt they have taken on to provide stimulus to prevent a recession from getting worse. How does the expectation of steady inflation in one economy affect your Forex strategy of a given currency pair?

An accomplished poker player knows and plays all of the odds. Over a long night or a long weekend the player who knows and plays the odds wins more, on the average, over time. There is nothing spectacular in this just like many aspects of ones Forex strategy may not be spectacular but when trading in the Forex market over time, for the long haul every little bit helps.

This part of one Forex Strategy has to do with that little bit extra every so often that mounts up over time. It also has to do with staying contained and staying on plan with your Forex Strategy. By staying contained I mean not trading up to your limit, every trade, all the time in the Forex market but doing repeated small trades.

If you know that the dollar is in a long term slide against the pound or the yen or, more to the point, it is in a month long free fall then you can modify your Forex strategy accordingly. If you are trading in light volume and are trading in the direction of the dollar’s free fall (in this example) you might get stuck when the market shifts. Let’s say you sold dollars and bought pound sterling expecting to buy back cheap dollars at the end of the day. The market rebounds and if your Forex strategy is to trade in large amounts then you had better get out of the trade fast and accept your losses. However, if you are trading in a lower amount, a smaller fraction of your reserves, you can wait for the market to turn around.

If, indeed the market is trending, over time in a given direction then trading with that direction in mind will give you that little advantage that mounts up with days, weeks, and months of Forex market trading.

Obviously you will follow the advice of your Forex trading software. However, when the software recommends a trade that does not work out then let it be that you will profit when the market resumes its medium and longer term direction.

Long term success in the Forex market as in other parts of life is the details. Finding each mini Forex strategy that makes sense and adding it to your tool kit will give you that little advantage every day and that advantage will lead to a little bit more daily success which in turn will lead to excellent long term results. Knowing your currency pairs, knowing long term trends, and factoring in the long and medium term trends into your short term Forex strategy will enhance your Forex market success.

The Forex market is huge and trades nearly 24 hours a day. These facts are given as reasons why you should trade the Forex Market. Both are good reasons. You can be in the market whenever there is trading volume and liquidity. However, that also means that you will work in the early morning hours if you trade the London market or late night hours if you trade Tokyo and live in the USA.

Because you will typically be able to trade in large volume and liquidity your technical analysis software will be more accurate. That is an excellent reason to trade in the Forex market. However, you need to make a point of trading the ideal hours and market, typically London where the largest volume is.

The Forex market offers you the option of 100 to 1 leverage. Higher leverage can certainly lead to more Forex profits in your Forex trading. It can also lead to the loss of all of your capital. This reason is a mixed one. For the professional, highly skilled, highly experienced trader there will be very select times when trading with a high leverage will be the way to Forex profits on very clear market moves with high volume and exceptional liquidity.

However, most professional, highly skilled, highly experienced traders in the Forex market have survived and made their Forex profits by following a well thought out, conservative, Forex trading plan that does not include 100 to 1 leverage.

You can make money working at home a few hours a week. Right! There are folks out there making trades who have been doing it for years, have incredible experience, are connected insiders in the international financial community and you are going to beat them at their own game in your spare time?

Forex trading in the Forex market is a job. Forex trading can be a very lucrative job with wonderful Forex profits. You make your Forex profits in the Forex market by doing your homework, knowing your Forex software, and being well versed in the Forex market currency pairs you work with. But Forex trading is with real money and for every person who makes Forex profits there is a person who does not.

If you have an internet connection you can trade in the Forex market. Make that, “If you have a reliable, high speed, internet connection and have all of your computer gear and software set up, you can trade in the Forex market anywhere. You do not want you internet connection to go down just when you need to buy or sell and then find that when you get back on line that you have lost your shirt!

Since you will be trading a limited number of currency pairs you will need to do less analysis than if you are in the stock market where there are thousands of stocks. It would be an extreme rarity to find someone who personally trades thousands of stocks. Doing a good job of keeping track, of more than a few stocks, can be difficult.

Certainly dealing with one currency pair can help you narrow your focus. However, the number of factors that affect currency values is huge and can be overwhelming unless you make it a point of keeping up with the essentials. Otherwise your research in the Forex market can come to resemble someone trying to keep up with thousands of stocks.

Sometimes we trade the news and sometimes we trade technical factors. Sometimes you can make more money trading by anticipating the trades of other traders. If you know when the bulk of traders will buy or sell you can place orders to buy and sell just “inside” of theirs and win each time. Right? Maybe.

What drives the Forex market? Yes, over the long term it is fundamentals. When a country prospers and its interest rates go up and its exports go up, etc. so does its currency in the Forex market. However, along the way Forex trading causes buys and sells based upon shorter term expectations and the Forex market reacts. This is where technical trading in the Forex market comes in.

Here are a couple of thoughts about technical Forex trading, Forex market psychology, and the like. How does Forex trading software project support and resistance levels? When your Forex trading software suggests that you buy or sell one currency versus the other it has done some very fast calculations, often based upon Fibonacci numbers, retracement levels.

This article will not pretend to explain the mathematics off all Forex trading software. The point is that similar types of mathematics are used in all Forex programs.

So, let’s say that the dollar is in a nosedive after a particularly bad session of Mr. Bernanke before congress. In this scenario everyone knows that the dollar will weaken over the next few months. But, how fast and how much are the questions. So, everyone places their bets differently, right? I mean we are all individuals and cannot all agree, right?

Wrong. If we all use variations of the same Forex trading software and get the same calculations using the same assumptions then we can all come to the same conclusions at the same time or, at least, our Forex trading software can!

What often appears to be market psychology is lots of traders following their software like sheep. Now, who cares, if it makes money? Right? Well, you could make more. And, if you are losing money, then what?

When everyone is trading based upon the same general computer calculations there is a matter of predictions that fulfill themselves.

Whenever purely technical Forex trading gets you in trouble it is good advice to take a fresh look at the fundamentals. However, sometimes it is the technical trading that gets you into trouble if you are the last one to click the button when everyone else is getting in or out of a trade. At that time you need to look at your Forex trading software or maybe look at being satisfied with a little less profit or a little less risk. Maybe selling just before the recommended resistance level will work.

If we all had unlimited capital then we would not worry about a short term glitch so long as our trade is in the direction that fundamentals tell us the Forex market will move. We do not all have unlimited assets but it is possible to keep ones trades within a reasonable fraction of available capital. Then there is room for correction and there is room to wait for fundamentals to assert themselves despite a herd of computers moving in lockstep moving the market back and forth.

In the Forex market the Forex news is the past. What matters are your Forex strategy and your anticipation of the next Forex news. “The dollar slides versus the euro.” “The Yen gains versus the British Pound.” These are the news headlines we see. The appropriate response is, “So what?” Your Forex strategy has to do with anticipating the news that will affect a Forex market move and developing more efficient means of taking a profit on that move.

Responding to the news of Forex market moves is like taking old stock tips. You are always the last one to get the tip and the stock is ready to move the other way. Don’t be mistaken. You need to read and keep up with the news. You also need to know what news is important and when it is coming out. Here we are talking about government reports such as the US Federal Reserve’s update of US economic conditions in its Beige Book. What we are not talking about is reading a newspaper article the following day reporting what some reporter says the Fed had to say.

It is important to know when the important data will be available because when such data is released that is when the Forex market as well as stock and options markets make their moves. Your Forex strategy should be to plan what you will do in response to any given set of reports. To the extent that the news is a report of government reports you are too late and are taking an old tip.

Your Forex strategy should include keeping current on trade data for the countries whose currencies you trade in the Forex market. For the USA agricultural data is important because it is the largest part of US exports. Thus keeping current on weather conditions, crop disease, etc. need to become of your Forex strategy routine. You do not need to become a soybean expert but knowing if there is a bumper crop expected in Brazil while the US is experiencing a drought is important if you trade dollars in the Forex market.

Likewise keeping up on what airplane and aerospace orders Boeing has is a helpful Forex strategy is, next to US agriculture, Boeing is typically the largest US exporter. The US debt and balance of trade are also things you need to keep up on. Again, your Forex strategy is to stay conversant on these matters and have a plan for how you want to trade depending upon if the various reports come in as anticipated or if they contain surprises, which typically roil the Forex market and other markets.

Once you are routinely keeping up with the current state of things that affect the Forex Market is when you begin to formulate a long and short term Forex Strategy. What do you believe the Forex market will do in the next week and in the next year? Your Forex strategy will be your responses to market moves with and against the generally expected flow of the Forex Market.

When there is a natural disaster or something like the terrorist attack on the World Trade Center your Forex strategy needs to include the possibility that markets will suddenly close. Your Forex strategy needs to be able to anticipate immediate currency pair changes and the Forex market corrections that always occur after a moment of general panic.

Having a well thought out Forex strategy is how you take advantage of the news even before it hits the streets.