The Forex Nitty Gritty

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.

The Forex market reflects the fact that the world economies will soon be on the mend. The Forex market and daily Forex currency trading anticipates the eventual relative values of currencies. Your Forex trading software anticipates the next Forex Market move based upon a database of past experience and sophisticated programming. Does having insight into where the Forex market will be next week, month, or year make any difference in daily Forex currency trading?

We can reasonably expect that some currencies will lose value over time and some will gain value as the world readjusts after the recession. Those who anticipate whose currency will drop in value and who will gain will come out winners in Forex currency trading. Forex trading software is basically technical trading in a box. It follows the patterns of the year, month, day, hour, minute, and second to give you a statistically based recommendation.

You believe that the US economic stimulus package was too big and that, over time, it will lead to inflation and a drop in the value of the US dollar in the Forex market. So, the question is this. In your Forex currency trading do you continually sell dollars for Yen, Euros, or the Pound Sterling? Not really.

Successful Forex currency trading is based upon the fact that the slide of the dollar or its ascent is not a smooth algebraic curve. The Forex market takes into consideration multiple events, trends, and possibilities and then does its Forex currency trading. The huge number of traders, each with a slightly different mindset, makes for a set of discontinuous market curves. It turns out that things like fractals out of so called Chaos Theory often do a better job of explaining what is going on than the algebra you learned in school. That is why you buy Forex trading software.

For your Forex trading software to work you need to practice and you need to be true to your Forex market trading plan. When the Forex market moves there is plenty of opportunity for profit for a practiced trader.

Forex market insight is still important because he or she who knows more has the opportunity to gain more in Forex currency trading. However, adequate Forex market insight has to do with knowing daily events as well as long-term trends and has to do with the Forex currency trading that is going on every day in many different currency pairs at once. This is where taking the time each day for a bit of homework and developing a reasonable Forex currency trading plan comes in.

Forex market insight will help with are some very practical Forex market considerations such as what market(s) to trade, and what hours and days to trade the Forex market and what hours and days to sit it out and watch. The great baseball pitch Satchel Page was asked why he so often stared at the batter a long time before throwing the pitch. Page joked that if he did not throw the ball the batter could not hit it! If you don’t know what is going on in the market, don’t panic and make things worse for yourself. Sit it out.

In trading the Forex market you have a Forex trading program and you have your own Forex trading strategy. Why do you need a Forex strategy if you already have a Forex trading program to trade the Forex market? The answer has to do with what your Forex strategy will be when the Forex trading program recommends a trade and the Forex market promptly goes the other way!

Computers can make very fast calculations based upon their programming and input. They can access their statistical programs and give you a recommendation that given past data input is predicted to be right 95% of the time. So, what if circumstances change at mid trade or what if your trade falls on the 5% side that is wrong? What is your Forex strategy then?

Forex traders debate whether a fundamental analysis or technical analysis is the way to go. That’s easy. They both are. You cannot think, analyze numbers, and do calculations as fast as today’s computers. However, programming a computer is like training a dog. It may do everything you want it to do to a point but it is still a dog.

You need to know the ins and outs of your trading station. You need to understand the technical analysis your Forex trading program does for you and how you can modify the parameters by which your Forex trading program makes suggestions. If you come out on the “5%” side you need to have a clear idea of what to do and how fast. If your fundamental analysis is good then your Forex strategy is to react according to what you know and what your computer doesn’t know.

A recurring situation is when the currency markets make a big shift. You get in part way through just as there is a correction. If you understand the Forex market fundamentals then you will ride out the correction and make a substantial profit or the day. If you jump ship based upon the advice of your Forex trading program and follow a bad Forex strategy then you will be substantially down for the day.

Your Forex trading program is a tool to trade the Forex market. Your Forex strategy can be thought of as a tool but since it is in reality in your head it is you. The more you know and the better prepared you are the more effectively you can execute your Forex strategy.

May we all have days when the Forex trading program is always right on the money and we never need to think much or worry. On the other hand trading the Forex market is a place where dreams come true without sound thinking and applied effort. Success requires a sound Forex strategy. The stronger your Forex trading strategy the better use you will be able to make of your Forex trading program. Knowing which currencies to trade, which Forex markets to trade and which days you could just as soon go to the beach is part of your Forex strategy. No trading, by the way, is sometimes the best Forex strategy when the Forex market’s moves baffle you. It is never a sin to put your Forex Trading Program in simulation mode and practice, observe, and reformulate your strategy.

10 REASONS TO START TRADING FOREX!

More and more well informed investor and entrepreneurs are diversifying their traditional investments like stocks, bonds & commodities with foreign currency because of the following reasons:

1) FOREX is the largest financial market in the world.

With a daily trading volume of over $1.5 trillion, the spot FOREX market can absorb trading sizes that dwarf the capacity of any other market. In fact, when compared with the $50 billion daily market for equities or the $30 billion futures market, it becomes quickly apparent this gives you, and millions of other FOREX traders, almost infinite trading liquidity and flexibility.

2) FOREX is a True 24-hour Market.

The FOREX Market never sleeps. Trading positions can be entered and exited at any moment around the globe, around the clock, 5.5 days a week. There is no waiting for an opening bell as in the case of trading stocks. It is a 24- hour, continuous electronic (ONLINE) currency exchange that never closes. This is very desirable for you if you want to trade on a part-time basis, because you can choose when you want to trade: morning, noon or night.

3) There is Never a Bear Market in FOREX.

You can have access to a seamless exchange of currencies. Currencies trade in “pairs” (for example, US dollar vs. JPY (YEN) or US dollar vs. CHF (Swiss franc), one side of every currency pair (for example, USD/CHF) is constantly moving in relation to the other. Thus, when you buy a particular currency, you are actually simultaneously selling the other currency in that particular pair. As the market moves, one of the currencies will increase in value versus the other. Of course, it is up to you to choose the correct currency to be long ( you bought) or short( you sold).

4) High Leverage – Up to 400:1 Leverage

You are permitted to trade foreign currencies on a highly leveraged basis – up to 400 times your investment with some brokers.

Standard 100,000- US$ currency lots can be traded with as little as 0.25% margin, or $250.

Mini FX accounts are permitted to trade with just 0.25% margin, meaning, just $25 allows you to control a 10,000-unit currency position.

Futures traders, who are accustomed to margin requirements generally equal to 5-8% of the contract value, will immediately recognize that the FOREX market provides much greater leverage, and for stock traders, who must post at least 50% margin, there’s no comparison. If you’re looking for an efficient use of trading , trade the Forex Market.

5) Price Movements Might be Highly Predictable.

Currency prices in the FX market generally repeat themselves in relatively predictable cycles, creating trends. The strong trends that foreign currencies develop are a significant advantage for traders who use the “technical” methods and strategies.

Unlike stocks, currencies have the tendency to develop strong trends. Over 80% of volume is speculative in nature and, as a result, the market frequently overshoots and then corrects itself. As a technically-trained trader, you can easily identify new trends and breakouts, to enter and exit positions.

6) YOU don’t pay commissions or fees to trade FOREX.

When you trade FOREX, through some brokers you can do it totally FREE of commissions and fees , regardless of your account size.

Some brokers require a very low minimum amount to open a brokerage account, only US$ 200 and they do not charge commissions or fees to trade or to maintain an account, regardless of your account balance or trading volume.

7) YOU don’t have to pay trading fees or exchange fees.

There are none of the usual fees, which futures and equity traders are accustomed to pay:

NO exchange or clearing fees,
NO NFA or SEC fees.

Because currencies trade over-the-counter (OTC), via a global electronic network, in FOREX, what you see on your trading screen, is what you get, allowing you to make quick decisions on your trades without having to worry or account for fees that may affect your profit/loss or slippage.

In the equity and commodity markets, you must pay both a commission and exchange fees. The over-the-counter structure of the FX market eliminates exchange and clearing fees, which in turn lowers transaction costs.

HOW to Forex brokers make money if they don’t charge commissions?

Like all traded financial products, over-the-counter currency trading involves a bid/ask spread, which represents the prices at which your counterpart is willing to trade. Your broker will receive a part of this bid/ask spread.

Because the currency market offers round-the-clock liquidity, you receive tight, competitive spreads both intra-day and night. Stock traders can be more vulnerable to liquidity risk and typically receive wider trading spreads, especially during after-hours trading.

9) Market Transparency

Market transparency is highly desired in any trading environment. The greater the market transparency, the more efficient the market becomes. Unlike other markets where transparency is compromised (like in the many recent scandals), FOREX markets are highly transparent (i.e., analyzing countries, and having access to real-time research / news, is easier than analyzing companies).

Because of this transparency, as an FX trader, you will be able to apply risk management strategies in accordance to your fundamental and technical indicators.

10) Instantaneous Order Execution

The FX market offers the highest level of market transparency out of all the financial markets. Because of this, order execution and fill confirmation usually occur in just 1-2 seconds.

In Forex, order execution is all-electronic and because you’ll be trading via an Internet-based platform, instantaneous execution is routine.

There are no exchanges, no traditional open-outcry pits, no floor brokers, and consequently, no delays.

The 2% rule is a powerful tool in Forex trading. By adopting this rule you`re using a strategy that decreases the size of your losses during losing streaks, an important consideration.  There is, however one small caveat that you need to be aware of when using the 2% rule to calculate how many Forex shares you are going to buy. As you know, the number of shares you can purchase is determined by your maximum loss and the size of your stop. This means that by increasing your risk, you can also increase the dollar value of the position you open. By simply shrinking your stop size, that is by setting a tighter stop loss, you can increase the dollar value of the position you open.

To avoid a situation where you could end up with excessively large positions that may put your Forex trading float at risk, you can choose to introduce an extra rule. This rule would limit the dollar value of a position to be no more than a set percentage of your entire Forex trading float.

For example, you might decide that you`ll never open a position that has a dollar value of more than 25% of your entire Forex trading float. This rule would only be executed if, after calculating the formula that determines how many shares you buy, you find the dollar value of that position would greater than 25% of your float. If this happened, you would scale down the position to make sure it did not exceed that 25%.

The percentage that you decide upon will depend on the type of system you`re trading, the size of your float, and your personal tolerance for risk. Generally, smaller Forex trading floats might use 25%, and larger Forex trading floats might use as little as 10% or even 5%. There are no definitive numbers, and the percentage that you choose will depend on your personal circumstances.

Once this tendency is corrected for you will have all your money management rules in place, ready to control your risk in the Forex market. Now you need to take the next step. Test your system to find out which of the variables best suit you, remembering always that position sizing is the most significant part of any system design. It is the lynchpin of money management. Once you`ve tested your system, and fine-tuned your rules, you will be well on your way to becoming a successful Forex trader.

Todays current futures market is quite unlike the futures of the 19th century. Todays future market is a worldwide one that includes manufactured goods, financial currencies and treasury bonds, and agricultural products.

When you speculate on futures it is not the actual good that is speculated upon rather it is the contract for the goods that is traded as value. Every futures contract includes a buyer and a seller. The following is an example of a futures speculation: A farmer agrees to deliver 1000 bushels of corn to a baker at a price of $5.00 a bushel. If the daily price of corn futures falls to $4.00 a bushel, the farmer’s account is credited with $1000 ($5.00 – $4.00 X 1000 bushels) and the baker’s account is debited by the same amount. Futures accounts are settled every day.

Using the above as an example this is how the contract settlement would play out: If the price of corn futures is still at $4.00 the farmer will have made $1000 on the futures contract and the baker will have lost an equal amount. However, the baker can now purchase corn on the open market at $4.00 a bushel – $1000 less than the original contract, so the amount he lost on the futures contract is made up by the cheaper cost of corn. Also, the farmer must sell his corn on the open market for $4.00 a bushel, less than what he anticipated when entering the futures contract, but the profit generated by the futures contract makes up the difference.

Speculators profit by daily fluctuations in the futures market by choosing to buy from the seller (buying short) or from the buyer (buying long).

The FOREX market has advantages over the futures market. FOREX is the largest financial market in the world. It is a liquid market and stop orders can be executed more easily and with less slippage than in other markets. The FOREX market is open 5 days a week, 24 hours a day. Traders can take advantages of opportunities as they become available. FOREX transactions are usually instantly executed. FOREX transactions are commission free. Brokers earn money on the spread.

Some investors feel that due to built in safeguards that FOREX trading is safer than futures trading.

The Foreign Exchange Market – better known as FOREX – is a world-wide market for buying and selling currencies.

It handles a huge volume of transactions 24 hours a day, 5 days a week. Daily exchanges are worth approximately $1.5 trillion (US dollars). In comparison, the United States Treasury Bond market averages $300 billion a day and American stock markets exchange about $100 billion a day.

The Foreign Exchange Market was established in 1971 with the abolishment of fixed currency exchanges. Currencies became valued at ‘floating’ rates determined by supply and demand. The FOREX grew steadily throughout the 1970’s, but with the technological advances of the 80’s FOREX grew from trading levels of $70 billion a day to the current level of $1.5 trillion.

The FOREX is made up of about 5000 trading institutions such as international banks, central government banks (such as the US Federal Reserve), and commercial companies and brokers for all types of foreign currency exchange.

There is no centralized location of FOREX – major trading centers are located in New York, Tokyo, London, Hong Kong, Singapore, Paris, and Frankfurt, and all trading is by telephone or over the Internet. Businesses use the market to buy and sell products in other countries, but most of the activity on the FOREX is from currency traders who use it to generate profits from small movements in the market.

Even though there are many huge players in FOREX, it is accessible to the small investor thanks to recent changes in the regulations. Previously, there was a minimum transaction size and traders were required to meet strict financial requirements. With the advent of Internet trading, regulations have been changed to allow large interbank units to be broken down into smaller lots.

Each lot is worth about $100,000 and is accessible to the individual investor through ‘leverage’ – loans extended for trading. Typically, lots can be controlled with a leverage of 100:1 meaning that US$1,000 will allow you to control a $100,000 currency exchange.

There are many advantages to trading in FOREX, including:

- Liquidity: Because of the size of the Foreign Exchange Market, investments are extremely liquid. International banks are continuously providing bid and ask offers and the high number of transactions each day means there is always a buyer or a seller for any currency.

- Accessibility: The market is open 24 hours a day, 5 days a week. The market opens Monday morning Australian time and closes Friday afternoon New York time. Trades can be done on the Internet from your home or office.

- Open Market: Currency fluctuations are usually caused by changes in national economies. News about these changes is accessible to everyone at the same time – there can be no ‘insider trading’ in FOREX.

- No commission Fees: Brokers earn money by setting a ’spread’ – the difference between what a currency can be bought at and what it can be sold at.

How does the foreign currency exchange market work?

Currencies are always traded in pairs – the US dollar against the Japanese yen, or the English pound against the euro. Every transaction involves selling one currency and buying another, so if an investor believes the euro will gain against the dollar, he will sell dollars and buy euros.

The potential for profit exists because there is always movement between currencies. Even small changes can result in substantial profits because of the large amount of money involved in each transaction.

At the same time, it can be a relatively safe market for the individual investor. There are safeguards built in to protect both the broker and the investor and a number of software tools exist to minimize loss.