The Forex Nitty Gritty

Whether a nation’s currency value goes up or down will depend upon its strategy for getting out of the recession. Traditionally, nations like the United States spend their way to recovery, with injections of cash into the financial system and, especially, by offering incentives to increase consumer spending. However, looking to the future, a better choice for getting out of the recession and creating the groundwork for a competitive society in the 21st century is by investing in improvements in infrastructure.

The long term trend for a given currency pair depends upon the economic strength and stability of a nation. The world is now emerging from the worst financial downturn in nearly 80 years. Huge amounts of money have been injected into economies in order to keep credit markets stable and the world seems to have avoided the worst, namely another Great Depression.

From the view of one’s Forex strategy, however, how a country deals with the short term problem is not enough. The question is which nation will use its “stimulus money” to improve its competitiveness in the coming decades. That nation will see its currency grow in value into the distant future.

Whether it is the nation or it is the business and industrial base of the nation that invests in its future, the outcome will be a more competitive and wealthier country. The outcome will be that within a given currency pair the better prepared country will see its currency appreciate and the nation which continually relies upon consumer spending and debt for economic recovery will see its currency depreciate in value in any and all currency pairs.

Although investment in economic infrastructure will show its effects over time, currency markets operate daily and the actions of nations and large economic entities are felt daily. Following the investment patterns of nations will allow one to formulate a more effective Forex strategy and to accomplish more in daily Forex Trading.

Following the investment activity of a nation will not only tell one whose currency will likely rise in the Forex market and whose currency will fall in the Forex market but will allow you to formulate a Forex strategy based upon an accurate prediction about where the action will be in the Forex market.

It is not just the fact that a currency will go up or down that allows for Forex trading profits but currency pairs vary continually, allowing the wise Forex trader to profit in both directions even when there is a steady upswing or down turn in a given currency.

Investment in hydroelectric projects, wind farms, biomass energy production and the like are likely to pay the USA dividends well into the 21st century and beyond as each barrel of oil that the USA does not import helps the value of the US dollar in all of the major currency pairs.

All of the improvements in weatherizing homes in the Northern USA will likewise lead to importation of less fossil fuel, a better balance of payments, and a stronger dollar in all currency pair relationships.

Trading forex online requires not just a mastery of technical subjects, but a reasonable command over the fundamental aspects of trends and market events which form the basis of market action. Comprehending the role of the US dollar as the world’s currency and the basis of international trade and finance is crucial to forming a fundamental grasp of the market action. Why is the dollar so important? Why does so much of forex action is denominated in the dollar? What is the secret of the importance of this currency to so many traders around the world? In this article we’ll take a look at the reasons behind this fact.

US is the world’s finance central

Few traders nowadays can fail to be aware that the U.S. is the world’s financial center. In spite of the important role played by Japan, despite the sophistication of London, contrary to the allure of places like the Cayman Islands, or Switzerland as tax havens to individual investors and hedge funds, the numerous financial centers of the U.S. remain the most dominant actors in the world markets. In spite of the importance of locations like Frankfurt or London, and rising centers such as Shanghai, New York, and the associated U.S. market remain the most powerful, sophisticated and deep ones in the world. The fact that the Chinese government seeks the expertise of U.S. firms for IPOs of public companies over their competitors in different parts of the world is one of the many evidences that can be shown to prove that the U.S. remains the center of the world economy.

US is the world’s largest economy

The U.S. economy is of course the world’s largest, and much of the influence and power of the U.S. currency is a result of the size of the American giant. U.S. is the major trade partner of many nations in the world, and although regional trade is increasing in importance with the rise of nations like India or China, America still remains the most important partner of many nations in the world.

US is the world’s greatest political and military power

Some nations prefer to support the dollar in return for U.S. guarantees of economic and diplomatic support. During the Cold War era, this was an even more important factor, but even today, nations in the Gulf Region, Australia, Taiwan, and even to a lesser extent in Europe, explicitly or implicitly support the dollar in exchange for political support, or simply traditions that have grown over the past decades.

The world financial system was built by the US

Finally, the international finance system as we observe it today was built mainly by the United States after the Second World War. Organizations like the IMF, or the World Bank are all sponsored by the U.S. to a large extent, and they were conceived and created to function best in a dollar-based international economic system.

Dollar is the trade and reserve currency of the world

As the world’s most important currency in economic, and political terms, the dollar is also the world’s reserve currency. Nations conduct international transactions in the dollar, and central bank reserves are mostly quoted and managed in U.S. dollar terms. No one has any interest in seeing a sudden collapse in the value of the U.S. dollar.

These are some of the basic reasons that give the U.S. dollar long-term advantage over other candidates to the status of the world’s reserve currency. Among these the role of the currency in the global financial system, and the diplomatic and political power of the U.S. are the most important factors contributing to its prestige at the moment. No forex trading strategy can be complete in the long term without taking the important advantages of the dollar into account, and that is only achieved by a careful study of the factors that have made the dollar centerpiece of the world financial system today.

An averaging of economic forecasts predicts a 3 percent US economic growth for the current quarter. So, it appears that things are getting better. Now that the worst is supposedly past, what does the future hold for various currency pairs? Which currencies will slide and which currencies will thrive? And which currency pairs will experience extreme fluctuations? What will be your Forex strategy in the post recession era where bailouts occurred in virtually every economy? What will be your Forex strategy when both sides of every currency pair have taken on huge amounts of debt?

We read the other day about the Russian government bailing out a large company with virtually no clear set of rules about how they may or may not get any money back. Although the US is concerned about the “too big to fail” policy that may have set up the recent financial debacle, the Chinese apparently are embracing it with both arms.

Who will emerge strong and have the stronger side of currency pairs in the coming years? We saw recently that short and medium term US securities are selling well. It would appear that some have faith in the US system, with all of its failings, as being more transparent and likely to succeed. One thinks of Japan, seemingly, ready to conquer the world economically twenty years ago and then promptly going into a prolonged economic slowdown because of hidden debt.

How currencies are managed, and the degree of transparency of an economy, are important to take into account in a Forex strategy. Relative values of currency pairs do not just hinge upon gross national product and national debt. Currency pair relative values also hinge upon expectations of sound fiscal management and transparency in financial dealings. A Forex strategy that takes these factors into consideration will likely succeed while a more narrowly focused Forex strategy will be more likely to fail.

A Forex strategy that takes economic transparency and good governance into account will more likely be able to pick trends in currency pairs successfully. More importantly a Forex strategy that is more knowledgeable is more likely to anticipate seemingly abrupt changes in relative currency pair values as economic problems cause obvious problems in “non-transparent” economies. A knowledgeable Forex strategy will help keep you from being surprised and help you take advantage of swings in currency pair values whether the news is another bailout or the collapse of a country’s economy.

Bailouts in the full light of day in the USA are one thing and a bailout that mimics those in the USA but really just means a political payoff to the “good old boys” in a country with corrupt governance is another. It took Western Europe, Japan, and the United States well over a hundred years to come to workable laws concerning property, trading, economic policy and the like. A free press has a lot to do with success in these matters. Seeing into what was going on in China or Russia used to be nearly impossible. Now, with more open borders it is easier, but still nowhere nearly as easy as dealing with Great Britain, the European Union, or Switzerland.

Remember, Forex trading profits come from a sound and knowledgeable Forex strategy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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.

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.

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.

If you want to try Forex trading, you must have some courage, a basic knowledge of Forex, and have access to well-researched Forex trading tips to help you trade successfully. Once you have a winning combination of these factors, you should be able to generate a constant stream of income beyond that of your regular job. Forex trading can become a very lucrative interest if you take the time to learn and test the tricks of the trade.

It is very important to spend a lot of time researching all aspects of Forex trading. Researching the field of currency trading will also get you familiar with the various terms and slang used in the foreign exchange market so you will not be an uninformed trader. You will also get an idea about how large the foreign exchange market is. Since the foreign exchange market has many individuals and businesses investing large amounts of money into it, its growth has been regarded as phenomenal. And the ability to learn the various aspects of the foreign exchange markets, and their related forex trading methods, will prove to be invaluable.

Here are some tips to trade currency that you can use at any time:

1. Before making the leap to real money, you must begin with a fictitious account. This is beneficial for everyone, for it will help you develop your own Forex trading strategies that can be used when you’re ready for the real thing. These strategies should not only keep you from losing a lot of money, but should also help you to win at any time.

2. Make sure that when you begin trading an actual Forex account, you’re not overwhelmed or feel like you can’t lose. You can lose your hard earned money, big time. You should not assume that your investments can be doubled because of a hot tip or because you’re trying to win back previous losses out of frustration. You can lose everything if you’re not disciplned. Self-control is of paramount importance.

3. Once you have developed a reasonably profitable Forex investing strategy, stay with it. But tweak it slightly over time to make it better. Do not make drastic changes all at once. Make slight modifications over time to slowly optimize your strategy.

4. Learn to interpret Forex signals correctly so you can make make the right decisions based on those signals. It is a wise move to find a good Forex mentor to help you along the way.

5. When trading an actual Forex account, keep records and track results so that you will know for sure if your strategy is making or losing you money. You will then be better able to make the right adjustments.

It’s possible to make a living or at least supplement your income with Forex trading. To be successful, develop a solid trading plan and stick to it, make small adjustments to your plan over time, eliminate emotion from your decisions, and you will make the right decisions most of the time.