The Forex Nitty Gritty

An interesting new problem may have arisen for currency traders, how to trade a declining Yuan. The assertion regarding the Chinese currency for many years has been that the People’s Bank of China buys dollars in order to reduce the value of the Yuan and keep Chinese exports flowing. The continuing balance of payments deficits that the US, especially, runs with China, has led US and other lawmakers to demand that China allow its currency to float without any intervention. The theory is that by allowing the Yuan to float Chinese exports will become more expensive and less competitive. Now it appears that the Yuan is falling in value, and not because of currency manipulation. Today’s currency traders trade a declining Yuan as the global economic recovery weakens and the twin financial crises in North America and Europe threaten a second dip to the recession and substantially reduced imports from China. In addition an increase in Chinese imports may well erase the Chinese trade surplus, according to Chinese sources.

Those who currently trade a declining Yuan, have watched as Yuan forwards declined. Forwards are derivative contracts used to hedge currency risk or engage in currency speculation for profit. Unlike trading options on currencies no money changes hands when a forward contract is agreed upon. Also, unlike options contracts, both the seller and the buyer are obligated to fulfill their portion of the forward contract on the delivery date. As currency traders anticipate a falling Yuan, forwards decline. The early result of the debt crisis in Europe and the USA has been the appreciation of other currencies, including the Yuan. However, the threat of a substantial economic downturn in both economies threatens Chinese exports and threatens to drive down the Yuan. Chinese exports did, in fact, fall last month. While talk of internationalization of the Yuan persists its value seems to be driving today by the market and much less so by currency manipulation.

To trade a declining Yuan will require a change of mindset for many traders. The Yuan rose to a seventeen year high against the dollar in mid-November, after a nearly four percent run up this year. Some may merely view this as a correction. However, the debt issues in Europe and North America are terribly real. Thus the Asian exporters who have profited from keeping their currencies weak and have built up huge dollar and Euro currency reserves are likely to pay a price in terms of reduced exports. A silver lining to the clouds may be that as the Yuan depreciates the value of China’s reserves will go up. For those set to trade a declining Yuan two general issues come to mind. One is that the continued appreciation of the Yuan is not guaranteed, especially if China ceases to manipulate its currency. The other is that China has its own set of internal issues and problems. The nation has had steady economic growth for years and many Chinese would consider it political suicide to drastically reduce exports and cash flow into the country. China states that it intends to increase development of internal infrastructure projects in order to maintain high employment and its internal economy. With time, to trade a declining Yuan or a rising Yuan traders may spend less time concerning themselves with currency manipulation and will watch the same sorts of employment numbers and statistics as they watch in the USA when trading the US dollar. With time the Yuan could join the dollar as a safe haven currency.

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Foreign currency trading is necessary for international trade. It is also an arena for the speculator looking for profits as well as companies wanting to hedge currency risk in international transactions. A German company may wish to sell machine parts to a company in the USA. They will want to be paid in Euros. The US company will need to use foreign currency trading to convert dollars to Euros in order to pay. The companies will come to an agreement on a price, in Euros, for the machine parts and the US company will pay upon delivery. If any time lapses between agreement and payment the US company will run the risk that the US dollar will fall in relation to the Euro. This will make the machine parts more expensive than anticipated. How to trade Forex in this situation can be done two ways. The US company can immediately buy Euros with dollars and make payment when the parts are delivered. This will be a good solution when the wait is a few days. If the contract will take six months to execute, the US company will not want to tie up its capital that long. The other reason for not immediately buying Euros is that the price the Euro in relation to the US dollar might fall. In that case the US company will get its machine parts at a discount. The other solution in this type of foreign currency trading is to buy options.

Foreign currency trading with options allows the company to guarantee itself the current price of Euros in US dollars if it chooses to execute the contract. It will be, however, under no obligation to execute the options contract. Thus the company will simply let the contract expire and take its profits if the price of the Euro falls. It will execute the contract, buy Euros at the contract or strike price if the Euro rises against the dollar. Traders can use Forex technical strategies in foreign currency trading as another means of enhancing profits and limiting losses. As news hits the Forex markets traders react. Not only do all traders not react the same to the news but all trades cannot happen at once. Thus there is a degree of inefficiency in the foreign currency trading markets when the fundamentals change. By following technical price patterns a trader can often successfully anticipate price changes and trade accordingly.

In times of economic, political and social chaos foreign currency trading often has more to with finding a safe place for assets than for finding stellar profits. This usually has had to do with the dollar as a safe haven currency. The dollar for all of its problems is the currency of a democratic nation, a huge economy, and a stable society. This cannot be said for all currencies of the world. Thus when war breaks out in North Africa and political demonstrations occur in countries throughout the Middle East a common occurrence is that traders buy dollars, Yen, or Swiss francs until the situation stabilizes.

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

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

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

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The standard wisdom on war and currency trading is that wars drive investors to put their money in currencies such as the dollar as a safe haven currency. Investors and traders respond to the uncertainty and economic disruption caused by armed conflict. Besides buying the US dollar, investors commonly buy Swiss francs, Yen, Euros, British Pounds, or gold bullion. When it is possible that a currency will devalue greatly, or disappear in the case of conquered country, any reasonably stable currency is a good bet. However, wars resolve themselves, for good or for ill. There are winners and there are losers. Depending upon who gains control of natural resources or markets economies may prosper as a result of war. When an economy prospers its currency commonly rises as well. This is, sadly, why many nations go to war.

Using the civil war in Libya as an example we can speculate about how that war and currency trading relate to each other. The facts of the day are always discounted by the market so it is possibility and speculation that drive prices. Those who might expect to be most closely affected by events in Libya are the European Union, Switzerland, and Great Britain. This is because Libya is a nearby supplier of oil. An unstable Libya is an unreliable source of oil. A rebel dominated Libya beholding to NATO forces and Arab supporters then becomes a goal for the oil consuming nations to the North of Libya. In that regard it is of note that rebel forces in the East of Libya have started selling oil through a Swiss trading company. The sale of a million barrels of crude oil promises to help the rebel cause in Libya and allow Libya, or part of it, to remain a stable supplier to oil to Europe. This becomes good news for the Swiss franc, Euro, and British Pound. Recently we wondered about Egypt and the Euro. Egypt came through its political crisis without violence. When demonstrators asked for more rights in Libya, the government responded with lethal force plunging the nation in civil conflict. War and currency trading issues are still a concern in Yemen, Syria, and Saudi Arabia as demonstrators demand right from rigid governments. The attentive currency trader will watch these situations and trade accordingly.

The Forex trader who accurately anticipates arms conflicts can profit by directly trading currencies that will suffer in consequence and in trading options on currencies with the likely end result is not so clear or certain. How to trade currency profitably is by anticipating war and currency trading in a timely manner. Many international companies trade these same situations in order to hedge currency risk. Speculators simply anticipate the sales and purchases of the major players in order to profit from war and currency trading. The first half of profiting from safe haven trading is when a crisis emerges. The second half is anticipating price movements of currencies as crises resolve. For example, as the Libyan situation stabilizes one might expect the Euro, Swiss franc, and British Pound to rise a little. To the extent that this happens and to the extent that a trader can anticipate it, he can  profitably trade situations of war and chaos and their effects on currency markets.

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

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

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

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The Federal Reserve buying gold and foreign currency can affect the Forex market in a number of ways. The Federal Reserve and the central banks of many nations routinely intervene in the Forex market in order to maintain the strength of a given currency or in order to hold its price down. The Federal Reserve buying gold and foreign currency can affect the US dollar or affect any currency the Fed chooses to buy with dollars. The Fed will, for example, choose to intervene in the currency markets in order to reduce the relative value of the dollar compared to the currencies of its trading partners. By selling dollars and buying gold or Yen, Euros, Swiss francs, or any other currency the value of the dollar tends to be reduced across the board. By buying Yen the price of Yen tends to go up in relation to the dollar. The same is true with Canadian dollars, Australian dollars, British Pounds, and the rest. How to trade Forex successfully will include having an understanding of how the Federal Reserve buying gold and foreign currency can affect the currency pair that one is trading.

The Federal Reserve buying gold and foreign currency can affect US exports, imports, and the US balance of payments. That is, in fact, why the Fed will choose to intervene in the Forex markets. The value of the US dollar in relation to other currencies is only important so far as it affects issues such as how effectively US companies can export their products and compete with foreign imports. The Asian exporters, Japan, Taiwan, and China, especially, have acted for years to raise the value of the US dollar and keep their currency values low in comparison. This has made their products cheaper, and thus more attractive to US buyers. It has given them a competitive advantage and contributed greatly to their success as exporters. The problem for the USA and the value of the dollar lies in the economic success of the USA and the relative stability of its currency, economy, politics, and national borders. The US dollar is a safe haven currency. In times of world wide turmoil and instability people buy dollars. This is a tribute to the high standing of the dollar and tends to keep the dollar artificially high. For the trader, as an example, how to invest in Euro is to buy the day before the US Fed decides to buy a few billion Euros with dollars.

The Federal Reserve buying gold and foreign currency can affect the artificial elevation of the value of the US dollar. When a big player, like the Fed or a large central bank, dumps a large amount of its currency in the Forex market there are immediately more sellers than buyers of the currency and will be until the price of the currency comes down to where every last offered dollar is purchased. The affect is to reduce the value of the dollar and raise the value of each and every currency which the Fed buys. The same applies to gold. Gold goes up when the US replenishes its gold reserves. How to trade Forex in these situations is to keep up with the Forex news and any announcements by the Fed. It is to anticipate when the Fed is likely to intervene. Then the trader needs to be able to anticipate just how well the sale of dollars will work in reducing the value of the dollar and just how soon it will rebound and trade accordingly.

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As another round of European debt bailout talks hit the news we look at just how to short the Euro in advance of farther declines. The Forex trader working in the EUR/USD pair can sell Euros and buy dollars. Thus he is “short” the Euro and “long” the dollar. However, people who are used to trading stocks may be looking for something analogous to selling a stock short in which the trader borrows shares from his broker and promptly sells them. How to short the Euro in a way similar to shorting a stock is to deal in futures or options in the Forex market. By selling a futures contract on the Euro a trader expects to be able to profitably exit his position at a later date once the currency has fallen below the futures contract value. Then he earns the contract price and pays the, then current, market price for the Euro. He can also purchase a put option on a futures contract which gives him the right but not the obligation to sell the Euro. In this case, if the Euro recovers, he only loses the price of the options premium. In the current uncertain circumstances how trade Forex on the Euro may well be to short the currency.

For those not directly engaged in trading foreign currencies there are other strategies for how to short the Euro. These involve using the Euro to buy stocks or gold or shorting an ETF that tracks the performance of the Euro. As we watch the downward direction of the Euro not all Europeans are sad to see the decline. European exporters like Siemens stand to see their products become more competitive as the Euro sinks in value. Using Euros to invest in a strong European stock could be a viable means of how to short the Euro. Shorting an ETF that tracks the Euro will be just like shorting any NYSE stock. The trader borrows from his broker and enters a sell position. He will have to buy back the ETF at a later time when, he believes, that the Euro will be cheaper. Likewise buying put options on the ETF gives the trader the option but not the obligation to sell at the contract price and buy at a lower price. Buying gold with the Euro is also a way how to short the Euro.

From the Forex trader’s viewpoint the cleaner solution for how to short the Euro is to trade the EUR/USD pair and sell Euros for dollars. Unlike tying up capital investing in European companies or dealing with the Euro through an ETF trading the Euro directly allows the trader to profit from minute by minute fluctuations in the Euro’s value. As talks about debt relief for Ireland continue the news drives the Euro up and down. A wise trader can make profitable use of these fluctuations without going through a “third party investment” such as buying stocks or gold. The trader will only need to know the factors influencing the EUR/USD pair and not have to further investigate what drives gold prices or the financials of foreign companies.

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

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

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

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

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

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

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

A common question these days from new comers to Forex is “how can I learn to invest safely in the Forex market.” This question often comes from those who lost substantial sums in the recent stock market crash and are looking for a means of recouping their losses. Normally the focus of new investors in Forex is the leverage offered by Forex trading and the excellent profits that Forex trading leverage can provide. However, those once bitten are twice shy and those who lost in derivatives in the market crash are wise to ask “how can I learn to invest safely in the Forex market. Investing safely is possible so long as the investor realizes that there is always market risk and that investing safely is doing the things that reduce risk while improving the chances of success. In the short and long run how to trade Forex successfully is with knowledge, discipline, and hard work. These are the answer to how can I invest safely in the Forex market?

There are no guarantees of success in today’s Forex market which is commonly trading sideways. Unfortunately there are ways to guarantee losses. For example, a trader who is in a currency pair that he does not understand and for which he has done no fundamental analysis is asking for trouble. Technical trading is largely based upon accurately reading and taking advantage of small market moves. However, the market may be moving in one direction and may briefly correct. Having a clear idea of where the fundamentals ought to take the market will help the trader decide whether or not to exit a position or to ride out the possibly brief correction. The trader can always exit a position and then reenter if the market turns around. The trouble is that every trade costs fees and commissions and if the market is turning around the trader will lose unless he re-enters his position very quickly on the turnaround. This gets into how many trades you make and the business of auditing your results.

There are traders who make money on many small trades each day and eat up a substantial portion of their earnings in fees and commissions. If one of these traders remembers to ask the question, how can I learn to invest safely in the Forex market, they will start to audit their trading results and learn to pick fewer trades with larger chances of success. The old adage is that you don’t lose if you don’t trade. So, how can I learn to invest safely in the Forex market? Research the currency pair you want to trade. Audit your trading results and aim for fewer, more profitable trades while avoiding what amounts to compulsive trading. This has to do with the psychology of trading. We usually talk about the twin demons of greed and fear that drive traders to bad trading decisions. The other “psychological” factor is a compulsiveness that can emerge at the trade station. To trade successfully the trader needs to treat trading as a business and execute trades that are planned and part of a Forex trading strategy. When considering Forex tips versus Forex strategy in Forex trading it is strategy that wins out. How can I learn to invest safely in the Forex market? Treat Forex trading as a business with attention to every detail. Forex trading can be very profitable for those to are diligent, knowledgeable, and work hard.

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To learn how to trade Forex an individual will start with the basics of the Forex market, the mechanics of trading, the use of trading software, and the fundamentals of technical analysis. Classes online are useful as is having an online tutor. Developing a successful Forex trading system depends upon integrating all aspects of Forex trading. For this the trader needs to set himself to the task of learning one thing at a time and practicing trading in simulation to bring up his skill set. The trader will need to decide upon how much capital to commit to Forex trading and what sort of leverage to use. A large degree of leverage can be very profitable but can also result in losses. The beginning trader is probably better served by trading with less leverage until he establishes a successful trading record. How to trade Forex is to learn all of this and than apply that knowledge.

When the beginner is learning how to trade Forex there are a series of decisions to make, many of them involving money. When looking at online trading software there are many products and, commonly, a lot of hype about how good the software is and how much money it will make the trader. Traders need to be wary of Forex scams in that the trading software is just a tool. It many, or may not, be an efficient tool but software does not guaranteed results. Knowing how to use the software is what is important. If the trader can find a software package with a trial period it may be best as he or she will be able to try in on for size and buy another brand if the first does not perform as expected. When looking for foreign exchange software find the best among the rest by being a good comparison shopper. Remember that the criteria for trading software have to do with information transfer and ease of operation, not necessarily with results. Results are the trader’s job.

How to trade Forex includes learning to integrate Forex strategy and the Forex news. Knowing which currencies to trade and when to trade them is a major part of how to trade Forex. Having all of the technical skill in the world will do the trader no good if he or she is in the wrong currency pair when the action happens. Traders are typically best served by trading the major pairs as these offer higher volume and liquidity which typically makes Forex trading software more accurate. However, Forex trading the Euro versus the dollar, a trader may not see any appreciable action when the central bank of Japan intervenes in the currency markets by buying both Euros and dollars. It is by anticipation of where the shifts in relative value of currency pairs will occur that Forex traders have the possibility of making money. It is by successful execution of trades that the trader actually profits from Forex trading. How to trade Forex is to learn both. It is by discipline and application of knowledge learned that Forex profits are made.

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