Financial factors are vital to fundamental analysis. Changes in a government's monetary or fiscal policies are bound to generate changes in the economy, and these will be reflected in the exchange rates. Financial factors should be triggered only by economic factors. When overnments focus on different aspects of the economy or have additional international responsibilities, financial factors may have priority over economic factors. This was painfully true in the case of the European Monetary System in the early 1990s. The realities of the marketplace revealed the underlying artificiality of this approach. Using the interest rates independently from the real economic environment translated into a very expensive strategy.
Because foreign exchange, by definition, consists of simultaneous transactions in two currencies, then it follows that the market must focus on two respective interest rates as well. This is the interest rate differential, a basic factor in the markets. Traders react when the interest rate differential changes, not simply when the interest rates themselves change. For example, if all the G-5 countries decided to simultaneously lower their interest rates by 0.5 percent, the move would be neutral for foreign exchange, because the interest rate differentials would also be neutral. Of course, most of the time the discount rates are cut unilaterally, a move that generates changes in both the interest differential and the exchange rate. Traders approach the interest rates like any other factor, trading on expectations and facts. For example, if rumor says that a discount rate will be cut, the respective currency will be sold before the fact. Once the cut occurs, it is quite possible that the currency will be bought back, or the other way around. An unexpected change in interest rates is likely to trigger a sharp currency move. "Buy on the rumor, sell on the fact...". Other factors affecting the trading decision are the time lag between the rumor and the fact, the reasons behind the interest rate change, and the perceived importance of the change.
The market generally prices in a discount rate change that was delayed. Since it is a fait accompli, it is neutral to the market. If the discount rate was changed for political rather than economic reasons, what is a common practice in the European Monetary System, the markets are likely to go against the central banks, sticking to the real fundamentals rather than the political ones. This happened in both September 1992 and the summer of 1993, when the European central banks lost unprecedented amounts of money trying to prop up their currencies, despite having high interest rates. The market perceived those interest rates as artificially high and, therefore, aggressively sold the respective currencies. Finally, traders deal on the perceived importance of a change in the interest rate differential.
Political Events and Crises
Political events generally take place over a period of time, but political crises strike suddenly. They are almost always, by definition, unexpected. Currency traders have a knack for responding to crises. Speed is essential; shooting from the hip is the only fighting option. The traders' reflexes take over. Without fast action, traders can be left out in the cold. There is no time for analysis, and only a split second, at best, to act. As volume drops dramatically, trading is hindered by a crisis. Prices dry out quickly, and sometimes the spreads between bid and offer jump from 5 pips to 100 pips. Getting back to the market is difficult.
Friday, January 9, 2009
Economic Indicators
Economic indicators occur in a steady stream, at certain times, and a little more often than changes in interest rates, governments, or natural activity such as earthquakes etc. Economic data is generally (except of the Gross Domestic Product and the Employment Cost Index, which are released quarterly) released on a monthly basis. All economic indicators are released in pairs. The first number reflects the latest period. The second number is the revised figure for the month prior to the latest period. For instance, in July, economic data is released for the month of June, the latest period. In addition, the release includes the revision of the same economic indicator figure for the month of May.
The reason for the revision is that the department in charge of the economic statistics compilation is in a better position to gather more information in a month's time. This feature is important for traders. If the figure for an economic indicator is better than expected by 0.4 percent for the past month, but the previous month's number is revised lower by 0.4 percent, then traders are likely to ignore the overall release of that specific economic data. Economic indicators are released at different times. In the United States, economic data is generally released at 8:30 and 10 am ET. It is important to remember that the most significant data for foreign exchange is released at 8:30 am ET. In order to allow time for last-minute adjustments, the United States currency futures markets open at 8:20 am ET. Information on upcoming economic indicators is published in all leading newspapers, such as the Wall Street Journal, the Financial Times, and the New York Times; and business magazines, such as Business Week. More often than not, traders use the monitor sources—Bridge Information Systems, Reuters, or Bloomberg—to gather information both from news publications and from the sources' own up-to-date information.
The Gross National Product (GNP)
The Gross National Product measures the economic performance of the whole economy. This indicator consists, at macro scale, of the sum of consumption spending, investment spending, government spending, and net trade. The gross national product refers to the sum of all goods and services produced by United States residents, either in the United States or abroad.
The Gross Domestic Product (GDP)
The Gross Domestic Product (GDP) refers to the sum of all goods and services produced in the United States, either by domestic or foreign companies. The differences between the two are nominal in the case of the economy of the United States. GDP figures are more popular outside the United States. In order to make it easier to compare the performances of different economies, the United States also releases GDP figures.
Consumption Spending
Consumption is made possible by personal income and discretionary income. The decision by consumers to spend or to save is psychological in nature. Consumer confidence is also measured as an important indicator of the propensity of consumers who have discretionary income to switch from saving to buying.
Investment Spending
Investment—or gross private domestic spending - consists of fixed investment and inventories.
Government Spending
Government spending is very influential in terms of both sheer size and its impact on other economic indicators, due to special expenditures. For instance, United States military expenditures had a significant role in total U.S. employment until 1990. The defense cuts that occurred at the time increased unemployment figures in the short run.
Net Trade
Net trade is another major component of the GNP. Worldwide internationalization and the economic and political developments since 1980 have had a sharp impact on the United States' ability to compete overseas. The U.S. trade deficit of the past decades has slowed down the overall GNP. GNP can be approached in two ways: flow of product and flow of cost.
Industrial Production
Industrial production consists of the total output of a nation's plants, utilities, and mines. From a fundamental point of view, it is an important economic indicator that reflects the strength of the economy, and by extrapolation, the strength of a specific currency. Therefore, foreign exchange traders use this economic indicator as a potential trading signal.
Capacity Utilization
Capacity utilization consists of total industrial output divided by total production capability. The term refers to the maximum level of output a plant can generate under normal business conditions. In general, capacity utilization is not a major economic indicator for the foreign exchange market. However, there are instances when its economic implications are useful for fundamental analysis. A "normal" figure for a steady economy is 81.5 percent. If the figure reads 85 percent or more, the data suggests that the industrial production is overheating, that the economy is close to full capacity. High capacity utilization rates precede inflation, and expectation in the foreign exchange market is that the central bank will raise interest rates in order to avoid or fight inflation.
Factory Orders
Factory orders refer to the total of durable and nondurable goods orders. Nondurable goods consist of food, clothing, light industrial products, and products designed for the maintenance of durable goods. Durable goods orders are discussed separately. The factory orders indicator has limited significance for foreign exchange traders.
Durable Goods Orders
Durable goods orders consist of products with a life span of more than three years. Examples of durable goods are autos, appliances, furniture, jewelry, and toys. They are divided into four major categories: primary metals, machinery, electrical machinery, and transportation. In order to eliminate the volatility pertinent to large military orders, the indicator includes a breakdown of the orders between defense and nondefense. This data is fairly important to foreign exchange markets because it gives a good indication of consumer confidence. Because durable goods cost more than nondurables, a high number in this indicator shows consumers' propensity to spend. Therefore, a good figure is generally bullish for the domestic currency.
Business Inventories
Business inventories consist of items produced and held for future sale. The compilation of this information is facile and holds little surprise for the market. Moreover, financial management and computerization help control business inventories in unprecedented ways. Therefore, the importance of this indicator for foreign exchange traders is limited.
Construction Indicators
Construction indicators constitute significant economic indicators that are included in the calculation of the GDP of the United States. Moreover, housing has traditionally been the engine that pulled the U.S. economy out of recessions after World War II. These indicators are classified into three major categories:
+ housing starts and permits
+ new and existing one-family home sales
+ construction spending.
Inflation Indicators
The rate of inflation is the widespread rise in prices. Therefore, gauging inflation is a vital macroeconomic task. Traders watch the development of inflation closely, because the method of choice for fighting inflation is raising the interest rates, and higher interest rates tend to support the local currency. Moreover, the inflation rate is used to "deflate" nominal interest rates and the GNP or GDP to their real values in order to achieve a more accurate measure of the data.
The values of the real interest rates or real GNP and GDP are of the utmost importance to the money managers and traders of international financial instruments, allowing them to accurately compare opportunities worldwide. To measure inflation traders use following economic tools:
+ Producer Price Index (PPI)
+ Consumer Price Index (CPI)
+ GNP Deflator
+ GDP Deflator
+ Employment Cost Index (ECI)
+ Commodity Research Bureau's Index (CRB Index)
+ Journal of Commerce Industrial Price Index (JoC)
The reason for the revision is that the department in charge of the economic statistics compilation is in a better position to gather more information in a month's time. This feature is important for traders. If the figure for an economic indicator is better than expected by 0.4 percent for the past month, but the previous month's number is revised lower by 0.4 percent, then traders are likely to ignore the overall release of that specific economic data. Economic indicators are released at different times. In the United States, economic data is generally released at 8:30 and 10 am ET. It is important to remember that the most significant data for foreign exchange is released at 8:30 am ET. In order to allow time for last-minute adjustments, the United States currency futures markets open at 8:20 am ET. Information on upcoming economic indicators is published in all leading newspapers, such as the Wall Street Journal, the Financial Times, and the New York Times; and business magazines, such as Business Week. More often than not, traders use the monitor sources—Bridge Information Systems, Reuters, or Bloomberg—to gather information both from news publications and from the sources' own up-to-date information.
The Gross National Product (GNP)
The Gross National Product measures the economic performance of the whole economy. This indicator consists, at macro scale, of the sum of consumption spending, investment spending, government spending, and net trade. The gross national product refers to the sum of all goods and services produced by United States residents, either in the United States or abroad.
The Gross Domestic Product (GDP)
The Gross Domestic Product (GDP) refers to the sum of all goods and services produced in the United States, either by domestic or foreign companies. The differences between the two are nominal in the case of the economy of the United States. GDP figures are more popular outside the United States. In order to make it easier to compare the performances of different economies, the United States also releases GDP figures.
Consumption Spending
Consumption is made possible by personal income and discretionary income. The decision by consumers to spend or to save is psychological in nature. Consumer confidence is also measured as an important indicator of the propensity of consumers who have discretionary income to switch from saving to buying.
Investment Spending
Investment—or gross private domestic spending - consists of fixed investment and inventories.
Government Spending
Government spending is very influential in terms of both sheer size and its impact on other economic indicators, due to special expenditures. For instance, United States military expenditures had a significant role in total U.S. employment until 1990. The defense cuts that occurred at the time increased unemployment figures in the short run.
Net Trade
Net trade is another major component of the GNP. Worldwide internationalization and the economic and political developments since 1980 have had a sharp impact on the United States' ability to compete overseas. The U.S. trade deficit of the past decades has slowed down the overall GNP. GNP can be approached in two ways: flow of product and flow of cost.
Industrial Production
Industrial production consists of the total output of a nation's plants, utilities, and mines. From a fundamental point of view, it is an important economic indicator that reflects the strength of the economy, and by extrapolation, the strength of a specific currency. Therefore, foreign exchange traders use this economic indicator as a potential trading signal.
Capacity Utilization
Capacity utilization consists of total industrial output divided by total production capability. The term refers to the maximum level of output a plant can generate under normal business conditions. In general, capacity utilization is not a major economic indicator for the foreign exchange market. However, there are instances when its economic implications are useful for fundamental analysis. A "normal" figure for a steady economy is 81.5 percent. If the figure reads 85 percent or more, the data suggests that the industrial production is overheating, that the economy is close to full capacity. High capacity utilization rates precede inflation, and expectation in the foreign exchange market is that the central bank will raise interest rates in order to avoid or fight inflation.
Factory Orders
Factory orders refer to the total of durable and nondurable goods orders. Nondurable goods consist of food, clothing, light industrial products, and products designed for the maintenance of durable goods. Durable goods orders are discussed separately. The factory orders indicator has limited significance for foreign exchange traders.
Durable Goods Orders
Durable goods orders consist of products with a life span of more than three years. Examples of durable goods are autos, appliances, furniture, jewelry, and toys. They are divided into four major categories: primary metals, machinery, electrical machinery, and transportation. In order to eliminate the volatility pertinent to large military orders, the indicator includes a breakdown of the orders between defense and nondefense. This data is fairly important to foreign exchange markets because it gives a good indication of consumer confidence. Because durable goods cost more than nondurables, a high number in this indicator shows consumers' propensity to spend. Therefore, a good figure is generally bullish for the domestic currency.
Business Inventories
Business inventories consist of items produced and held for future sale. The compilation of this information is facile and holds little surprise for the market. Moreover, financial management and computerization help control business inventories in unprecedented ways. Therefore, the importance of this indicator for foreign exchange traders is limited.
Construction Indicators
Construction indicators constitute significant economic indicators that are included in the calculation of the GDP of the United States. Moreover, housing has traditionally been the engine that pulled the U.S. economy out of recessions after World War II. These indicators are classified into three major categories:
+ housing starts and permits
+ new and existing one-family home sales
+ construction spending.
Inflation Indicators
The rate of inflation is the widespread rise in prices. Therefore, gauging inflation is a vital macroeconomic task. Traders watch the development of inflation closely, because the method of choice for fighting inflation is raising the interest rates, and higher interest rates tend to support the local currency. Moreover, the inflation rate is used to "deflate" nominal interest rates and the GNP or GDP to their real values in order to achieve a more accurate measure of the data.
The values of the real interest rates or real GNP and GDP are of the utmost importance to the money managers and traders of international financial instruments, allowing them to accurately compare opportunities worldwide. To measure inflation traders use following economic tools:
+ Producer Price Index (PPI)
+ Consumer Price Index (CPI)
+ GNP Deflator
+ GDP Deflator
+ Employment Cost Index (ECI)
+ Commodity Research Bureau's Index (CRB Index)
+ Journal of Commerce Industrial Price Index (JoC)
Economic Fundamentals
Theories of Exchange Rate Determination
Fundamentals may be classified into economic factors, financial factors, political factors, and crises. Economic factors differ from the other three factors in terms of the certainty of their release. The dates and times of economic data release are known well in advance, at least among the industrialized nations. Below are given briefly several known theories of exchange rate determination.
Purchasing Power Parity
Purchasing power parity states that the price of a good in one country should equal the price of the same good in another country, exchanged at the current rate—the law of one price. There are two versions of the purchasing power parity theory: the absolute version and the relative version. Under the absolute version, the exchange rate simply equals the ratio of the two countries' general price levels, which is the weighted average of all goods produced in a country. However, this version works only if it is possible to find two countries, which produce or consume the same goods. Moreover, the absolute version assumes that transportation costs and trade barriers are insignificant. In reality, transportation costs are significant and dissimilar around the world.
Trade barriers are still alive and well, sometimes obvious and sometimes hidden, and they influence costs and goods distribution. Finally, this version disregards the importance of brand names. For example, cars are chosen not only based on the best price for the same type of car, but also on the basis of the name.FOREX.
The PPP Relative Version
Under the relative version, the percentage change in the exchange rate from a given base period must equal the difference between the percentage change in the domestic price level and the percentage change in the foreign price level. The relative version of the PPP is also not free of problems: it is difficult or arbitrary to define the base period, trade restrictions remain a real and thorny issue, just as with the absolute version, different price index weighting and the inclusion of different products in the indexes make the comparison difficult and in the long term, countries' internal price ratios may change, causing the exchange rate to move away from the relative PPP.
In conclusion, the spot exchange rate moves independently of relative domestic and foreign prices. In the short run, the exchange rate is influenced by financial and not by commodity market conditions.
Theory of Elasticities
The theory of elasticities holds that the exchange rate is simply the price of foreign exchange that maintains the balance of payments in equilibrium. For instance, if the imports of country A are strong, then the trade balance is weak. Consequently, the exchange rate rises, leading to the growth of country A's exports, and triggers in turn a rise in its domestic income, along with a decrease in its foreign income.
Whereas a rise in the domestic income (in country A) will trigger an increase in the domestic consumption of both domestic and foreign goods and, therefore, more demand for foreign currencies, a decrease in the foreign income (in country B) will trigger a decrease in the domestic consumption of both country B's domestic and foreign goods, and therefore less demand for its own currency. The elasticities approach is not problem-free because in the short term the exchange rate is more inelastic than it is in the long term and the additional exchange rate variables arise continuously, changing the rules of the game.
Modern Monetary Theories on Short-Term Exchange Rate Volatility
The modern monetary theories on short-term exchange rate volatility take into consideration the short-term capital markets' role and the long-term impact of the commodity markets on foreign exchange. These theories hold that the divergence between the exchange rate and the purchasing power parity is due to the supply and demand for financial assets and the nternational capability.
One of the modern monetary theories states that exchange rate volatility is triggered by a one-time domestic money supply increase, because this is assumed to raise expectations of higher future monetary growth. The purchasing power parity theory is extended to include the capital markets. If, in both countries whose currencies are exchanged, the demand for money is determined by the level of domestic income and domestic interest rates, then a higher income increases demand for transactions balances while a higher interest rate increases the opportunity cost of holding money, reducing the demand for money.
Under a second approach, the exchange rate adjusts instantaneously to maintain continuous interest rate parity, but only in the long run to maintain PPP. Volatility occurs because the commodity markets adjust more slowly than the financial markets. This version is known as the dynamic monetary approach.
The Portfolio-Balance Approach
The portfolio-balance approach holds that currency demand is triggered by the demand for financial assets, rather than the demand for the currency per se.
Synthesis of Traditional and Modern Monetary Views
In order to better suit the previous theories to the realities of the market, some of the more stringent conditions were adjusted into a synthesis of the traditional and modern monetary theories. A short-term capital outflow induced by a monetary shock creates a payments imbalance that requires an exchange rate change to maintain balance of payments equilibrium. Speculative forces, commodity markets disturbances, and the existence of short-term capital mobility trigger the exchange rate volatility.
The degree of change in the exchange rate is a function of consumers' elasticity of demand. Because the financial markets adjust faster than the commodities markets, the exchange rate tends to be affected in the short term by capital market changes, and in the long term by commodities changes.
Fundamentals may be classified into economic factors, financial factors, political factors, and crises. Economic factors differ from the other three factors in terms of the certainty of their release. The dates and times of economic data release are known well in advance, at least among the industrialized nations. Below are given briefly several known theories of exchange rate determination.
Purchasing Power Parity
Purchasing power parity states that the price of a good in one country should equal the price of the same good in another country, exchanged at the current rate—the law of one price. There are two versions of the purchasing power parity theory: the absolute version and the relative version. Under the absolute version, the exchange rate simply equals the ratio of the two countries' general price levels, which is the weighted average of all goods produced in a country. However, this version works only if it is possible to find two countries, which produce or consume the same goods. Moreover, the absolute version assumes that transportation costs and trade barriers are insignificant. In reality, transportation costs are significant and dissimilar around the world.
Trade barriers are still alive and well, sometimes obvious and sometimes hidden, and they influence costs and goods distribution. Finally, this version disregards the importance of brand names. For example, cars are chosen not only based on the best price for the same type of car, but also on the basis of the name.FOREX.
The PPP Relative Version
Under the relative version, the percentage change in the exchange rate from a given base period must equal the difference between the percentage change in the domestic price level and the percentage change in the foreign price level. The relative version of the PPP is also not free of problems: it is difficult or arbitrary to define the base period, trade restrictions remain a real and thorny issue, just as with the absolute version, different price index weighting and the inclusion of different products in the indexes make the comparison difficult and in the long term, countries' internal price ratios may change, causing the exchange rate to move away from the relative PPP.
In conclusion, the spot exchange rate moves independently of relative domestic and foreign prices. In the short run, the exchange rate is influenced by financial and not by commodity market conditions.
Theory of Elasticities
The theory of elasticities holds that the exchange rate is simply the price of foreign exchange that maintains the balance of payments in equilibrium. For instance, if the imports of country A are strong, then the trade balance is weak. Consequently, the exchange rate rises, leading to the growth of country A's exports, and triggers in turn a rise in its domestic income, along with a decrease in its foreign income.
Whereas a rise in the domestic income (in country A) will trigger an increase in the domestic consumption of both domestic and foreign goods and, therefore, more demand for foreign currencies, a decrease in the foreign income (in country B) will trigger a decrease in the domestic consumption of both country B's domestic and foreign goods, and therefore less demand for its own currency. The elasticities approach is not problem-free because in the short term the exchange rate is more inelastic than it is in the long term and the additional exchange rate variables arise continuously, changing the rules of the game.
Modern Monetary Theories on Short-Term Exchange Rate Volatility
The modern monetary theories on short-term exchange rate volatility take into consideration the short-term capital markets' role and the long-term impact of the commodity markets on foreign exchange. These theories hold that the divergence between the exchange rate and the purchasing power parity is due to the supply and demand for financial assets and the nternational capability.
One of the modern monetary theories states that exchange rate volatility is triggered by a one-time domestic money supply increase, because this is assumed to raise expectations of higher future monetary growth. The purchasing power parity theory is extended to include the capital markets. If, in both countries whose currencies are exchanged, the demand for money is determined by the level of domestic income and domestic interest rates, then a higher income increases demand for transactions balances while a higher interest rate increases the opportunity cost of holding money, reducing the demand for money.
Under a second approach, the exchange rate adjusts instantaneously to maintain continuous interest rate parity, but only in the long run to maintain PPP. Volatility occurs because the commodity markets adjust more slowly than the financial markets. This version is known as the dynamic monetary approach.
The Portfolio-Balance Approach
The portfolio-balance approach holds that currency demand is triggered by the demand for financial assets, rather than the demand for the currency per se.
Synthesis of Traditional and Modern Monetary Views
In order to better suit the previous theories to the realities of the market, some of the more stringent conditions were adjusted into a synthesis of the traditional and modern monetary theories. A short-term capital outflow induced by a monetary shock creates a payments imbalance that requires an exchange rate change to maintain balance of payments equilibrium. Speculative forces, commodity markets disturbances, and the existence of short-term capital mobility trigger the exchange rate volatility.
The degree of change in the exchange rate is a function of consumers' elasticity of demand. Because the financial markets adjust faster than the commodities markets, the exchange rate tends to be affected in the short term by capital market changes, and in the long term by commodities changes.
Thursday, January 8, 2009
Currency Options
A currency option is a contract between a buyer and a seller that gives the buyer the right, but not the obligation, to trade a specific amount of currency at a predetermined price and within a predetermined period of time, regardless of the market price of the currency; and gives the seller, or writer, the obligation to deliver the currency under the predetermined terms, if and when the buyer wants to exercise the option. Currency options are unique trading instruments, equally fit for speculation and hedging. Options allow for a comprehensive customization of each individual strategy, a quality of vital importance for the sophisticated investor. More factors affect the option price relative to the prices of other foreign currency instruments. Unlike spot or forwards, both high and low volatility may generate a profit in the options market. For some, options are a cheaper vehicle for currency trading. For others, options mean added security and exact stop-loss order execution.
Currency options constitute the fastest-growing segment of the foreign exchange market. As of April 1998, options represented 5 percent of the foreign exchange market. The biggest options trading center is the United States, followed by the United Kingdom and Japan. Options prices are based on, or derived from, the cash instruments. Therefore, an option is a derivative instrument. Options are usually mentioned vis-à-vis insurance and hedging strategies. Often, however, traders have misconceptions regarding both the difficulty and simplicity of using options. There are also misconceptions regarding the capabilities of options. In the currency markets, options are available on either cash or futures. It follows, then, that they are traded either over-the-counter or on the centralized futures markets.
The majority of currency options, around 81 percent, are traded overthe-counter. The over-the-counter market is similar to the spot or swap market. Corporations may call banks and banks will trade with each other either directly or in the brokers' market. This type of dealing allows for maximum flexibility: any amount, any currency, any odd expiration date, any time. The currency amounts may be even or odd. The amounts may be quoted in either U.S. dollars or foreign currencies. Any currency may be traded as an option, not only the ones available as futures contracts. Therefore, traders may quote on any exotic currency, as required, including any cross currencies.
The expiration date may be quoted anywhere from several hours to several years, although the bulk of dates are concentrated around the even dates—one week, one month, two months, and so on. The cash market never closes, so options may be traded literally around the clock. Trading an option on currency futures will entitle the buyer to the right, but not the obligation, to take physical possession of the currency future. Unlike the currency futures, buying currency options does not require an initiation margin. The option premium, or price, paid by the buyer to the seller, or writer, reflects the buyer's total risk.
However, upon taking physical possession of the currency future by exercising the option, a trader will have to deposit a margin. Seven major factors have an impact on the option price:
1. Price of the currency.
2. Strike (exercise) price.
3. Volatility of the currency.
4. Expiration date.
5. Interest rate differential.
6. Call or put.
7. American or European option style.
The currency price is the central building block, as all the other factors are compared and analyzed against it. It is the currency price behavior that both generates the need for options and impacts on the profitability of options.
Currency options constitute the fastest-growing segment of the foreign exchange market. As of April 1998, options represented 5 percent of the foreign exchange market. The biggest options trading center is the United States, followed by the United Kingdom and Japan. Options prices are based on, or derived from, the cash instruments. Therefore, an option is a derivative instrument. Options are usually mentioned vis-à-vis insurance and hedging strategies. Often, however, traders have misconceptions regarding both the difficulty and simplicity of using options. There are also misconceptions regarding the capabilities of options. In the currency markets, options are available on either cash or futures. It follows, then, that they are traded either over-the-counter or on the centralized futures markets.
The majority of currency options, around 81 percent, are traded overthe-counter. The over-the-counter market is similar to the spot or swap market. Corporations may call banks and banks will trade with each other either directly or in the brokers' market. This type of dealing allows for maximum flexibility: any amount, any currency, any odd expiration date, any time. The currency amounts may be even or odd. The amounts may be quoted in either U.S. dollars or foreign currencies. Any currency may be traded as an option, not only the ones available as futures contracts. Therefore, traders may quote on any exotic currency, as required, including any cross currencies.
The expiration date may be quoted anywhere from several hours to several years, although the bulk of dates are concentrated around the even dates—one week, one month, two months, and so on. The cash market never closes, so options may be traded literally around the clock. Trading an option on currency futures will entitle the buyer to the right, but not the obligation, to take physical possession of the currency future. Unlike the currency futures, buying currency options does not require an initiation margin. The option premium, or price, paid by the buyer to the seller, or writer, reflects the buyer's total risk.
However, upon taking physical possession of the currency future by exercising the option, a trader will have to deposit a margin. Seven major factors have an impact on the option price:
1. Price of the currency.
2. Strike (exercise) price.
3. Volatility of the currency.
4. Expiration date.
5. Interest rate differential.
6. Call or put.
7. American or European option style.
The currency price is the central building block, as all the other factors are compared and analyzed against it. It is the currency price behavior that both generates the need for options and impacts on the profitability of options.
Futures Market
Currency futures are specific types of forward outright deals which occupy in general a small part of the Forex market. Because they are derived from the spot price, they are derivative instruments. They are specific with regard to the expiration date and the size of the trade amount. Whereas, generally, forward outright deals—those that mature past the spot delivery date—will mature on any valid date in the two countries whose currencies are being traded, standardized amounts of foreign currency futures mature only on the third Wednesday of March, June, September, and December. There is a row of characteristics of currency futures, which make them attractive. It is open to all market participants, individuals included. This is different from the spot market, which is virtually closed to individuals – except high net-worth individuals—because of the size of the currency amounts traded. It is a central market, just as efficient as the cash market, and whereas the cash market is a very decentralized market, futures trading takes place under one roof. It eliminates the credit risk because the Chicago Mercantile Exchange Clearinghouse acts as the buyer for every seller, and vice versa. In turn, the Clearinghouse minimizes its own exposure by requiring traders who maintain a non-profitable position to post margins equal in size to their losses.
Moreover, currency futures provide several benefits for traders because futures are special types of forward outright contracts, corporations can use them for hedging purposes. Although the futures and spot markets trade closely together, certain divergences between the two occur, generating arbitraging opportunities. Gaps, volume, and open interest are significant technical analysis tools solely available in the futures market. Yet their significance extrapolates to the spot market as well. Because of these benefits, currency futures trading volume has steadily attracted a large variety of players. For traders outside the exchange, the prices are available from on-line monitors. The most popular pages are found on Bridge, Telerate, Reuters, and Bloomberg. Telerate presents the currency futures on composite pages, while Reuters and Bloomberg display currency futures on individual pages shows the convergence between the futures and spot prices.
Moreover, currency futures provide several benefits for traders because futures are special types of forward outright contracts, corporations can use them for hedging purposes. Although the futures and spot markets trade closely together, certain divergences between the two occur, generating arbitraging opportunities. Gaps, volume, and open interest are significant technical analysis tools solely available in the futures market. Yet their significance extrapolates to the spot market as well. Because of these benefits, currency futures trading volume has steadily attracted a large variety of players. For traders outside the exchange, the prices are available from on-line monitors. The most popular pages are found on Bridge, Telerate, Reuters, and Bloomberg. Telerate presents the currency futures on composite pages, while Reuters and Bloomberg display currency futures on individual pages shows the convergence between the futures and spot prices.
Forward Market
The forward currency market consists of two instruments: forward outright deals and swaps. A swap deal is unusual among the rest of the foreign exchange instruments in the fact that it consists of two deals, or legs. All the other transactions consist of single deals. In its original form, a swap deal is a combination of a spot deal and a forward outright deal. Generally, this market includes only cash transactions. Therefore, currency futures contracts, although a special breed of forward outright transactions, are analyzed separately. According to figures published by the Bank for International Settlements, the percentage share of the forward market was 57 percent in 1998, translated into U.S. dollars, out of an estimated daily gross turnover of US$1.49 trillion, the total forward market represents US$900 billion. In the forward market there is no norm with regard to the settlement dates, which range from 3 days to 3 years. Volume in currency swaps longer than one year tends to be light but, technically, there is no impediment to making these deals. Any date past the spot date and within the above range may be a forward settlement, provided that it is a valid business day for both currencies. The forward markets are decentralized markets, with players around the world entering into a variety of deals either on a one-on-one basis or through brokers. In contrast, the currency futures market is a centralized market, in which all the deals are executed on trading floors provided by different exchanges.
Whereas in the futures market only a handful of foreign currencies may be traded in multiples of standardized amounts, the forward markets are open to any currencies in any amount. The forward price consists of two significant parts: the spot exchange rate and the forward spread. The spot rate is the main building block. The forward price is derived from the spot price by adjusting the spot price with the forward spread, so it follows that both forward outright and swap deals are derivative instruments. The forward spread is also known as the forward points or the forward pips. The forward spread is necessary for adjusting the spot rate for specific settlement dates different from the spot date. It holds, then, that the maturity date is another determining factor of the forward price. Just as in the case of the spot market, the left side of the quote is the bid side, and the right side is the offer side.
Whereas in the futures market only a handful of foreign currencies may be traded in multiples of standardized amounts, the forward markets are open to any currencies in any amount. The forward price consists of two significant parts: the spot exchange rate and the forward spread. The spot rate is the main building block. The forward price is derived from the spot price by adjusting the spot price with the forward spread, so it follows that both forward outright and swap deals are derivative instruments. The forward spread is also known as the forward points or the forward pips. The forward spread is necessary for adjusting the spot rate for specific settlement dates different from the spot date. It holds, then, that the maturity date is another determining factor of the forward price. Just as in the case of the spot market, the left side of the quote is the bid side, and the right side is the offer side.
Spot Market
Currency spot trading is the most popular foreign currency instrument around the world, making up 37 percent of the total activity. The fast-paced spot market is not for the fainthearted, as it features high volatility and quick profits (and losses). A spot deal consists of a bilateral contract whereby a party delivers a specified amount of a given currency against receipt of a specified amount of another currency from a counterparty, based on an agreed exchange rate, within two business days of the deal date. The exception is the Canadian dollar, in which the spot delivery is executed next business day. The name "spot" does not mean that the currency exchange occurs the same business day the deal is executed. Currency transactions that require same-day delivery are called cash transactions. The two-day spot delivery for currencies was developed long before technological breakthroughs in information processing.
This time period was necessary to check out all transactions' details among counterparties. Although technologically feasible, the contemporary markets did not find it necessary to reduce the time to make payments. Human errors still occur and they need to be fixed before delivery. When currency deliveries are made to the wrong party, fines are imposed. In terms of volume, currencies around the world are traded mostly against the U.S. dollar, because the U.S. dollar is the currency of reference. The other major currencies are the euro, followed by the Japanese yen, the British pound, and the Swiss franc. Other currencies with significant spot market shares are the Canadian dollar and the Australian dollar.
In addition, a significant share of trading takes place in the currencies crosses, a non-dollar instrument whereby foreign currencies are quoted against other foreign currencies, such as euro against Japanese yen. There are several reasons for the popularity of currency spot trading. Profits (or losses) are realized quickly in the spot market, due to market volatility. In addition, since spot deals mature in only two business days, the time exposure to credit risk is limited.
Turnover in the spot market has been increasing dramatically, thanks to the combination of inherent profitability and reduced credit risk. The spot market is characterized by high liquidity and high volatility. Volatility is the degree to which the price of currency tends to fluctuate within a certain period of time. Free-floating currencies, such as the euro or the Japanese yen, tend to be volatile against the U.S. dollar. In an active global trading day (24 hours), the euro/dollar exchange rate may change its value 18,000 times. An exchange rate may "fly" 200 pips in a matter of seconds if the market gets wind of a significant event.
This time period was necessary to check out all transactions' details among counterparties. Although technologically feasible, the contemporary markets did not find it necessary to reduce the time to make payments. Human errors still occur and they need to be fixed before delivery. When currency deliveries are made to the wrong party, fines are imposed. In terms of volume, currencies around the world are traded mostly against the U.S. dollar, because the U.S. dollar is the currency of reference. The other major currencies are the euro, followed by the Japanese yen, the British pound, and the Swiss franc. Other currencies with significant spot market shares are the Canadian dollar and the Australian dollar.
In addition, a significant share of trading takes place in the currencies crosses, a non-dollar instrument whereby foreign currencies are quoted against other foreign currencies, such as euro against Japanese yen. There are several reasons for the popularity of currency spot trading. Profits (or losses) are realized quickly in the spot market, due to market volatility. In addition, since spot deals mature in only two business days, the time exposure to credit risk is limited.
Turnover in the spot market has been increasing dramatically, thanks to the combination of inherent profitability and reduced credit risk. The spot market is characterized by high liquidity and high volatility. Volatility is the degree to which the price of currency tends to fluctuate within a certain period of time. Free-floating currencies, such as the euro or the Japanese yen, tend to be volatile against the U.S. dollar. In an active global trading day (24 hours), the euro/dollar exchange rate may change its value 18,000 times. An exchange rate may "fly" 200 pips in a matter of seconds if the market gets wind of a significant event.
The Federal Reserve System
Like the other central banks, the Federal Reserve of the USA affects the foreign exchange markets in three general areas.
+ the discount rate
+ the money market instruments
+ foreign exchange operations
For the foreign exchange operations most significant are repurchase agreements to sell the same security back at the same price at a predetermined date in the future (usually within 15 days), and at a specific rate of interest. This arrangement amounts to a temporary injection of reserves into the banking system. The impact on the foreign exchange market is that the dollar should weaken. The repurchase agreements may be either customer repos or system repos. Matched sale-purchase agreements are just the opposite of repurchase agreements. When executing a matched sale-purchase agreement, the Fed sells a security for immediate delivery to a dealer or a foreign central bank, with the agreement to buy back the same security at the same price at a predetermined time in the future. This arrangement amounts to a temporary drain of reserves.
The impact on the foreign exchange market is that the dollar should strengthen. The major central banks are involved in foreign exchange operations in more ways than intervening in the open market. Their operations include payments among central banks or to international agencies. In addition, the Federal Reserve has entered a series of currency swap arrangements with other central banks since 1962. For instance, to help the allied war effort against Iraq's invasion of Kuwait in 1990-1991, payments were executed by the Bundesbank and Bank of Japan to the Federal Reserve. Also, payments to the World bank or the United Nations are executed through central banks.
Intervention in the United States foreign exchange markets by the U.S. Treasury and the Federal Reserve is geared toward restoring orderly conditions in the market or influencing the exchange rates. It is not geared toward affecting the reserves. There are two types of foreign exchange interventions: naked intervention and sterilized intervention.
+ Naked intervention, or unsterilized intervention, refers to the sole foreign exchange activity. All that takes place is the intervention itself, in which the Federal Reserve either buys or sells U.S. dollars against a foreign currency. In addition to the impact on the foreign exchange market, there is also a monetary effect on the money supply. If the money supply is impacted, then consequent adjustments must be made in interest rates, in prices, and at all levels of the economy. Therefore, a naked foreign exchange intervention has a long-term effect.
+ Sterilized intervention neutralizes its impact on the money supply. As there are rather few central banks that want the impact of their intervention in the foreign exchange markets to affect all corners of their economy, sterilized interventions have been the tool of choice. This holds true for the Federal Reserve as well. The sterilized intervention involves an additional step to the original currency transaction. This step consists of a sale of government securities that offsets the reserve addition that occurs due to the intervention. It may be easier to visualize it if you think that the central bank will finance the sale of a currency through the sale of a number of government securities. Because a sterilized intervention only generates an impact on the supply and demand of a certain currency, its impact will tend to have a short-to medium-term effect.
+ the discount rate
+ the money market instruments
+ foreign exchange operations
For the foreign exchange operations most significant are repurchase agreements to sell the same security back at the same price at a predetermined date in the future (usually within 15 days), and at a specific rate of interest. This arrangement amounts to a temporary injection of reserves into the banking system. The impact on the foreign exchange market is that the dollar should weaken. The repurchase agreements may be either customer repos or system repos. Matched sale-purchase agreements are just the opposite of repurchase agreements. When executing a matched sale-purchase agreement, the Fed sells a security for immediate delivery to a dealer or a foreign central bank, with the agreement to buy back the same security at the same price at a predetermined time in the future. This arrangement amounts to a temporary drain of reserves.
The impact on the foreign exchange market is that the dollar should strengthen. The major central banks are involved in foreign exchange operations in more ways than intervening in the open market. Their operations include payments among central banks or to international agencies. In addition, the Federal Reserve has entered a series of currency swap arrangements with other central banks since 1962. For instance, to help the allied war effort against Iraq's invasion of Kuwait in 1990-1991, payments were executed by the Bundesbank and Bank of Japan to the Federal Reserve. Also, payments to the World bank or the United Nations are executed through central banks.
Intervention in the United States foreign exchange markets by the U.S. Treasury and the Federal Reserve is geared toward restoring orderly conditions in the market or influencing the exchange rates. It is not geared toward affecting the reserves. There are two types of foreign exchange interventions: naked intervention and sterilized intervention.
+ Naked intervention, or unsterilized intervention, refers to the sole foreign exchange activity. All that takes place is the intervention itself, in which the Federal Reserve either buys or sells U.S. dollars against a foreign currency. In addition to the impact on the foreign exchange market, there is also a monetary effect on the money supply. If the money supply is impacted, then consequent adjustments must be made in interest rates, in prices, and at all levels of the economy. Therefore, a naked foreign exchange intervention has a long-term effect.
+ Sterilized intervention neutralizes its impact on the money supply. As there are rather few central banks that want the impact of their intervention in the foreign exchange markets to affect all corners of their economy, sterilized interventions have been the tool of choice. This holds true for the Federal Reserve as well. The sterilized intervention involves an additional step to the original currency transaction. This step consists of a sale of government securities that offsets the reserve addition that occurs due to the intervention. It may be easier to visualize it if you think that the central bank will finance the sale of a currency through the sale of a number of government securities. Because a sterilized intervention only generates an impact on the supply and demand of a certain currency, its impact will tend to have a short-to medium-term effect.
Wednesday, January 7, 2009
Kinds of Exchange Systems
Trading with Brokers
Foreign exchange brokers, unlike equity brokers, do not take positions for themselves, they only service banks. Their roles are:
+ bringing together buyers and sellers in the market
+ optimizing the price they show to their customers
+ quickly, accurately, and faithfully executing the traders' orders.
The majority of the foreign exchange brokers execute business via phone. The phone lines between brokers and banks are dedicated, or direct, and are usually in-stalled free of charge by the broker. A foreign exchange brokerage firm has direct lines to banks around the world. Most foreign exchange is executed through an open box system—a microphone in front of the broker that continuously transmits everything he or she says on the direct phone lines to the speaker boxes in the banks. This way, all banks can hear all the deals being executed. Because of the open box system used by brokers, a trader is able to hear all prices quoted; whether the bid was hit or the offer taken; and the following price. What the trader will not be able to
hear is the amounts of particular bids and offers and the names of the banks showing the prices.
Prices are anonymous the anonymity of the banks that are trading in the market ensures the market's efficiency, as all banks have a fair chance to trade. Brokers charge a commission that is paid equally by the buyer and the seller. The fees are negotiated on an individual basis by the bank and the brokerage firm. Brokers show their customers the prices made by other customers either two-way (bid and offer) prices or one way (bid or offer) prices from his or her customers. Traders show different prices because they "read" the market differently; they have different expectations and different interests. A broker who has more than one price on one or both sides will automatically optimize the price.
In other words, the broker will always show the highest bid and the lowest offer. Therefore, the market has access to the narrowest spread possible. Fundamental and technical analyses are used for forecasting the future direction of the currency. A trader might test the market by hitting a bid for a small amount to see if there is any reaction. Brokers cannot be forced into taking a principal's role if the name switch takes longer than anticipated. Another advantage of the brokers' market is that brokers might provide a broader selection of banks to their customers. Some European and Asian banks have overnight desks so their orders are usually placed with brokers who can deal with the American banks, adding to the liquidity of the market.
Direct Dealing
Direct dealing is based on trading reciprocity. A market maker—the bank making or quoting a price—expects the bank that is calling to reciprocate with respect to making a price when called upon. Direct dealing provides more trading discretion, as compared to dealing in the brokers' market. Sometimes traders take advantage of this characteristic. Direct dealing used to be conducted mostly on the phone. Dealing errors were difficult to prove and even more difficult to settle. In order to increase dealing safety, most banks tapped the phone lines on which trading
was conducted. This measure was helpful in recording all the transaction details and enabling the dealers to allocate the responsibility for errors fairly. But tape recorders were unable to prevent trading errors. Direct dealing was forever changed in the mid - 1980s, by the introduction of dealing systems.
Dealing Systems
Dealing systems are on-line computers that link the contributing banks around the world on a one-on-one basis. The performance of dealing systems is characterized by speed, reliability, and safety. Accessing a bank through a dealing system is much faster than making a phone call. Dealing systems are continuously being improved in order to offer maximum support to the dealer's main function: trading. The software is very reliable in picking up the big figure of the exchange rates and the standard value dates. In addition, it is extremely precise and fast in contacting other parties, switching among conversations, and accessing the database. The
trader is in continuous visual contact with the information exchanged on the monitor. It is easier to see than hear this information, especially when switching among conversations. Most banks use a combination of brokers and direct dealing systems. Both approaches reach the same banks, but not the same parties, because corporations, for instance, cannot deal in the brokers' market. Traders develop personal relationships with both brokers and traders in the markets, but select their trading medium based on price quality, not on personal feelings. The market share between dealing systems and brokers fluctuates based on market conditions. Fast market conditions are beneficial to dealing systems, whereas regular market conditions are more beneficial to brokers.
Matching Systems
Unlike dealing systems, on which trading is not anonymous and is conducted on a one-on-one basis, matching systems are anonymous and individual traders deal against the rest of the market, similar to dealing in the brokers' market. However, unlike the brokers' market, there are no individuals to bring the prices to the market, and liquidity may be limited at times. Matching systems are well-suited for trading smaller amounts as well. The dealing systems characteristics of speed, reliability, and safety are replicated in the matching systems. In addition, credit lines are automatically managed by the systems. Traders input the total credit line for each counter party. When the credit line has been reached, the system automatically disallows dealing with the particular party by displaying credit restrictions, or shows the trader only the price made by banks that have open lines of credit. As soon as the credit line is restored, the system allows the bank to deal again. In the interbank market, traders deal directly with dealing systems, matching systems, and brokers in a complementary fashion.
Foreign exchange brokers, unlike equity brokers, do not take positions for themselves, they only service banks. Their roles are:
+ bringing together buyers and sellers in the market
+ optimizing the price they show to their customers
+ quickly, accurately, and faithfully executing the traders' orders.
The majority of the foreign exchange brokers execute business via phone. The phone lines between brokers and banks are dedicated, or direct, and are usually in-stalled free of charge by the broker. A foreign exchange brokerage firm has direct lines to banks around the world. Most foreign exchange is executed through an open box system—a microphone in front of the broker that continuously transmits everything he or she says on the direct phone lines to the speaker boxes in the banks. This way, all banks can hear all the deals being executed. Because of the open box system used by brokers, a trader is able to hear all prices quoted; whether the bid was hit or the offer taken; and the following price. What the trader will not be able to
hear is the amounts of particular bids and offers and the names of the banks showing the prices.
Prices are anonymous the anonymity of the banks that are trading in the market ensures the market's efficiency, as all banks have a fair chance to trade. Brokers charge a commission that is paid equally by the buyer and the seller. The fees are negotiated on an individual basis by the bank and the brokerage firm. Brokers show their customers the prices made by other customers either two-way (bid and offer) prices or one way (bid or offer) prices from his or her customers. Traders show different prices because they "read" the market differently; they have different expectations and different interests. A broker who has more than one price on one or both sides will automatically optimize the price.
In other words, the broker will always show the highest bid and the lowest offer. Therefore, the market has access to the narrowest spread possible. Fundamental and technical analyses are used for forecasting the future direction of the currency. A trader might test the market by hitting a bid for a small amount to see if there is any reaction. Brokers cannot be forced into taking a principal's role if the name switch takes longer than anticipated. Another advantage of the brokers' market is that brokers might provide a broader selection of banks to their customers. Some European and Asian banks have overnight desks so their orders are usually placed with brokers who can deal with the American banks, adding to the liquidity of the market.
Direct Dealing
Direct dealing is based on trading reciprocity. A market maker—the bank making or quoting a price—expects the bank that is calling to reciprocate with respect to making a price when called upon. Direct dealing provides more trading discretion, as compared to dealing in the brokers' market. Sometimes traders take advantage of this characteristic. Direct dealing used to be conducted mostly on the phone. Dealing errors were difficult to prove and even more difficult to settle. In order to increase dealing safety, most banks tapped the phone lines on which trading
was conducted. This measure was helpful in recording all the transaction details and enabling the dealers to allocate the responsibility for errors fairly. But tape recorders were unable to prevent trading errors. Direct dealing was forever changed in the mid - 1980s, by the introduction of dealing systems.
Dealing Systems
Dealing systems are on-line computers that link the contributing banks around the world on a one-on-one basis. The performance of dealing systems is characterized by speed, reliability, and safety. Accessing a bank through a dealing system is much faster than making a phone call. Dealing systems are continuously being improved in order to offer maximum support to the dealer's main function: trading. The software is very reliable in picking up the big figure of the exchange rates and the standard value dates. In addition, it is extremely precise and fast in contacting other parties, switching among conversations, and accessing the database. The
trader is in continuous visual contact with the information exchanged on the monitor. It is easier to see than hear this information, especially when switching among conversations. Most banks use a combination of brokers and direct dealing systems. Both approaches reach the same banks, but not the same parties, because corporations, for instance, cannot deal in the brokers' market. Traders develop personal relationships with both brokers and traders in the markets, but select their trading medium based on price quality, not on personal feelings. The market share between dealing systems and brokers fluctuates based on market conditions. Fast market conditions are beneficial to dealing systems, whereas regular market conditions are more beneficial to brokers.
Matching Systems
Unlike dealing systems, on which trading is not anonymous and is conducted on a one-on-one basis, matching systems are anonymous and individual traders deal against the rest of the market, similar to dealing in the brokers' market. However, unlike the brokers' market, there are no individuals to bring the prices to the market, and liquidity may be limited at times. Matching systems are well-suited for trading smaller amounts as well. The dealing systems characteristics of speed, reliability, and safety are replicated in the matching systems. In addition, credit lines are automatically managed by the systems. Traders input the total credit line for each counter party. When the credit line has been reached, the system automatically disallows dealing with the particular party by displaying credit restrictions, or shows the trader only the price made by banks that have open lines of credit. As soon as the credit line is restored, the system allows the bank to deal again. In the interbank market, traders deal directly with dealing systems, matching systems, and brokers in a complementary fashion.
Kinds of Major currencies
U.S. Dollar
The United States dollar is the world's main currency. All currencies are generally quoted in U.S. dollar terms. Under conditions of international economic and political unrest, the U.S. dollar is the main safe-haven currency which was proven particularly well during the Southeast Asian crisis of 1997-1998. The U.S. dollar became the leading currency toward the end of the Second World War and was at the center of the Bretton Woods Accord, as the other currencies were virtually pegged against it. The introduction of the euro in 1999 reduced the dollar's importance only marginally.
The major currencies traded against the U.S. dollar are the euro, Japanese yen, British pound, and Swiss franc.
Euro
The euro was designed to become the premier currency in trading by simply being quoted in American terms. Like the U.S. dollar, the euro has a strong international presence stemming from members of the European Monetary Union. The currency remains plagued by unequal growth, high unemployment, and government resistance to structural changes. The pair was also weighed in 1999 and 2000 by outflows from foreign investors, particularly Japanese, who were forced to liquidate their losing investments in eurodenominated assets. Moreover, European money managers rebalanced their portfolios and reduced their euro exposure as their needs for hedging currency risk in Europe declined.
Japanese Yen
The Japanese yen is the third most traded currency in the world; it has a much smaller international presence than the U.S. dollar or the euro. The yen is very liquid around the world, practically around the clock. The natural demand to trade the yen concentrated mostly among the Japanese keiretsu, the economic and financial conglomerates. The yen is much more sensitive to the fortunes of the Nikkei index, the Japanese stock market, and the real estate market. The attempt of the Bank of Japan to deflate the double bubble in these two markets had a negative effect on the Japanese yen, although the impact was short-lived.
British Pound
Until the end of World War II, the pound was the currency of reference. Its nickname, cable, is derived from the telex machine, which was used to trade it in its heyday. The currency is heavily traded against the euro and the U.S. dollar, but has a spotty presence against other currencies. The two-year bout with the Exchange Rate Mechanism, between 1990 and 1992, had a soothing effect on the British pound, as it generally had to follow the deutsche mark's fluctuations, but the crisis conditions that precipitated the pound's withdrawal from the ERM had a psychological effect on the currency.
Prior to the introduction of the euro, both the pound benefited from any doubts about the currency convergence. After the introduction of the euro, Bank of England is attempting to bring the high U.K. rates closer to the lower rates in the euro zone. The pound could join the euro in the early 2000s, provided that the U.K. referendum is positive.
Swiss Franc
The Swiss franc is the only currency of a major European country that belongs neither to the European Monetary Union nor to the G-7 countries. Although the Swiss economy is relatively small, the Swiss franc is one of the four major currencies, closely resembling the strength and quality of the Swiss economy and finance. Switzerland has a very close economic relationship with Germany, and thus to the euro zone. Therefore, in terms of political uncertainty in the East, the Swiss franc is favored generally over the euro. Typically, it is believed that the Swiss franc is a stable currency. Actually, from a foreign exchange point of view, the Swiss franc closely resembles the patterns of the euro, but lacks its liquidity. As the demand for it exceeds supply, the Swiss franc can be more volatile than the euro.
The United States dollar is the world's main currency. All currencies are generally quoted in U.S. dollar terms. Under conditions of international economic and political unrest, the U.S. dollar is the main safe-haven currency which was proven particularly well during the Southeast Asian crisis of 1997-1998. The U.S. dollar became the leading currency toward the end of the Second World War and was at the center of the Bretton Woods Accord, as the other currencies were virtually pegged against it. The introduction of the euro in 1999 reduced the dollar's importance only marginally.
The major currencies traded against the U.S. dollar are the euro, Japanese yen, British pound, and Swiss franc.
Euro
The euro was designed to become the premier currency in trading by simply being quoted in American terms. Like the U.S. dollar, the euro has a strong international presence stemming from members of the European Monetary Union. The currency remains plagued by unequal growth, high unemployment, and government resistance to structural changes. The pair was also weighed in 1999 and 2000 by outflows from foreign investors, particularly Japanese, who were forced to liquidate their losing investments in eurodenominated assets. Moreover, European money managers rebalanced their portfolios and reduced their euro exposure as their needs for hedging currency risk in Europe declined.
Japanese Yen
The Japanese yen is the third most traded currency in the world; it has a much smaller international presence than the U.S. dollar or the euro. The yen is very liquid around the world, practically around the clock. The natural demand to trade the yen concentrated mostly among the Japanese keiretsu, the economic and financial conglomerates. The yen is much more sensitive to the fortunes of the Nikkei index, the Japanese stock market, and the real estate market. The attempt of the Bank of Japan to deflate the double bubble in these two markets had a negative effect on the Japanese yen, although the impact was short-lived.
British Pound
Until the end of World War II, the pound was the currency of reference. Its nickname, cable, is derived from the telex machine, which was used to trade it in its heyday. The currency is heavily traded against the euro and the U.S. dollar, but has a spotty presence against other currencies. The two-year bout with the Exchange Rate Mechanism, between 1990 and 1992, had a soothing effect on the British pound, as it generally had to follow the deutsche mark's fluctuations, but the crisis conditions that precipitated the pound's withdrawal from the ERM had a psychological effect on the currency.
Prior to the introduction of the euro, both the pound benefited from any doubts about the currency convergence. After the introduction of the euro, Bank of England is attempting to bring the high U.K. rates closer to the lower rates in the euro zone. The pound could join the euro in the early 2000s, provided that the U.K. referendum is positive.
Swiss Franc
The Swiss franc is the only currency of a major European country that belongs neither to the European Monetary Union nor to the G-7 countries. Although the Swiss economy is relatively small, the Swiss franc is one of the four major currencies, closely resembling the strength and quality of the Swiss economy and finance. Switzerland has a very close economic relationship with Germany, and thus to the euro zone. Therefore, in terms of political uncertainty in the East, the Swiss franc is favored generally over the euro. Typically, it is believed that the Swiss franc is a stable currency. Actually, from a foreign exchange point of view, the Swiss franc closely resembles the patterns of the euro, but lacks its liquidity. As the demand for it exceeds supply, the Swiss franc can be more volatile than the euro.
Factors Caused Foreign Exchange Volume Growth
Foreign exchange trading is generally conducted in a decentralized manner, with the exceptions of currency futures and options. Foreign exchange has experienced spectacular growth in volume ever since currencies were allowed to float freely against each other. While the daily turnover in 1977 was U.S. $5 billion, it increased to U.S. $600 billion in 1987, reached the U.S. $1 trillion mark in September 1992, and stabilized at around $1,5 trillion by the year 2000.
For foreign exchange, currency volatility is a prime factor in the growth of volume. In fact, volatility is a sine qua non condition for trading. The only instruments that may be profitable under conditions of low volatility are currency options.
Interest Rate Volatility
Economic internationalization generated a significant impact on interest rates as well. Economics became much more interrelated and that exacerbated the need to change interest rates faster. Interest rates are generally changed in order to adjust the growth in the economy, and interest rate differentials have a substantial impact on exchange rates.
Business Internationalization
In recent decades the business world the competition has intensified, triggering a worldwide hunt for more markets and cheaper raw materials and labor. The pace of economic internationalization picked up even more in the 1990s, due to the fall of Communism in Europe and to up-and-down economic and financial development in both Southeast Asia and South America. These changes have been positive toward foreign exchange, since more transactional layers were added.
Increasing of Corporate Interest
A successful performance of a product or service overseas may be pulled down from the profit point of view by adverse foreign exchange conditions and vice versa. An accurate handling of the foreign exchange may enhance the overall international performance of a product or service. Proper handling of foreign exchange generally adds substantially to the rate of return. Therefore, interest in foreign exchange has increased in the past decade. Many corporations are using currencies not only for hedging, but also for capitalizing on opportunities that exist solely in the currency markets.
Increasing of Traders Sophistication
Advances in technology, computer software, and telecommunications and increased experience have increased the level of traders' sophistication. This enhanced traders' confidence in their ability to both generate profits and properly handle the exchange risks. Therefore, trading sophistication led toward volume increase.
Developments in Telecommunications
The introduction of automated dealing systems in the 1980s, of matching systems in the early 1990s, and of Internet trading in the late 1990s completely altered the way foreign exchange was conducted. The dealing systems are online computer systems that link banks on a one-to-one basis, while matching systems are electronic brokers. They are reliable and much faster, allowing traders to conduct more simultaneous trades. They are also safer, as traders are able to see the deals that they execute. The dealing systems had a major role in expanding the foreign exchange business due to their reliability, speed, and safety.
Computer and Programming development
Computers play a significant role at many stages of conducting foreign exchange. In addition to the dealing systems, matching systems simultaneously connect all traders around the world, electronically duplicating the brokers' market. The new office systems provide full accounting coverage, ticket writing, back office processing, and risk management implementation at a fraction of their previous cost. Advanced software makes it possible to generate all types of charts, augment them with sophisticated technical studies, and put them at traders' fingertips on a continuous basis at a rather limited cost.
For foreign exchange, currency volatility is a prime factor in the growth of volume. In fact, volatility is a sine qua non condition for trading. The only instruments that may be profitable under conditions of low volatility are currency options.
Interest Rate Volatility
Economic internationalization generated a significant impact on interest rates as well. Economics became much more interrelated and that exacerbated the need to change interest rates faster. Interest rates are generally changed in order to adjust the growth in the economy, and interest rate differentials have a substantial impact on exchange rates.
Business Internationalization
In recent decades the business world the competition has intensified, triggering a worldwide hunt for more markets and cheaper raw materials and labor. The pace of economic internationalization picked up even more in the 1990s, due to the fall of Communism in Europe and to up-and-down economic and financial development in both Southeast Asia and South America. These changes have been positive toward foreign exchange, since more transactional layers were added.
Increasing of Corporate Interest
A successful performance of a product or service overseas may be pulled down from the profit point of view by adverse foreign exchange conditions and vice versa. An accurate handling of the foreign exchange may enhance the overall international performance of a product or service. Proper handling of foreign exchange generally adds substantially to the rate of return. Therefore, interest in foreign exchange has increased in the past decade. Many corporations are using currencies not only for hedging, but also for capitalizing on opportunities that exist solely in the currency markets.
Increasing of Traders Sophistication
Advances in technology, computer software, and telecommunications and increased experience have increased the level of traders' sophistication. This enhanced traders' confidence in their ability to both generate profits and properly handle the exchange risks. Therefore, trading sophistication led toward volume increase.
Developments in Telecommunications
The introduction of automated dealing systems in the 1980s, of matching systems in the early 1990s, and of Internet trading in the late 1990s completely altered the way foreign exchange was conducted. The dealing systems are online computer systems that link banks on a one-to-one basis, while matching systems are electronic brokers. They are reliable and much faster, allowing traders to conduct more simultaneous trades. They are also safer, as traders are able to see the deals that they execute. The dealing systems had a major role in expanding the foreign exchange business due to their reliability, speed, and safety.
Computer and Programming development
Computers play a significant role at many stages of conducting foreign exchange. In addition to the dealing systems, matching systems simultaneously connect all traders around the world, electronically duplicating the brokers' market. The new office systems provide full accounting coverage, ticket writing, back office processing, and risk management implementation at a fraction of their previous cost. Advanced software makes it possible to generate all types of charts, augment them with sophisticated technical studies, and put them at traders' fingertips on a continuous basis at a rather limited cost.
Trading with LiteForex
Why you choose Lite Forex ?LiteForex offers revolutionary trading technology for beginner traders, and lets you start trading in the Forex market depositing just ONE DOLLAR! Your deposit appears in US cents on the Lite group accounts, so you feel like you are trading the same amount in US Dollars. This new technology allows Forex beginners to learn Forex in a REAL life situation with minimal investmen.
LiteForex is a service mark and division of Straighthold Investment Group, one of the most respected online Forex-trading companies in the industry. Straighthold Investment Group is a financial services corporation specialized in providing traders from around the world with high quality of online trading services.
Open LiteForex account is easy and take you a few minute, there are two types of account you can select:
+ Life Forex: the LITEForex account group has been developed for beginners above all, but can also be used by traders who wish to test their mechanical trading systems. The main advantage of the LITEForex managed Forex account is that you only need a starting deposit of 1 US dollar. After you open the LITEForex managed Forex account you can trade through our company on the same terms as other traders, who work on other account groups. The only difference is the operating amount.
+ Real Forex: this account group is particularly intended for Forex professionals who have sufficient experience working with large sums
If you are a beginnger, let start with Lite Forex, this type of account allow you start to trade from 1$, it's great and very cheap fee to learn trading.
Following these steps to create account:
+ Choose account type you want to create
+ Fill all the required fields in your account information
Benefit from LiteForex:+ Commission-Free Trading
+ Transparancy in transaction report.
+ Professional Trading Platform (Meta Trader 4) allow Expert Advisors (robots) for 24 hours, stable.
+ No dealing desk.
+ Small spread under normal markets. spreads are not fixed and will fluctuate with market volatility.
+ Option for Mini and Micro Lot.
+ Leverage up to 500:1.
+ Deposit can use WebMoney,Liberty Reserve, Wire Transfer methods.
Once you finish create your account, you can download Download Trading Terminal , install this software on your computer:
and start your trading with LiteForex.
Main Stages of Recent Foreign Exchange Development
The main phases of the further development of the Forex in modern times were:
+ signing of the Bretton Woods Accord
+ constitution of the international monetary fund
+ emergency of the free-floating foreign exchange markets
+ creation of currency reserves
+ constitution of the European Monetary Union and the European Monetary Cooperation Fund;
+ introduction of the Euro as a currency.
The Bretton Woods Accord was signed in July 1944 by the United States, Great Britain, and France which agreed to make the currency market stable, particularly due to governmental controls on currency values. In order to implement it, two major goals were: emphasized: to provide the pegging (backing of prices) of currencies and to organize the International Monetary Fund (IMF).
In accordance to the Bretton Woods Accord, the major trading currencies were pegged to the U.S. dollar in the sense that they were allowed to fluctuate only one percent on either side of that rate. When a currency exceeded this range, marked by intervention points, the central bank in charge had to buy it or sell it, and thus bring it back into range. In turn, the U.S. dollar was pegged to gold at $35 per ounce. Thus, the U.S. dollar became the world's reserve currency. The purpose of IMF is to consult with one another to maintain a stable system of buying and selling the currencies, so that payments in foreign money can take place between countries smoothly and timely.
The IMF lends money to members who have trouble meeting financial obligations to other members, on the condition that they undertake economic reforms to eliminate these difficulties for their own good and the good of the entire membership. In total the main tasks of the IMF are:
+ to promote international cooperation by providing the means for members to consult and collaborate on international monetary issues
+ to facilitate the growth of international trade and thus contribute to high levels of employment and real income among member nations
+ to promote stability of exchange rates and orderly exchange agreements, and discourage competitive currency depreciation
+ to foster a multilateral system of international payments, and to seek the elimination of exchange restrictions that hinder the growth of world trade
+ to make financial resources available to members, on a temporary basis and with adequate safeguards, to permit them to correct payments imbalances without resorting to measures destructive to national and international prosperity.
To execute these goals the IMF uses such instruments as Reserve tranche which allows a member to draw on its own reserve asset quota at the time of payment, Credit tranche drawings and stand-by arrangements are the standard form of IMF loans, the compensatory financing facility extends financial help to countries with temporary problems generated by reductions in export revenues, the buffer stock financing facility which is geared toward assisting the stocking up on primary commodities in order to ensure price stability in a specific commodity and the extended facility designed to assist members with financial problems in amounts or for periods exceeding the scope of the other facilities.
+ signing of the Bretton Woods Accord
+ constitution of the international monetary fund
+ emergency of the free-floating foreign exchange markets
+ creation of currency reserves
+ constitution of the European Monetary Union and the European Monetary Cooperation Fund;
+ introduction of the Euro as a currency.
The Bretton Woods Accord was signed in July 1944 by the United States, Great Britain, and France which agreed to make the currency market stable, particularly due to governmental controls on currency values. In order to implement it, two major goals were: emphasized: to provide the pegging (backing of prices) of currencies and to organize the International Monetary Fund (IMF).
In accordance to the Bretton Woods Accord, the major trading currencies were pegged to the U.S. dollar in the sense that they were allowed to fluctuate only one percent on either side of that rate. When a currency exceeded this range, marked by intervention points, the central bank in charge had to buy it or sell it, and thus bring it back into range. In turn, the U.S. dollar was pegged to gold at $35 per ounce. Thus, the U.S. dollar became the world's reserve currency. The purpose of IMF is to consult with one another to maintain a stable system of buying and selling the currencies, so that payments in foreign money can take place between countries smoothly and timely.
The IMF lends money to members who have trouble meeting financial obligations to other members, on the condition that they undertake economic reforms to eliminate these difficulties for their own good and the good of the entire membership. In total the main tasks of the IMF are:
+ to promote international cooperation by providing the means for members to consult and collaborate on international monetary issues
+ to facilitate the growth of international trade and thus contribute to high levels of employment and real income among member nations
+ to promote stability of exchange rates and orderly exchange agreements, and discourage competitive currency depreciation
+ to foster a multilateral system of international payments, and to seek the elimination of exchange restrictions that hinder the growth of world trade
+ to make financial resources available to members, on a temporary basis and with adequate safeguards, to permit them to correct payments imbalances without resorting to measures destructive to national and international prosperity.
To execute these goals the IMF uses such instruments as Reserve tranche which allows a member to draw on its own reserve asset quota at the time of payment, Credit tranche drawings and stand-by arrangements are the standard form of IMF loans, the compensatory financing facility extends financial help to countries with temporary problems generated by reductions in export revenues, the buffer stock financing facility which is geared toward assisting the stocking up on primary commodities in order to ensure price stability in a specific commodity and the extended facility designed to assist members with financial problems in amounts or for periods exceeding the scope of the other facilities.
Foreign Exchange in a Historical Perspective
Currency trading has a long history and can be traced back to the ancient Middle East and Middle Ages when foreign exchange started to take shape after the international merchant bankers devised bills of exchange, which were transferable third-party payments that allowed flexibility and growth in foreign exchange dealings.
The modern foreign exchange market characterized by the consequent periods of increased volatility and relative stability formed itself in the twentieth century. By the mid-1930s London became to be the leading center for foreign exchange and the British pound served as the currency to trade and to keep as a reserve currency. Because in the old times foreign exchange was traded on the telex machines, or cable, the pound has generally the nickname “cable ”.
In 1930, the Bank for International Settlements was established in Basel, Switzerland, to oversee the financial efforts of the newly independent countries, emerged after the World War I, and to provide monetary relief to countries experiencing temporary balance of payments difficulties. After the World War II, where the British economy was destroyed and the United States was the only country unscarred by war, U.S. dollar became the prominent currency of the entire globe. Nowadays, currencies all over the world are generally quoted against the U.S. dollar.
The modern foreign exchange market characterized by the consequent periods of increased volatility and relative stability formed itself in the twentieth century. By the mid-1930s London became to be the leading center for foreign exchange and the British pound served as the currency to trade and to keep as a reserve currency. Because in the old times foreign exchange was traded on the telex machines, or cable, the pound has generally the nickname “cable ”.
In 1930, the Bank for International Settlements was established in Basel, Switzerland, to oversee the financial efforts of the newly independent countries, emerged after the World War I, and to provide monetary relief to countries experiencing temporary balance of payments difficulties. After the World War II, where the British economy was destroyed and the United States was the only country unscarred by war, U.S. dollar became the prominent currency of the entire globe. Nowadays, currencies all over the world are generally quoted against the U.S. dollar.
Tuesday, January 6, 2009
Foreign Exchange as a Financial Market
Currency exchange is very attractive for both the corporate and individual traders who make money on the Forex - a special financial market assigned for the foreign exchange. The following features make this market different in compare to all other sectors of the world financial system:
• heightened sensibility to a large and continuously changing number of factors
• accessibility to all traders in the major currencies
• guaranteed quantity and liquidity of the major currencies
• increased consideration for several currencies, round-the clock
business hours which enable traders to deal after normal hours or during
national holidays in their country finding markets abroad open
• extremely high efficiency relative to other financial markets
This goal of this manual is to introduce beginning traders to all the essential aspects of foreign exchange in a practical manner and to be a source of best answers on the typical questions as why are currencies being traded, who are the traders, what currencies do they trade, what makes rates move, what instruments are used for the trade, how a currency behavior can be forecasted and where the pertinent information may be obtained from. Mastering the content of an appropriate section the user will be able to make his/her own decisions, test them, and ultimately use recommended tools and approaches for his/her own benefit.
• heightened sensibility to a large and continuously changing number of factors
• accessibility to all traders in the major currencies
• guaranteed quantity and liquidity of the major currencies
• increased consideration for several currencies, round-the clock
business hours which enable traders to deal after normal hours or during
national holidays in their country finding markets abroad open
• extremely high efficiency relative to other financial markets
This goal of this manual is to introduce beginning traders to all the essential aspects of foreign exchange in a practical manner and to be a source of best answers on the typical questions as why are currencies being traded, who are the traders, what currencies do they trade, what makes rates move, what instruments are used for the trade, how a currency behavior can be forecasted and where the pertinent information may be obtained from. Mastering the content of an appropriate section the user will be able to make his/her own decisions, test them, and ultimately use recommended tools and approaches for his/her own benefit.
Day Trading on a Forex platform
Step 1: Deciding to perform a Forex deal
You have an intention to trade Forex, and you have your own reasoning for doing so – e.g. you feel that the USD will increase compared with the EUR. The EUR/USD exchange rate is, at the time, around 1.2000 (the common presentation of the Euro-US$ pair is EUR/USD, meaning 1.2000 US dollars for 1 Euro). Your feeling can be based on your experience, or on technical analysis, or fundamental analysis, etc. For whatever reason, you believe that the USD will rise to around 1.1850 (EUR will be down, which means USD will go up). You want to profit if your forecast is correct, and so choose to make a trade.
Step 2: Determining the deal
Below is a screen-shot of a Day-Trading deal in the making and an explanation of each step required to put the trade into effect
Select currencies
Select the currencies in the Forex pair. There is no connection between your “base working currency" (or “account base currency", the currency in which you handle your Forex account and make deposits and withdrawals) and the currencies in the pair you select. In this
example you selected “BUY USD" because you feel it is low in terms of Euro, and it will increase in the near future. Once it increases to the level you anticipate, you will close the deal, and get more EUR for the USD you previously “bought" - hence, you make profit.
Select the amount
Since Forex trading is “non-delivery" trading (i.e. – no physical currencies are transacted), the Forex deal (contract) has a “volume", or “size", meaning the amount of the currencies in this contract. You determine the volume of the contract, but you do not have to purchase the
whole amount. In general, you work in the most common leverage (see below), 1:100: therefore a deal of 10,000 Euro will require much less money to facilitate it.
Select the amount to risk
This is your investment. This is the amount you risk, meaning the MAXIMUM amount you can lose. On a 1:100 leverage, EUR 10,000 against USD thus requires only USD 100 (in fact, the actual leverage you are offered in this case is 1:120, since you “buy" EUR10,000 with USD
12,000 guaranteed using only USD 100 of your own money). Stop-Loss rate : This is the currency exchange rate at which your deal would automatically close in the event the market ran counter to your forecast. In this event, you would lose your USD 100 investment. You can define another
Stop-Loss rate
This is the currency exchange rate at which your deal would automatically close in the event the market ran counter to your forecast. In this event, you would lose your USD 100 investment. You can define another Stop-Loss rate, however, the “amount to risk" will change accordingly. There is a direct relationship between the Stop-Loss rate and the “Margin" (i.e the amount risked) required for the deal
Freeze Rate
This feature is unique to the Easy-Forex Trading Platform. You see the rate for the deal and you are almost ready to accept it, but before you do, you need a few seconds to think. With the freeze rate feature you are allowed a few seconds more to either decline or accept the deal.
Accept
When you’re ready, click “Accept" and your deal is activated. You have enough money in your Forex account to make the deal, so it’s in play. You are holding now an “Open Position" in Forex.
Please note
Renewal until… The Day-Trading deal resembles a “SPOT" transaction (but is not identical). The rates in the deal are the updated current rates (“spot"), and the deal may be closed anytime during the trading day. However, the trader can extend the deal to the following day (paying a
small renewal fee). Most platforms offer an automatic renewal of the deal, for a few days period. The trader may close the position at any time. If the trader closes the deal before the indicated closing time (usually it is 22:00 GMT), no renewal fee will be charged.
Step 3: Checking account status
With online platforms, traders have 24x7 access in order to monitor open positions, to close positions, or change parameters (definitions) in the deal.
ID : The reference number of the deal, as recorded in the platform.
Open date : The day the deal was opened by the trader.
Buy: The volume of the currency “bought".
Sell: The volume of the currency “sold".
Rolling until: The last day to which the deal will be automatically renewed.
Rate: The exchange rate of the currency pair in the deal.
Stop-Loss rate: The rate defined for automatic “stop-loss" of the deal. The deal will close if this rate occurs in the market during the time the deal is active.
Take-Profit rate: The rate at which the deal will close automatically assuming the market moves in the direction forecast by the trader. When defined, this rate allows a trader to take profit automatically when a set rate is achieved, thus allowing the trader to focus on other tasks rather than watching the market closely.
Margin : The amount invested by the trader for the deal. This is the maximum
amount the trader can lose.
Last rate: The last known rate (it is the current rate at the time the trader is
viewing the screen).
Current Profit/Loss: The status of the trader’s position. This will be the profit (or the loss) from this deal, if it was closed at this very second.
Check closing value: Pressing this key will calculate and present the status of all of the trader’s open Day-Trading deals (total profit or loss). This is the place for the trader to manually close a position, before it reaches Stop-Loss or Take-Profit.
Change Stop-Loss: The trader is allowed to change his Stop-Loss, at any time while the deal is still active. As previously mentioned, doing so would affect the amount of margin needed for the deal. If the trader changes the Stop-Loss downward (in a case where the position is losing, and is now near the automatic closing), then additional funds will be required for margin. If the trader changes the Stop-Loss upward (in a case where the deal will already see a profit, and the trader wishes to define a higher Stop-Loss to decrease the original risk), then the difference will be credited.
Change Take-Profit: Similarly, the trader is allowed to define, or change, a Take-Profit rate. Note that unlike a Stop-Loss rate, the trader does not have to define any Take-Profit rate; it simply allows the trader to focus on tasks other than rate-watching.
Scenario: The trader can key in various hypothetical exchange rates to see their impact on their overall position (amount of profit or loss), if and when such rates occur in the market.
Step 4: Closing the deal manually
Using the deal defined in the screen shot above, the deal definitions are: Buy USD; sell EUR; EUR10,000; Deal rate 1.1952; Stop-Loss 1.2052; no Take-Profit defined; margin USD 100.
The table below shows what would occur under various scenarios:
The table shows the effect of “leveraged" trading: the trader invests USD 100, for a EUR 10,000 contract. Therefore, a small change in the currency exchange rate reflects a much higher change in value. The Trader may lose up to 100% of the investment (USD 100), but can gain an
unlimited profit. The table also illustrates the value of PIPs. In this deal, every PIP (the fourth
decimal digit) results in a profit or loss of USD 1.00 to the trader. So long as the trader gains on this deal, each PIP is worth $1 on a $100 margin leveraged at 1:100 .
Limit Orders
Some dealing rooms and platforms offer the trader the ability to set a "reserved" rate for a deal, that would "capture", if and when such a rate occurs in the market, resulting in a Day-Trading deal. The trader can define the rate he/she wishes, letting the platform do the watching, until it appears in the market. Easy-Forex does not charge additional fees for Limit Orders. Setting up a Limit Order is very similar to the process described above for Day-Trading. Should the reserved
deal not be realized, the funds which were allocated for it will be returned to the trader's account.
--------------------
Trading Forex
You have an intention to trade Forex, and you have your own reasoning for doing so – e.g. you feel that the USD will increase compared with the EUR. The EUR/USD exchange rate is, at the time, around 1.2000 (the common presentation of the Euro-US$ pair is EUR/USD, meaning 1.2000 US dollars for 1 Euro). Your feeling can be based on your experience, or on technical analysis, or fundamental analysis, etc. For whatever reason, you believe that the USD will rise to around 1.1850 (EUR will be down, which means USD will go up). You want to profit if your forecast is correct, and so choose to make a trade.
Step 2: Determining the deal
Below is a screen-shot of a Day-Trading deal in the making and an explanation of each step required to put the trade into effect
Select the currencies in the Forex pair. There is no connection between your “base working currency" (or “account base currency", the currency in which you handle your Forex account and make deposits and withdrawals) and the currencies in the pair you select. In this
example you selected “BUY USD" because you feel it is low in terms of Euro, and it will increase in the near future. Once it increases to the level you anticipate, you will close the deal, and get more EUR for the USD you previously “bought" - hence, you make profit.
Select the amount
Since Forex trading is “non-delivery" trading (i.e. – no physical currencies are transacted), the Forex deal (contract) has a “volume", or “size", meaning the amount of the currencies in this contract. You determine the volume of the contract, but you do not have to purchase the
whole amount. In general, you work in the most common leverage (see below), 1:100: therefore a deal of 10,000 Euro will require much less money to facilitate it.
Select the amount to risk
This is your investment. This is the amount you risk, meaning the MAXIMUM amount you can lose. On a 1:100 leverage, EUR 10,000 against USD thus requires only USD 100 (in fact, the actual leverage you are offered in this case is 1:120, since you “buy" EUR10,000 with USD
12,000 guaranteed using only USD 100 of your own money). Stop-Loss rate : This is the currency exchange rate at which your deal would automatically close in the event the market ran counter to your forecast. In this event, you would lose your USD 100 investment. You can define another
Stop-Loss rate
This is the currency exchange rate at which your deal would automatically close in the event the market ran counter to your forecast. In this event, you would lose your USD 100 investment. You can define another Stop-Loss rate, however, the “amount to risk" will change accordingly. There is a direct relationship between the Stop-Loss rate and the “Margin" (i.e the amount risked) required for the deal
Freeze Rate
This feature is unique to the Easy-Forex Trading Platform. You see the rate for the deal and you are almost ready to accept it, but before you do, you need a few seconds to think. With the freeze rate feature you are allowed a few seconds more to either decline or accept the deal.
Accept
When you’re ready, click “Accept" and your deal is activated. You have enough money in your Forex account to make the deal, so it’s in play. You are holding now an “Open Position" in Forex.
Please note
Renewal until… The Day-Trading deal resembles a “SPOT" transaction (but is not identical). The rates in the deal are the updated current rates (“spot"), and the deal may be closed anytime during the trading day. However, the trader can extend the deal to the following day (paying a
small renewal fee). Most platforms offer an automatic renewal of the deal, for a few days period. The trader may close the position at any time. If the trader closes the deal before the indicated closing time (usually it is 22:00 GMT), no renewal fee will be charged.
Step 3: Checking account status
With online platforms, traders have 24x7 access in order to monitor open positions, to close positions, or change parameters (definitions) in the deal.
ID : The reference number of the deal, as recorded in the platform.
Open date : The day the deal was opened by the trader.
Buy: The volume of the currency “bought".
Sell: The volume of the currency “sold".
Rolling until: The last day to which the deal will be automatically renewed.
Rate: The exchange rate of the currency pair in the deal.
Stop-Loss rate: The rate defined for automatic “stop-loss" of the deal. The deal will close if this rate occurs in the market during the time the deal is active.
Take-Profit rate: The rate at which the deal will close automatically assuming the market moves in the direction forecast by the trader. When defined, this rate allows a trader to take profit automatically when a set rate is achieved, thus allowing the trader to focus on other tasks rather than watching the market closely.
Margin : The amount invested by the trader for the deal. This is the maximum
amount the trader can lose.
Last rate: The last known rate (it is the current rate at the time the trader is
viewing the screen).
Current Profit/Loss: The status of the trader’s position. This will be the profit (or the loss) from this deal, if it was closed at this very second.
Check closing value: Pressing this key will calculate and present the status of all of the trader’s open Day-Trading deals (total profit or loss). This is the place for the trader to manually close a position, before it reaches Stop-Loss or Take-Profit.
Change Stop-Loss: The trader is allowed to change his Stop-Loss, at any time while the deal is still active. As previously mentioned, doing so would affect the amount of margin needed for the deal. If the trader changes the Stop-Loss downward (in a case where the position is losing, and is now near the automatic closing), then additional funds will be required for margin. If the trader changes the Stop-Loss upward (in a case where the deal will already see a profit, and the trader wishes to define a higher Stop-Loss to decrease the original risk), then the difference will be credited.
Change Take-Profit: Similarly, the trader is allowed to define, or change, a Take-Profit rate. Note that unlike a Stop-Loss rate, the trader does not have to define any Take-Profit rate; it simply allows the trader to focus on tasks other than rate-watching.
Scenario: The trader can key in various hypothetical exchange rates to see their impact on their overall position (amount of profit or loss), if and when such rates occur in the market.
Step 4: Closing the deal manually
Using the deal defined in the screen shot above, the deal definitions are: Buy USD; sell EUR; EUR10,000; Deal rate 1.1952; Stop-Loss 1.2052; no Take-Profit defined; margin USD 100.
The table below shows what would occur under various scenarios:
unlimited profit. The table also illustrates the value of PIPs. In this deal, every PIP (the fourth
decimal digit) results in a profit or loss of USD 1.00 to the trader. So long as the trader gains on this deal, each PIP is worth $1 on a $100 margin leveraged at 1:100 .
Limit Orders
Some dealing rooms and platforms offer the trader the ability to set a "reserved" rate for a deal, that would "capture", if and when such a rate occurs in the market, resulting in a Day-Trading deal. The trader can define the rate he/she wishes, letting the platform do the watching, until it appears in the market. Easy-Forex does not charge additional fees for Limit Orders. Setting up a Limit Order is very similar to the process described above for Day-Trading. Should the reserved
deal not be realized, the funds which were allocated for it will be returned to the trader's account.
--------------------
Trading Forex
Fundamental Analysis
Fundamental analysis is a method of forecasting future price movements of a financial instrument based on economic, political, environmental and other relevant factors, as well as data that will affect the basic supply and demand of whatever underlies the financial instrument. In practice, many market players use technical analysis in conjunction with fundamental analysis to determine their trading strategy. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments, whereas the fundamental analyst needs to know a particular market intimately. Fundamental analysis focuses on what ought to happen in a market. Among the factors considered are: supply and demand; seasonal cycles; weather; government policy.
The fundamental analyst studies the causes of market movements, while the technical analyst studies the effect. Fundamental analysis is a macro, or strategic, assessment of where a currency should be traded, based on any criteria but the movement of the currency's price itself. These criteria often include the economic conditions of the country that the currency represents,
monetary policy, and other “fundamental" elements. Many profitable trades are made moments prior to, or shortly after, major economic announcements.
Leading economic indicators
The following is a list of economic indicators used in the USA. Obviously, there are many more, as well as those of other leading economies. In general, it is not only the numerical value of an indicator that is important, but also the market’s anticipation and prediction of the forecast , and the impact of the relation between anticipated and actual figures on the market. Such macro indicators are followed by the vast majority of traders worldwide. The “quality" of the published data can differ over time. The value of the indicator data is considered greater if it presents new information, or is instrumental to drawing conclusions which could not be drawn under other reports or data. Furthermore, an indicator is highly valuable if one may use it to better forecast future trends.
Each indicator is marked as High (H), Medium (M) or Low (L), according to the importance commonly attributed to it.
CCI - Consumer Confidence Index
The Conference Board; last Tuesday of each month, 10:00am EST, covers current month's data. The CCI is a survey based on a sample of 5,000 U.S. households and is considered one of the most accurate indicators of confidence. The idea behind consumer confidence is that when the economy warrants more jobs, increased wages, and lower interest rates, it increases our confidence and spending power. The respondents answer questions about their income, the market condition as they see it, and the chances to see increase in their income. Confidence is looked at closely by the Federal Reserve when determining interest rates. It is considered
to be a big market mover as private consumption is two thirds of the American economy.
CPI - Consumer Price Index; Core-CPI
Bureau of Labor and Statistics; around the 20 th of each month, 8:30am EST, covers previous month's data The CPI is considered the most widely used measure of inflation and is regarded as an indicator of the effectiveness of government policy. The CPI is a basket of consumer goods (and services) tracked from month to month (excluding taxes). The CPI is one of the most followed economic indicators and considered to be a very big market mover. A rising CPI indicates inflation. The Core-CPI (CPI, excluding food and energy, expense items which are subject to seasonal fluctuations) gives a more stringent measure of general prices.
Employment Report
Department of Labor; the first Friday of each month, 8:30am EST, covers previous month data The collection of the data is gathered through a survey among 375,000 business and 60,000 households. The report reviews: the number of new work places created or cancelled in the economy, average wages per hour and the average length of the work week. The report is considered as one of the most important economic publications, both for the fact that it discloses new up-to-date information and due to the fact that, together with NFP, it gives a good picture of the total state of the economy. The report also breaks out data by sector.
Employment Situation Report
Bureau of Labor and Statistics; the first Friday of each month, 8:30am EST, covers previous month data The Employment Situation Report is a monthly indicator which contains two major parts. One part is the unemployment and new jobs created, the report reveals the unemployment rate and the change in the unemployment rate. The second part of the report indicates things like average weekly hours worked and average hourly earnings. This data is important for determining the tightness of the labor market, which is a major determinant of inflation. The Bureau of Labor surveys over 250 regions across the United States and covers almost every major industry. This indicator is certainly one of the most watched indicators and almost always moves markets. Investors value the fact that information in the Employment report is very timely as it is less than a week old. The report provides one of the best snapshots of the health of the economy.
FOMC Meeting (Federal Open Market Committee): Rate announcement
The meeting of the US Federal Bank representatives, held 8 times a year. The decision about the prime interest rate is published during each meeting (around 14:15 EST). The FED (the Federal Reserve of USA) is responsible for managing the US monetary policy, controlling the banks, providing services to governmental organizations and citizens, and maintaining the country’s financial stability. There are 12 Fed regions in the USA (each comprising several states), represented in the Fed committee by regional commissioners. The rate of interest on a currency is in practice the price of the money. The higher the rate of interest on a currency, the more people will tend to hold that currency, to purchase it and in that way to strengthen the value of the currency. This is very important indicator affecting the rate of inflation and is a very big market mover.
There is great importance to the FOMC announcement, however – the content of the
deliberation held in the meeting, which is published 2 weeks after the rate announcement, is almost as important to the markets.
GDP - Gross Domestic Product
BEA (Bureau of Economic Analysis); last day of the quarter, 8:30am EST, covers previous quarter data. The US Commerce department publishes the GDP in 3 modes: advance; preliminary and final. GDP is a gross measure of market activity. It represents the monetary value of all the goods and services produced by an economy over a specified period. This includes consumption, government purchases, investments, and the trade balance. The GDP is perhaps the greatest indicator of the economic health of a country. It is usually measured on a yearly basis, but quarterly stats are also released.
The Commerce Department releases an "advance report" on the last day of each quarter.
Within a month it follows up with the "preliminary report" and then the "final report" is released yet a month later. The most recent GDP figures have a relatively high importance to the markets. GDP indicates the pace at which a country's economy is growing (or shrinking).
ISM (Institute for Supply Management) Manufacturing Index
Institute for Supply Management; the first business day of the month, 10:00am EST, covers previous month data The Manufacturing ISM Report On Business is based on data compiled from monthly replies to questions asked of purchasing executives in more than 400 industrial companies. It reflects a compound average of 5 main economic areas (new customers’ orders 30%; manufacturing 25%; employment 20%; supply orders 15%; inventories 10%). Any data over 50 points shows the expansion of economic activities, and data under 50 points shows a contraction.
MCSI - Michigan Consumer Sentiment Index
University of Michigan; first of each month, covers previous month data A survey of consumer sentiment conducted by the University of Michigan. The index is becoming more and more useful for investors. It gives a snapshot of whether or not consumers feel like spending money.
NFP - Changes in non-farm payrolls
Department of Labor; the first Friday of each month, 8:30am EST, covers previous month data. The data intended to represent changes in the total number of paid U.S. workers of any business, excluding the following:
- general government employees;
- private household employees;
- employees of nonprofit organizations that provide assistance to individuals;
- farm employees.
The total non-farm payroll accounts for approximately 80% of the workers responsible for the entire gross domestic product of the United States. The report is used to assist government policy-makers and economists in determining the current state of the economy and predicting future levels of economic activity. It is a very big market mover, due largely to high fluctuations in the forecasting.
PMI - Purchasing Managers Index
Institute for Supply Management; the first business day of each month, 10:00am EST, covers previous month's data. The PMI is a composite index that is based on five major indicators including: new orders; inventory levels; production; supplier deliveries and the employment environment. Each indicator has a different weight and the data is adjusted for seasonal factors. The Association of Purchasing Managers surveys over 300 purchasing managers nationwide who represent 20 different industries. A PMI index over 50 indicates that manufacturing is expanding, while anything below 50 means that the industry is contracting. The PMI report is an extremely important indicator for the financial markets as it is the best indicator of factory production. The index is popularly used for detecting inflationary pressure as well as indicating manufacturing activity. The PMI is not as strong as the CPI in detecting inflation, but because the data is released one day after the month, it is very timely. Should the PMI report an unexpected change, it is usually followed by a quick reaction in market. One especially key area of the report is growth in new orders, which predicts manufacturing activity in future months.
--------------------
Trading Forex
The fundamental analyst studies the causes of market movements, while the technical analyst studies the effect. Fundamental analysis is a macro, or strategic, assessment of where a currency should be traded, based on any criteria but the movement of the currency's price itself. These criteria often include the economic conditions of the country that the currency represents,
monetary policy, and other “fundamental" elements. Many profitable trades are made moments prior to, or shortly after, major economic announcements.
Leading economic indicators
The following is a list of economic indicators used in the USA. Obviously, there are many more, as well as those of other leading economies. In general, it is not only the numerical value of an indicator that is important, but also the market’s anticipation and prediction of the forecast , and the impact of the relation between anticipated and actual figures on the market. Such macro indicators are followed by the vast majority of traders worldwide. The “quality" of the published data can differ over time. The value of the indicator data is considered greater if it presents new information, or is instrumental to drawing conclusions which could not be drawn under other reports or data. Furthermore, an indicator is highly valuable if one may use it to better forecast future trends.
Each indicator is marked as High (H), Medium (M) or Low (L), according to the importance commonly attributed to it.
CCI - Consumer Confidence Index
The Conference Board; last Tuesday of each month, 10:00am EST, covers current month's data. The CCI is a survey based on a sample of 5,000 U.S. households and is considered one of the most accurate indicators of confidence. The idea behind consumer confidence is that when the economy warrants more jobs, increased wages, and lower interest rates, it increases our confidence and spending power. The respondents answer questions about their income, the market condition as they see it, and the chances to see increase in their income. Confidence is looked at closely by the Federal Reserve when determining interest rates. It is considered
to be a big market mover as private consumption is two thirds of the American economy.
CPI - Consumer Price Index; Core-CPI
Bureau of Labor and Statistics; around the 20 th of each month, 8:30am EST, covers previous month's data The CPI is considered the most widely used measure of inflation and is regarded as an indicator of the effectiveness of government policy. The CPI is a basket of consumer goods (and services) tracked from month to month (excluding taxes). The CPI is one of the most followed economic indicators and considered to be a very big market mover. A rising CPI indicates inflation. The Core-CPI (CPI, excluding food and energy, expense items which are subject to seasonal fluctuations) gives a more stringent measure of general prices.
Employment Report
Department of Labor; the first Friday of each month, 8:30am EST, covers previous month data The collection of the data is gathered through a survey among 375,000 business and 60,000 households. The report reviews: the number of new work places created or cancelled in the economy, average wages per hour and the average length of the work week. The report is considered as one of the most important economic publications, both for the fact that it discloses new up-to-date information and due to the fact that, together with NFP, it gives a good picture of the total state of the economy. The report also breaks out data by sector.
Employment Situation Report
Bureau of Labor and Statistics; the first Friday of each month, 8:30am EST, covers previous month data The Employment Situation Report is a monthly indicator which contains two major parts. One part is the unemployment and new jobs created, the report reveals the unemployment rate and the change in the unemployment rate. The second part of the report indicates things like average weekly hours worked and average hourly earnings. This data is important for determining the tightness of the labor market, which is a major determinant of inflation. The Bureau of Labor surveys over 250 regions across the United States and covers almost every major industry. This indicator is certainly one of the most watched indicators and almost always moves markets. Investors value the fact that information in the Employment report is very timely as it is less than a week old. The report provides one of the best snapshots of the health of the economy.
FOMC Meeting (Federal Open Market Committee): Rate announcement
The meeting of the US Federal Bank representatives, held 8 times a year. The decision about the prime interest rate is published during each meeting (around 14:15 EST). The FED (the Federal Reserve of USA) is responsible for managing the US monetary policy, controlling the banks, providing services to governmental organizations and citizens, and maintaining the country’s financial stability. There are 12 Fed regions in the USA (each comprising several states), represented in the Fed committee by regional commissioners. The rate of interest on a currency is in practice the price of the money. The higher the rate of interest on a currency, the more people will tend to hold that currency, to purchase it and in that way to strengthen the value of the currency. This is very important indicator affecting the rate of inflation and is a very big market mover.
There is great importance to the FOMC announcement, however – the content of the
deliberation held in the meeting, which is published 2 weeks after the rate announcement, is almost as important to the markets.
GDP - Gross Domestic Product
BEA (Bureau of Economic Analysis); last day of the quarter, 8:30am EST, covers previous quarter data. The US Commerce department publishes the GDP in 3 modes: advance; preliminary and final. GDP is a gross measure of market activity. It represents the monetary value of all the goods and services produced by an economy over a specified period. This includes consumption, government purchases, investments, and the trade balance. The GDP is perhaps the greatest indicator of the economic health of a country. It is usually measured on a yearly basis, but quarterly stats are also released.
The Commerce Department releases an "advance report" on the last day of each quarter.
Within a month it follows up with the "preliminary report" and then the "final report" is released yet a month later. The most recent GDP figures have a relatively high importance to the markets. GDP indicates the pace at which a country's economy is growing (or shrinking).
ISM (Institute for Supply Management) Manufacturing Index
Institute for Supply Management; the first business day of the month, 10:00am EST, covers previous month data The Manufacturing ISM Report On Business is based on data compiled from monthly replies to questions asked of purchasing executives in more than 400 industrial companies. It reflects a compound average of 5 main economic areas (new customers’ orders 30%; manufacturing 25%; employment 20%; supply orders 15%; inventories 10%). Any data over 50 points shows the expansion of economic activities, and data under 50 points shows a contraction.
MCSI - Michigan Consumer Sentiment Index
University of Michigan; first of each month, covers previous month data A survey of consumer sentiment conducted by the University of Michigan. The index is becoming more and more useful for investors. It gives a snapshot of whether or not consumers feel like spending money.
NFP - Changes in non-farm payrolls
Department of Labor; the first Friday of each month, 8:30am EST, covers previous month data. The data intended to represent changes in the total number of paid U.S. workers of any business, excluding the following:
- general government employees;
- private household employees;
- employees of nonprofit organizations that provide assistance to individuals;
- farm employees.
The total non-farm payroll accounts for approximately 80% of the workers responsible for the entire gross domestic product of the United States. The report is used to assist government policy-makers and economists in determining the current state of the economy and predicting future levels of economic activity. It is a very big market mover, due largely to high fluctuations in the forecasting.
PMI - Purchasing Managers Index
Institute for Supply Management; the first business day of each month, 10:00am EST, covers previous month's data. The PMI is a composite index that is based on five major indicators including: new orders; inventory levels; production; supplier deliveries and the employment environment. Each indicator has a different weight and the data is adjusted for seasonal factors. The Association of Purchasing Managers surveys over 300 purchasing managers nationwide who represent 20 different industries. A PMI index over 50 indicates that manufacturing is expanding, while anything below 50 means that the industry is contracting. The PMI report is an extremely important indicator for the financial markets as it is the best indicator of factory production. The index is popularly used for detecting inflationary pressure as well as indicating manufacturing activity. The PMI is not as strong as the CPI in detecting inflation, but because the data is released one day after the month, it is very timely. Should the PMI report an unexpected change, it is usually followed by a quick reaction in market. One especially key area of the report is growth in new orders, which predicts manufacturing activity in future months.
--------------------
Trading Forex
Technical Analysis
Technical analysis and fundamental analysisThis chapter and the next one provide insight into the two major methods ofanalysis used to forecast the behavior of the Forex market. Technical analysisand fundamental analysis differ greatly, but both can be useful forecastingtools for the Forex trader. They have the same goal - to predict a price ormovement. The technician studies the effects, while the fundamentaliststudies the causes of market movements. Many successful traders combine amixture of both approaches for superior results.
Technical analysis
Technical analysis is a method of predicting price movements and futuremarket trends by studying what has occurred in the past using charts. Technical analysis is concerned with what has actually happened in themarket, rather than what should happen, and takes into account the price ofinstruments and the volume of trading, and creates charts from that data as aprimary tool. One major advantage of technical analysis is that experiencedanalysts can follow many markets and market instruments simultaneously.
Technical analysis is built on three essential principles:
1. Market action discounts everything! This means that the actual price is areflection of everything that is known to the market that could affect it.Some of these factors are: fundamentals, supply and demand, political factors and market sentiment. However, thepure technical analyst is only concerned with price movements, not with thereasons for any changes.
2. Prices move in trends. Technical analysis is used to identify patterns ofmarket behavior that have long been recognized as significant. For manygiven patterns there is a high probability that they will produce the expectedresults. There are also recognized patterns that repeat themselves on aconsistent basis.
3. History repeats itself. Forex chart patterns have been recognized andcategorized for over 100 years, and the manner in which many patterns arerepeated leads to the conclusion that human psychology changes little overtime. Since patterns have worked well in the past, it is assumed that they willcontinue to work well into the future.
Disadvantages of Technical Analysis
•Some critics claim that the Dow approach (“prices are not random") isquite weak, since today’s prices do not necessarily project futureprices
• The critics claim that signals about the changing of a trend appear toolate, often after the change had already taken place. Therefore,traders who rely on technical analysis react too late, hence losingabout 1/3 of the fluctuations
• Analysis made in short time intervals may be exposed to “noise", andmay result in a misreading of market directions.
• The use of most patterns has been widely publicized in the last severalyears. Many traders are quite familiar with these patterns and often acton them in concern. This creates a self-fulfilling prophecy, as waves ofbuying or selling are created in response to “bullish" or “bearish"patterns.
Advantages of Technical Analysis
• Technical analysis can be used to project movements of any asset available for trade in thecapital market
• Technical analysis focuses on what is happening, as opposed to whathas previously happened, and is therefore valid at any price level
• The technical approach concentrates on prices, which neutralizesexternal factors. Pure technical analysis is based on objective tools(charts, tables) while disregarding emotions and other factors
• Signaling indicators sometimes point to the imminent end of a trend,before it shows in the actual market. Accordingly, the trader canmaintain profit or minimize losses.
--------------------
Trading Forex
Technical analysis
Technical analysis is a method of predicting price movements and futuremarket trends by studying what has occurred in the past using charts. Technical analysis is concerned with what has actually happened in themarket, rather than what should happen, and takes into account the price ofinstruments and the volume of trading, and creates charts from that data as aprimary tool. One major advantage of technical analysis is that experiencedanalysts can follow many markets and market instruments simultaneously.
Technical analysis is built on three essential principles:
1. Market action discounts everything! This means that the actual price is areflection of everything that is known to the market that could affect it.Some of these factors are: fundamentals, supply and demand, political factors and market sentiment. However, thepure technical analyst is only concerned with price movements, not with thereasons for any changes.
2. Prices move in trends. Technical analysis is used to identify patterns ofmarket behavior that have long been recognized as significant. For manygiven patterns there is a high probability that they will produce the expectedresults. There are also recognized patterns that repeat themselves on aconsistent basis.
3. History repeats itself. Forex chart patterns have been recognized andcategorized for over 100 years, and the manner in which many patterns arerepeated leads to the conclusion that human psychology changes little overtime. Since patterns have worked well in the past, it is assumed that they willcontinue to work well into the future.
Disadvantages of Technical Analysis
•Some critics claim that the Dow approach (“prices are not random") isquite weak, since today’s prices do not necessarily project futureprices
• The critics claim that signals about the changing of a trend appear toolate, often after the change had already taken place. Therefore,traders who rely on technical analysis react too late, hence losingabout 1/3 of the fluctuations
• Analysis made in short time intervals may be exposed to “noise", andmay result in a misreading of market directions.
• The use of most patterns has been widely publicized in the last severalyears. Many traders are quite familiar with these patterns and often acton them in concern. This creates a self-fulfilling prophecy, as waves ofbuying or selling are created in response to “bullish" or “bearish"patterns.
Advantages of Technical Analysis
• Technical analysis can be used to project movements of any asset available for trade in thecapital market
• Technical analysis focuses on what is happening, as opposed to whathas previously happened, and is therefore valid at any price level
• The technical approach concentrates on prices, which neutralizesexternal factors. Pure technical analysis is based on objective tools(charts, tables) while disregarding emotions and other factors
• Signaling indicators sometimes point to the imminent end of a trend,before it shows in the actual market. Accordingly, the trader canmaintain profit or minimize losses.
--------------------
Trading Forex
Training for success
Understanding the nuances of the Forex market requires experience andtraining, but is critical to success. In fact, ongoing learning is as important tothe veteran trader as it is to the beginner. The foreign currency market ismassive, and the key to success is knowledge. Through training, observationand practice, you can learn how to identify and understand where the Forexmarket is going, and what controls that direction.
To invest in the right currencies at the right time in a large, nonstop andglobal trading arena, there is much to learn. Forex markets move quickly andcan take new directions from moment to moment. Forex training helps youassess when to enter a currency based on the direction it is taking, and howto forecast its direction for the near future.
Training with Easy-Forex
Offers one of the most effective forms of training through hands-on experience. For as little as USD 25 at risk per trade, you can start tradingwhile learning in real-time. Easy-Forex strongly recommends starting withvery small volumes, and depositing an amount to cover a series of trades.Learn the basics of the foreign exchange market, trading terminology,advanced technical analysis, and how to develop successful trading strategies.Discover how the Forex market offers more opportunities for quick financialgains than almost any other market. The many available resources and tools to train yourself. There are many free tools and resources available in the market, particularlyonline. Among these, you will find:
Charts
There are many kinds of charts. Start withsimple charts. Try to identify trends and major changes, and try to relatethem to technical patterns as well as to macro events (news, either financialor political). Make an effort to determine the general magnitude of eachchange on the chart (meaning: what is the $ value of the change, if you weretrading at that point)
Guided tours
Most platforms provide guided tours, demos or tutorials, either online or via download.
News / breaking news
Keep abreast of world news. Read all the headlines, particularly thosedirectly related to Forex. Check the impact of such news, if any, on thecharts.
Forex outlooks
Read daily/weekly outlooks posted on Forex or general financial sites. Manyinclude alerts to upcoming reports and events such as market indicators andinterest rate decisions.
Forecasts
Read forecasts, some of which are available free of charge. Bear in mind that forecasts and predictions are made by people, none of whom can guaranteethe occurrence of future events…
Indices
Follow the indices of the leading markets. Compare them to the changes in the Forex market, and to changes inparticular currency pairs.
Economic indicators
Pay attention to the release of economic indicators (for example – themonthly unemployment rate in the USA), and try to identify their impact onthe market in general, and on specific currency pairs in particular.
Glossary
Don’t hesitate to browse Forex glossaries, which are offered free on manyplatforms. A given word may have different meaning as it relates to Forex andto the terminology used by the Forex market participants.Seminars and coursesTry to attend professional Forex seminars. Some seminars are offered free,often as part of a client recruitment process by a given platform; many are,nevertheless, worth attending. Educational courses are offered online and bymany post-secondary institutions.
Forex books
Read, or even just browse. Many books are offered free, or as part of aservice package to the trader. For many, historical background and technicalanalysis are topics better covered in books than in an educational setting.
Internet forums / blogs
Visit and participate in Forex forums. This gives you an opportunity to learnfrom the experience of others. Of course, remember that some forumparticipants may be biased, promoting a given Forex platform or their ownagenda.
So much to consider
To succeed as a Forex trader, you must take into consideration a wide varietyof factors such as:
• spread (“pips")
• commissions and fees
• ease of access to the trading platform
• minimum amounts needed for trading
• additional amounts needed (if any)
• control over activity and positions
• the platform software requirements
• ease of deposits and withdrawals
• personal service and support provided by the platform
• the platform’s business partners
• the platform’s management, offices and outreach
• the products offered onboard the platform; and many others.Online training, no downloads.
The “demo" account ideaMany
Forex platforms offer new registrants a “demo" account. A typica lexample would provide 10,000 “demo" dollars that can be “traded" as ameans of learning how to succeed in Forex, does not offer “demo" accounts. Coming to understand thatreason must rule over emotion is the most important lesson a trader canlearn, and it cannot be done with play money. If there is no consequence toindulging in emotional responses to the market, there is no learning, so“demo" accounts tend to have little educational value. Rather, Easy-Forex allows you to start trading with just $25, including full access to one-on-onetraining. New registrants are thus able to garner both an educational andexperiential benefit unavailable through simulated situations.
--------------------
Trading Forex
To invest in the right currencies at the right time in a large, nonstop andglobal trading arena, there is much to learn. Forex markets move quickly andcan take new directions from moment to moment. Forex training helps youassess when to enter a currency based on the direction it is taking, and howto forecast its direction for the near future.
Training with Easy-Forex
Offers one of the most effective forms of training through hands-on experience. For as little as USD 25 at risk per trade, you can start tradingwhile learning in real-time. Easy-Forex strongly recommends starting withvery small volumes, and depositing an amount to cover a series of trades.Learn the basics of the foreign exchange market, trading terminology,advanced technical analysis, and how to develop successful trading strategies.Discover how the Forex market offers more opportunities for quick financialgains than almost any other market. The many available resources and tools to train yourself. There are many free tools and resources available in the market, particularlyonline. Among these, you will find:
Charts
There are many kinds of charts. Start withsimple charts. Try to identify trends and major changes, and try to relatethem to technical patterns as well as to macro events (news, either financialor political). Make an effort to determine the general magnitude of eachchange on the chart (meaning: what is the $ value of the change, if you weretrading at that point)
Guided tours
Most platforms provide guided tours, demos or tutorials, either online or via download.
News / breaking news
Keep abreast of world news. Read all the headlines, particularly thosedirectly related to Forex. Check the impact of such news, if any, on thecharts.
Forex outlooks
Read daily/weekly outlooks posted on Forex or general financial sites. Manyinclude alerts to upcoming reports and events such as market indicators andinterest rate decisions.
Forecasts
Read forecasts, some of which are available free of charge. Bear in mind that forecasts and predictions are made by people, none of whom can guaranteethe occurrence of future events…
Indices
Follow the indices of the leading markets. Compare them to the changes in the Forex market, and to changes inparticular currency pairs.
Economic indicators
Pay attention to the release of economic indicators (for example – themonthly unemployment rate in the USA), and try to identify their impact onthe market in general, and on specific currency pairs in particular.
Glossary
Don’t hesitate to browse Forex glossaries, which are offered free on manyplatforms. A given word may have different meaning as it relates to Forex andto the terminology used by the Forex market participants.Seminars and coursesTry to attend professional Forex seminars. Some seminars are offered free,often as part of a client recruitment process by a given platform; many are,nevertheless, worth attending. Educational courses are offered online and bymany post-secondary institutions.
Forex books
Read, or even just browse. Many books are offered free, or as part of aservice package to the trader. For many, historical background and technicalanalysis are topics better covered in books than in an educational setting.
Internet forums / blogs
Visit and participate in Forex forums. This gives you an opportunity to learnfrom the experience of others. Of course, remember that some forumparticipants may be biased, promoting a given Forex platform or their ownagenda.
So much to consider
To succeed as a Forex trader, you must take into consideration a wide varietyof factors such as:
• spread (“pips")
• commissions and fees
• ease of access to the trading platform
• minimum amounts needed for trading
• additional amounts needed (if any)
• control over activity and positions
• the platform software requirements
• ease of deposits and withdrawals
• personal service and support provided by the platform
• the platform’s business partners
• the platform’s management, offices and outreach
• the products offered onboard the platform; and many others.Online training, no downloads.
The “demo" account ideaMany
Forex platforms offer new registrants a “demo" account. A typica lexample would provide 10,000 “demo" dollars that can be “traded" as ameans of learning how to succeed in Forex, does not offer “demo" accounts. Coming to understand thatreason must rule over emotion is the most important lesson a trader canlearn, and it cannot be done with play money. If there is no consequence toindulging in emotional responses to the market, there is no learning, so“demo" accounts tend to have little educational value. Rather, Easy-Forex allows you to start trading with just $25, including full access to one-on-onetraining. New registrants are thus able to garner both an educational andexperiential benefit unavailable through simulated situations.
--------------------
Trading Forex
Monday, January 5, 2009
Overview of trading Forex online
How a Forex system operates in real time
Online foreign exchange trading occurs in real time. Exchange rates are constantly changing, in intervals of seconds. Quotes are accurate for the time they are displayed only. At any moment, a different rate may be quoted. When a trader locks in a rate and executes a transaction, that transaction is immediately processed; the trade has been executed.
Up-to-date exchange rates
As rates change so rapidly, any Forex software must display the most up-to-date rates. To accomplish this, the Forex software is continuously communicating with a remote server that provides the most current exchange rates. The rates quoted, unlike traditional bank exchange rates, are actual tradable rates.
Trading online on Forex platforms
The internet revolution caused a major change in the way Forex trading is conducted throughout the world. Until the advent of the internet-Forex age at the end of the 1990’s, Forex trading was conducted via phone orders (or fax, or in-person), posted to brokers or banks. Most of the trading could be executed only during business hours. The same was true for most activities related to Forex, such as making the deposits necessary for trading, not to mention profit taking. The internet has radically altered the Forex market, enabling around the clock trading and conveniences such as the use of credit cards for fund deposits. Forex on the internet: basic steps. In general, the individual Forex trader is required to fulfill two steps prior to trading:
• Register at the trading platform
• Deposit funds to facilitate trading
Requirements vary with each trading platform, but these steps bear further discussion:
Registering
Registration is done online by the individual trader. There are various forms used in the industry. Some are quite simple, where others are longer and more time-consuming. In part, this can be attributed to governmental or other authorities’ requirements, though some Forex platforms require more information than is actually needed. Some even require a face-to-face meeting, or to obtain hard copies of required documents such as a passport, or driver’s license.
The key requirements for registration are the trader’s full name, telephone, e-mail address, residence, and sometimes also the trader’s yearly income or capital (equity) and an ID number (passport / driver’s license / SSN / etc.).
Typically, the Forex platform is not required to run a thorough check, but rely on the registrant to be truthful. Nevertheless, each Forex platform conducts certain routines, in order to check and verify the authenticity of the details provided. Registrants are required to declare that funds used for trading are not in question, and are not the result of any criminal act or money laundering activity. This is mandatory as part of a global anti-money laundering effort.
Depositing funds
New registrants must deposit funds to facilitate trading. However, the majority of the Forex platforms today require that, in addition to funds used for actual trading, an additional amount be deposited. Often called “maintenance margin" or “activity collateral", its purpose is for the platform to have an additional guarantee. Some of the platforms that require an additional deposit do pay interest on the collateral, which is “frozen" under the trader’s name.
Trading online
The trading platform operates 24 hours a day just as the global Forex market runs around the clock. However, many online Forex market makers require the download and installation of software specific to their own trading platform. Consequently, accessibility is limited to those terminals that have the software. Since Forex trading is borderless, and may be performed at any given time, it is obviously advantageous to have access to trading from as many locations as possible. The Easy-Forex™ Trading Platform is a fully web-based system, which means trading can be conducted from any computer connected to the internet. Traders are only required to log-in, ensure they have available funds to trade, or make new deposits, and commence trading.
The Trading Platform: real-time software
The main feature of any Forex trading platform is real time access to exchange rates, to deal and order making, to deposits and withdrawals, and to monitoring the status of positions and one’s account. The Easy-Forex™ Trading Platform system uses web services to continuously fetch the most current exchange rates. The most recent data displays without the need for a page refresh. This includes account status screens such as “My Position", which updates continually to reflect changes in rates and other real time elements.
Transaction processing and storage
As soon as a transaction is executed, the relevant data is processed securely and sent to the data server where it is stored. A backup is created on a different server farm, to ensure data integrity and continuity. All of this happens in real time, with no human intervention.
Trading via brokers and dealing rooms
Performing Forex trading via Dealing Room dealers (over the phone) requires knowledge about the way dealing rooms work, and the terminologies used in the course of trading. At start, the client should specify whether he/she is interested in obtaining a QUOTE (in order to make a deal) or just an INDICATION. In the case of an indication, the price given does not bind the dealer, but rather provides information about market conditions.
When asking for QUOTE, the trader must specify the currency pair and the deal amount (volume). For example: “Need a quote for EUR/USD in EUR100,000". It is wise to withhold from the dealer the intended direction of the deal, specifying the pair only. Accordingly, the dealer then provides a quote comprising two prices, buy and sell (“both sides quote"). The quote binds the dealer for the very second it is given. If the trader does not immediately ask for execution, then the price is no longer in force. The dealer would then tell the customer “risk", or “change", meaning – the price quoted is no longer in force. In such case, the trader should ask for a new price.
On the other hand, in order to make a deal, the trader must proclaim “buy" or “sell", together with the currency (or the price). An example:
• The trader asks for a quote for EUR/USD.
• The dealer says “1.2010/15".
• If the trader wants to buy EUR, he/she says “buy" (or "buy EURO", or “15".
• If the trader wants to sell EUR, he/she says “sell" (or "sell EURO", or “10".
The moment the trader says “buy" (or “sell") he/she is bound to the deal, regardless of the market situation.
--------------------
Trading Forex
Online foreign exchange trading occurs in real time. Exchange rates are constantly changing, in intervals of seconds. Quotes are accurate for the time they are displayed only. At any moment, a different rate may be quoted. When a trader locks in a rate and executes a transaction, that transaction is immediately processed; the trade has been executed.
Up-to-date exchange rates
As rates change so rapidly, any Forex software must display the most up-to-date rates. To accomplish this, the Forex software is continuously communicating with a remote server that provides the most current exchange rates. The rates quoted, unlike traditional bank exchange rates, are actual tradable rates.
Trading online on Forex platforms
The internet revolution caused a major change in the way Forex trading is conducted throughout the world. Until the advent of the internet-Forex age at the end of the 1990’s, Forex trading was conducted via phone orders (or fax, or in-person), posted to brokers or banks. Most of the trading could be executed only during business hours. The same was true for most activities related to Forex, such as making the deposits necessary for trading, not to mention profit taking. The internet has radically altered the Forex market, enabling around the clock trading and conveniences such as the use of credit cards for fund deposits. Forex on the internet: basic steps. In general, the individual Forex trader is required to fulfill two steps prior to trading:
• Register at the trading platform
• Deposit funds to facilitate trading
Requirements vary with each trading platform, but these steps bear further discussion:
Registering
Registration is done online by the individual trader. There are various forms used in the industry. Some are quite simple, where others are longer and more time-consuming. In part, this can be attributed to governmental or other authorities’ requirements, though some Forex platforms require more information than is actually needed. Some even require a face-to-face meeting, or to obtain hard copies of required documents such as a passport, or driver’s license.
The key requirements for registration are the trader’s full name, telephone, e-mail address, residence, and sometimes also the trader’s yearly income or capital (equity) and an ID number (passport / driver’s license / SSN / etc.).
Typically, the Forex platform is not required to run a thorough check, but rely on the registrant to be truthful. Nevertheless, each Forex platform conducts certain routines, in order to check and verify the authenticity of the details provided. Registrants are required to declare that funds used for trading are not in question, and are not the result of any criminal act or money laundering activity. This is mandatory as part of a global anti-money laundering effort.
Depositing funds
New registrants must deposit funds to facilitate trading. However, the majority of the Forex platforms today require that, in addition to funds used for actual trading, an additional amount be deposited. Often called “maintenance margin" or “activity collateral", its purpose is for the platform to have an additional guarantee. Some of the platforms that require an additional deposit do pay interest on the collateral, which is “frozen" under the trader’s name.
Trading online
The trading platform operates 24 hours a day just as the global Forex market runs around the clock. However, many online Forex market makers require the download and installation of software specific to their own trading platform. Consequently, accessibility is limited to those terminals that have the software. Since Forex trading is borderless, and may be performed at any given time, it is obviously advantageous to have access to trading from as many locations as possible. The Easy-Forex™ Trading Platform is a fully web-based system, which means trading can be conducted from any computer connected to the internet. Traders are only required to log-in, ensure they have available funds to trade, or make new deposits, and commence trading.
The Trading Platform: real-time software
The main feature of any Forex trading platform is real time access to exchange rates, to deal and order making, to deposits and withdrawals, and to monitoring the status of positions and one’s account. The Easy-Forex™ Trading Platform system uses web services to continuously fetch the most current exchange rates. The most recent data displays without the need for a page refresh. This includes account status screens such as “My Position", which updates continually to reflect changes in rates and other real time elements.
Transaction processing and storage
As soon as a transaction is executed, the relevant data is processed securely and sent to the data server where it is stored. A backup is created on a different server farm, to ensure data integrity and continuity. All of this happens in real time, with no human intervention.
Trading via brokers and dealing rooms
Performing Forex trading via Dealing Room dealers (over the phone) requires knowledge about the way dealing rooms work, and the terminologies used in the course of trading. At start, the client should specify whether he/she is interested in obtaining a QUOTE (in order to make a deal) or just an INDICATION. In the case of an indication, the price given does not bind the dealer, but rather provides information about market conditions.
When asking for QUOTE, the trader must specify the currency pair and the deal amount (volume). For example: “Need a quote for EUR/USD in EUR100,000". It is wise to withhold from the dealer the intended direction of the deal, specifying the pair only. Accordingly, the dealer then provides a quote comprising two prices, buy and sell (“both sides quote"). The quote binds the dealer for the very second it is given. If the trader does not immediately ask for execution, then the price is no longer in force. The dealer would then tell the customer “risk", or “change", meaning – the price quoted is no longer in force. In such case, the trader should ask for a new price.
On the other hand, in order to make a deal, the trader must proclaim “buy" or “sell", together with the currency (or the price). An example:
• The trader asks for a quote for EUR/USD.
• The dealer says “1.2010/15".
• If the trader wants to buy EUR, he/she says “buy" (or "buy EURO", or “15".
• If the trader wants to sell EUR, he/she says “sell" (or "sell EURO", or “10".
The moment the trader says “buy" (or “sell") he/she is bound to the deal, regardless of the market situation.
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