The essence of the FX2u Forex strategy is that it does not have any Forex trading system but could forecast the market trend accurately.
Every set of Forex trading system available has its disadvantages. The market trend could not be forecasted. If the market could be forecasted, by depending on the RSI, PAR, MOM analysis techniques and some other theories, Forex traders could easily make a fortune.
Many Forex traders could not obtain the anticipated outcome by using these analysis tools, and suffer huge losses. The main reason is relying on some imperfect tools to forecast the unpredictable market trend is just a waste of effort. Therefore the FX2u Forex strategy spirit is to abolish the entire subjective analysis tool.
To survive in the market is to follow the market trend, following the market trend is the essence of the FX2u Forex strategy. By using the opposite theory to enter the market, will only lead to lost. The reason is that if the market rises, it may continue to rise. If the market drops, it may continue to drop. No one is able to forecast when the market trend will stop.
By following the market trend, the market risk could be reduce to the lowest, the FX2u Forex strategy will advance the following the ten principles:
fully understand the how market function and the market trend, else don’t trade
After entering the market, the Forex trader MUST immediately put a market stop.
If the stop order has been hit it MUST be executed immediately, NEVER make changes by lowering the stop order price.
If the forecast is wrong, Forex traders should leave the market immediately, then analyze again.
If the forecast is wrong, Forex traders should stop loss and should not increase trading.
Forex traders should admit mistakes, do not continuously make mistakes.
All analysis tools are imperfect, mistakes could always occur.
If the market rises Forex traders should buy, if the market drops Forex traders should sell, always follow the market trend.
Forex traders should not forecast the market price because such forecast will not be as easy as forecasting the market trend.
If the forecast is wrong, once the loss reach 10%, Forex traders must stop loss immediately, do not let it surpasses 10%, otherwise it would be difficult to recoup the capital again.
Saturday, November 1, 2008
How Do Other Countries Devalue Their Currencies?
Countries devalue their currencies only when they have no other way to correct past economic mistakes - whether their own or mistakes committed by their predecessors.
The ills of a devaluation are still at least equal to its advantages.
True, it does encourage exports and discourage imports to some extents and for a limited period of time. As the devaluation is manifested in a higher inflation, even this temporary relief is eroded. In a previous article in this paper I described WHY governments resort to such a drastic measure. This article will deal with HOW they do it.
A government can be forced into a devaluation by an ominous trade deficit. Thailand, Mexico, the Czech Republic - all devalued strongly, willingly or unwillingly, after their trade deficits exceeded 8% of the GDP. It can decide to devalue as part of an economic package of measures which is likely to include a freeze on wages, on government expenses and on fees charged by the government for the provision of public services. This, partly, has been the case in Macedonia. In extreme cases and when the government refuses to respond to market signals of economic distress - it may be forced into devaluation. International and local speculators will buy foreign exchange from the government until its reserves are depleted and it has no money even to import basic staples and other necessities.
Thus coerced, the government has no choice but to devalue and buy back dearly the foreign exchange that it has sold to the speculators cheaply.
In general, there are two known exchange rate systems: the floating and the fixed.
In the floating system, the local currency is allowed to fluctuate freely against other currencies and its exchange rate is determined by market forces within a loosely regulated foreign exchange domestic (or international) market. Such currencies need not necessarily be fully convertible but some measure of free convertibility is a sine qua non.
In the fixed system, the rates are centrally determined (usually by the Central Bank or by the Currency Board where it supplants this function of the Central Bank). The rates are determined periodically (normally, daily) and revolve around a "peg" with very tiny variations.
Life being more complicated than any economic system, there are no "pure cases".
Even in floating rate systems, Central banks intervene to protect their currencies or to move them to an exchange rate deemed favourable (to the country's economy) or "fair". The market's invisible hand is often handcuffed by "We-Know-Better" Central Bankers. This usually leads to disastrous (and breathtakingly costly) consequences. Suffice it to mention the Pound Sterling debacle in 1992 and the billion dollars made overnight by the arbitrageur-speculator Soros - both a direct result of such misguided policy and hubris.
Floating rates are considered a protection against deteriorating terms of trade.
If export prices fall or import prices surge - the exchange rate will adjust itself to reflect the new flows of currencies. The resulting devaluation will restore the equilibrium.
Floating rates are also good as a protection against "hot" (speculative) foreign capital looking to make a quick killing and vanish. As they buy the currency, speculators will have to pay more expensively, due to an upward adjustment in the exchange rates. Conversely, when they will try to cash their profits, they will be penalized by a new exchange rate.
So, floating rates are ideal for countries with volatile export prices and speculative capital flows. This characterizes most of the emerging economies (also known as the Third World).
It looks surprising that only a very small minority of these states has them until one recalls their high rates of inflation. Nothing like a fixed rate (coupled with consistent and prudent economic policies) to quell inflationary expectations. Pegged rates also help maintain a constant level of foreign exchange reserves, at least as long as the government does not stray from sound macro-economic management. It is impossible to over-estimate the importance of the stability and predictability which are a result of fixed rates: investors, businessmen and traders can plan ahead, protect themselves by hedging and concentrate on long term growth.
It is not that a fixed exchange rate is forever. Currencies - in all types of rate determination systems - move against one another to reflect new economic realities or expectations regarding such realities. Only the pace of changing the exchange rates is different.
Countries have invented numerous mechanisms to deal with exchange rates fluctuations.
Many countries (Argentina, Bulgaria) have currency boards. This mechanism ensures that all the local currency in circulation is covered by foreign exchange reserves in the coffers of the Central bank. All, government, and Central Bank alike - cannot print money and must operate within the straitjacket.
Other countries peg their currency to a basket of currencies. The composition of this basket is supposed to reflect the composition of the country's international trade. Unfortunately, it rarely does and when it does, it is rarely updated (as is the case in Israel). Most countries peg their currencies to arbitrary baskets of currencies in which the dominant currency is a "hard, reputable" currency such as the US dollar. This is the case with the Thai baht.
In Slovakia the basket is made up of two currencies only (40% dollar and 60% DEM) and the Slovak crown is free to move 7% up and down, around the basket-peg.
Some countries have a "crawling peg". This is an exchange rate, linked to other currencies, which is fractionally changed daily. The currency is devalued at a rate set in advance and made known to the public (transparent). A close variant is the "crawling band" (used in Israel and in some countries in South America). The exchange rate is allowed to move within a band, above and below a central peg which, in itself depreciates daily at a preset rate.
This pre-determined rate reflects a planned real devaluation over and above the inflation rate.
It denotes the country's intention to encourage its exports without rocking the whole monetary boat. It also signals to the markets that the government is bent on taming inflation.
So, there is no agreement among economists. It is clear that fixed rate systems have cut down inflation almost miraculously. The example of Argentina is prominent: from 27% a month (1991) to 1% a year (1997)!!!
The problem is that this system creates a growing disparity between the stable exchange rate - and the level of inflation which goes down slowly. This, in effect, is the opposite of devaluation - the local currency appreciates, becomes stronger. Real exchange rates strengthen by 42% (the Czech Republic), 26% (Brazil), even 50% (Israel until lately, despite the fact that the exchange rate system there is hardly fixed). This has a disastrous effect on the trade deficit: it balloons and consumes 4-10% of the GDP.
This phenomenon does not happen in non-fixed systems. Especially benign are the crawling peg and the crawling band systems which keep apace with inflation and do not let the currency appreciate against the currencies of major trading partners. Even then, the important question is the composition of the pegging basket. If the exchange rate is linked to one major currency - the local currency will appreciate and depreciate together with that major currency. In a way the inflation of the major currency is thus imported through the foreign exchange mechanism. This is what happened in Thailand when the dollar got stronger in the world markets.
In other words, the design of the pegging and exchange rate system is the crucial element.
In a crawling band system - the wider the band, the less the volatility of the exchange rate. This European Monetary System (EMS - ERM), known as "The Snake", had to realign itself a few times during the 1990s and each time the solution was to widen the bands within which the exchange rates were allowed to fluctuate. Israel had to do it twice. On June 18th, the band was doubled and the Shekel can go up and down by 10% in each direction.
But fixed exchange rates offer other problems. The strengthening real exchange rate attracts foreign capital. This is not the kind of foreign capital that countries are looking for. It is not Foreign Direct Investment (FDI). It is speculative, hot money in pursuit of ever higher returns. It aims to benefit from the stability of the exchange rate - and from the high interest rates paid on deposits in local currency.
Let us study an example: if a foreign investor were to convert 100,000 DEM to Israeli Shekels last year and invest them in a liquid deposit with an Israeli bank - he will have ended up earning an interest rate of 12% annually. The exchange rate did not change appreciably - so he would have needed the same amount of Shekels to buy his DEM back. On his Shekel deposit he would have earned between 12-16%, all net, tax free profit.
No wonder that Israel's foreign exchange reserves doubled themselves in the preceding 18 months. This phenomenon happened all over the globe, from Mexico to Thailand.
This kind of foreign capital expands the money supply (it is converted to local currency) and - when it suddenly evaporates - prices and wages collapse. Thus it tends to exacerbate the natural inflationary-deflationary cycles in emerging economies. Measures like control on capital inflows, taxing them are useless in a global economy with global capital markets.
They also deter foreign investors and distort the allocation of economic resources.
The other option is "sterilization": selling government bonds and thus absorbing the monetary overflow or maintaining high interest rates to prevent a capital drain. Both measures have adverse economic effects, tend to corrupt and destroy the banking and financial infrastructure and are expensive while bringing only temporary relief.
Where floating rate systems are applied, wages and prices can move freely. The market mechanisms are trusted to adjust the exchange rates. In fixed rate systems, taxes move freely. The state, having voluntarily given up one of the tools used in fine tuning the economy (the exchange rate) - must resort to fiscal rigor, tightening fiscal policy (=collect more taxes) to absorb liquidity and rein in demand when foreign capital comes flowing in.
In the absence of fiscal discipline, a fixed exchange rate will explode in the face of the decision makers either in the form of forced devaluation or in the form of massive capital outflows.
After all, what is wrong with volatile exchange rates? Why must they be fixed, save for psychological reasons? The West has never prospered as it does nowadays, in the era of floating rates. Trade, investment - all the areas of economic activity which were supposed to be influenced by exchange rate volatility - are experiencing a continuous big bang. That daily small fluctuations (even in a devaluation trend) are better than a big one time devaluation in restoring investor and business confidence is an axiom. That there is no such thing as a pure floating rate system (Central Banks always intervene to limit what they regard as excessive fluctuations) - is also agreed on all economists.
That exchange rate management is no substitute for sound macro- and micro-economic practices and policies - is the most important lesson. After all, a currency is the reflection of the country in which it is legal tender. It stores all the data about that country and their appraisal. A currency is a unique package of past and future with serious implications on the present.
The ills of a devaluation are still at least equal to its advantages.
True, it does encourage exports and discourage imports to some extents and for a limited period of time. As the devaluation is manifested in a higher inflation, even this temporary relief is eroded. In a previous article in this paper I described WHY governments resort to such a drastic measure. This article will deal with HOW they do it.
A government can be forced into a devaluation by an ominous trade deficit. Thailand, Mexico, the Czech Republic - all devalued strongly, willingly or unwillingly, after their trade deficits exceeded 8% of the GDP. It can decide to devalue as part of an economic package of measures which is likely to include a freeze on wages, on government expenses and on fees charged by the government for the provision of public services. This, partly, has been the case in Macedonia. In extreme cases and when the government refuses to respond to market signals of economic distress - it may be forced into devaluation. International and local speculators will buy foreign exchange from the government until its reserves are depleted and it has no money even to import basic staples and other necessities.
Thus coerced, the government has no choice but to devalue and buy back dearly the foreign exchange that it has sold to the speculators cheaply.
In general, there are two known exchange rate systems: the floating and the fixed.
In the floating system, the local currency is allowed to fluctuate freely against other currencies and its exchange rate is determined by market forces within a loosely regulated foreign exchange domestic (or international) market. Such currencies need not necessarily be fully convertible but some measure of free convertibility is a sine qua non.
In the fixed system, the rates are centrally determined (usually by the Central Bank or by the Currency Board where it supplants this function of the Central Bank). The rates are determined periodically (normally, daily) and revolve around a "peg" with very tiny variations.
Life being more complicated than any economic system, there are no "pure cases".
Even in floating rate systems, Central banks intervene to protect their currencies or to move them to an exchange rate deemed favourable (to the country's economy) or "fair". The market's invisible hand is often handcuffed by "We-Know-Better" Central Bankers. This usually leads to disastrous (and breathtakingly costly) consequences. Suffice it to mention the Pound Sterling debacle in 1992 and the billion dollars made overnight by the arbitrageur-speculator Soros - both a direct result of such misguided policy and hubris.
Floating rates are considered a protection against deteriorating terms of trade.
If export prices fall or import prices surge - the exchange rate will adjust itself to reflect the new flows of currencies. The resulting devaluation will restore the equilibrium.
Floating rates are also good as a protection against "hot" (speculative) foreign capital looking to make a quick killing and vanish. As they buy the currency, speculators will have to pay more expensively, due to an upward adjustment in the exchange rates. Conversely, when they will try to cash their profits, they will be penalized by a new exchange rate.
So, floating rates are ideal for countries with volatile export prices and speculative capital flows. This characterizes most of the emerging economies (also known as the Third World).
It looks surprising that only a very small minority of these states has them until one recalls their high rates of inflation. Nothing like a fixed rate (coupled with consistent and prudent economic policies) to quell inflationary expectations. Pegged rates also help maintain a constant level of foreign exchange reserves, at least as long as the government does not stray from sound macro-economic management. It is impossible to over-estimate the importance of the stability and predictability which are a result of fixed rates: investors, businessmen and traders can plan ahead, protect themselves by hedging and concentrate on long term growth.
It is not that a fixed exchange rate is forever. Currencies - in all types of rate determination systems - move against one another to reflect new economic realities or expectations regarding such realities. Only the pace of changing the exchange rates is different.
Countries have invented numerous mechanisms to deal with exchange rates fluctuations.
Many countries (Argentina, Bulgaria) have currency boards. This mechanism ensures that all the local currency in circulation is covered by foreign exchange reserves in the coffers of the Central bank. All, government, and Central Bank alike - cannot print money and must operate within the straitjacket.
Other countries peg their currency to a basket of currencies. The composition of this basket is supposed to reflect the composition of the country's international trade. Unfortunately, it rarely does and when it does, it is rarely updated (as is the case in Israel). Most countries peg their currencies to arbitrary baskets of currencies in which the dominant currency is a "hard, reputable" currency such as the US dollar. This is the case with the Thai baht.
In Slovakia the basket is made up of two currencies only (40% dollar and 60% DEM) and the Slovak crown is free to move 7% up and down, around the basket-peg.
Some countries have a "crawling peg". This is an exchange rate, linked to other currencies, which is fractionally changed daily. The currency is devalued at a rate set in advance and made known to the public (transparent). A close variant is the "crawling band" (used in Israel and in some countries in South America). The exchange rate is allowed to move within a band, above and below a central peg which, in itself depreciates daily at a preset rate.
This pre-determined rate reflects a planned real devaluation over and above the inflation rate.
It denotes the country's intention to encourage its exports without rocking the whole monetary boat. It also signals to the markets that the government is bent on taming inflation.
So, there is no agreement among economists. It is clear that fixed rate systems have cut down inflation almost miraculously. The example of Argentina is prominent: from 27% a month (1991) to 1% a year (1997)!!!
The problem is that this system creates a growing disparity between the stable exchange rate - and the level of inflation which goes down slowly. This, in effect, is the opposite of devaluation - the local currency appreciates, becomes stronger. Real exchange rates strengthen by 42% (the Czech Republic), 26% (Brazil), even 50% (Israel until lately, despite the fact that the exchange rate system there is hardly fixed). This has a disastrous effect on the trade deficit: it balloons and consumes 4-10% of the GDP.
This phenomenon does not happen in non-fixed systems. Especially benign are the crawling peg and the crawling band systems which keep apace with inflation and do not let the currency appreciate against the currencies of major trading partners. Even then, the important question is the composition of the pegging basket. If the exchange rate is linked to one major currency - the local currency will appreciate and depreciate together with that major currency. In a way the inflation of the major currency is thus imported through the foreign exchange mechanism. This is what happened in Thailand when the dollar got stronger in the world markets.
In other words, the design of the pegging and exchange rate system is the crucial element.
In a crawling band system - the wider the band, the less the volatility of the exchange rate. This European Monetary System (EMS - ERM), known as "The Snake", had to realign itself a few times during the 1990s and each time the solution was to widen the bands within which the exchange rates were allowed to fluctuate. Israel had to do it twice. On June 18th, the band was doubled and the Shekel can go up and down by 10% in each direction.
But fixed exchange rates offer other problems. The strengthening real exchange rate attracts foreign capital. This is not the kind of foreign capital that countries are looking for. It is not Foreign Direct Investment (FDI). It is speculative, hot money in pursuit of ever higher returns. It aims to benefit from the stability of the exchange rate - and from the high interest rates paid on deposits in local currency.
Let us study an example: if a foreign investor were to convert 100,000 DEM to Israeli Shekels last year and invest them in a liquid deposit with an Israeli bank - he will have ended up earning an interest rate of 12% annually. The exchange rate did not change appreciably - so he would have needed the same amount of Shekels to buy his DEM back. On his Shekel deposit he would have earned between 12-16%, all net, tax free profit.
No wonder that Israel's foreign exchange reserves doubled themselves in the preceding 18 months. This phenomenon happened all over the globe, from Mexico to Thailand.
This kind of foreign capital expands the money supply (it is converted to local currency) and - when it suddenly evaporates - prices and wages collapse. Thus it tends to exacerbate the natural inflationary-deflationary cycles in emerging economies. Measures like control on capital inflows, taxing them are useless in a global economy with global capital markets.
They also deter foreign investors and distort the allocation of economic resources.
The other option is "sterilization": selling government bonds and thus absorbing the monetary overflow or maintaining high interest rates to prevent a capital drain. Both measures have adverse economic effects, tend to corrupt and destroy the banking and financial infrastructure and are expensive while bringing only temporary relief.
Where floating rate systems are applied, wages and prices can move freely. The market mechanisms are trusted to adjust the exchange rates. In fixed rate systems, taxes move freely. The state, having voluntarily given up one of the tools used in fine tuning the economy (the exchange rate) - must resort to fiscal rigor, tightening fiscal policy (=collect more taxes) to absorb liquidity and rein in demand when foreign capital comes flowing in.
In the absence of fiscal discipline, a fixed exchange rate will explode in the face of the decision makers either in the form of forced devaluation or in the form of massive capital outflows.
After all, what is wrong with volatile exchange rates? Why must they be fixed, save for psychological reasons? The West has never prospered as it does nowadays, in the era of floating rates. Trade, investment - all the areas of economic activity which were supposed to be influenced by exchange rate volatility - are experiencing a continuous big bang. That daily small fluctuations (even in a devaluation trend) are better than a big one time devaluation in restoring investor and business confidence is an axiom. That there is no such thing as a pure floating rate system (Central Banks always intervene to limit what they regard as excessive fluctuations) - is also agreed on all economists.
That exchange rate management is no substitute for sound macro- and micro-economic practices and policies - is the most important lesson. After all, a currency is the reflection of the country in which it is legal tender. It stores all the data about that country and their appraisal. A currency is a unique package of past and future with serious implications on the present.
Forex Options Market Overview
The forex options market started as an over-the-counter (OTC) financial vehicle for large banks, financial institutions and large international corporations to hedge against foreign currency exposure. Like the forex spot market, the forex options market is considered an "interbank" market. However, with the plethora of real-time financial data and forex option trading software available to most investors through the internet, today's forex option market now includes an increasingly large number of individuals and corporations who are speculating and/or hedging foreign currency exposure via telephone or online forex trading platforms.
Forex option trading has emerged as an alternative investment vehicle for many traders and investors. As an investment tool, forex option trading provides both large and small investors with greater flexibility when determining the appropriate forex trading and hedging strategies to implement.
Most forex options trading is conducted via telephone as there are only a few forex brokers offering online forex option trading platforms.
Forex Option Defined - A forex option is a financial currency contract giving the forex option buyer the right, but not the obligation, to purchase or sell a specific forex spot contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the forex option buyer pays to the forex option seller for the forex option contract rights is called the forex option "premium."
The Forex Option Buyer - The buyer, or holder, of a foreign currency option has the choice to either sell the foreign currency option contract prior to expiration, or he or she can choose to hold the foreign currency options contract until expiration and exercise his or her right to take a position in the underlying spot foreign currency. The act of exercising the foreign currency option and taking the subsequent underlying position in the foreign currency spot market is known as "assignment" or being "assigned" a spot position.
The only initial financial obligation of the foreign currency option buyer is to pay the premium to the seller up front when the foreign currency option is initially purchased. Once the premium is paid, the foreign currency option holder has no other financial obligation (no margin is required) until the foreign currency option is either offset or expires.
On the expiration date, the call buyer can exercise his or her right to buy the underlying foreign currency spot position at the foreign currency option's strike price, and a put holder can exercise his or her right to sell the underlying foreign currency spot position at the foreign currency option's strike price. Most foreign currency options are not exercised by the buyer, but instead are offset in the market before expiration.
Foreign currency options expires worthless if, at the time the foreign currency option expires, the strike price is "out-of-the-money." In simplest terms, a foreign currency option is "out-of-the-money" if the underlying foreign currency spot price is lower than a foreign currency call option's strike price, or the underlying foreign currency spot price is higher than a put option's strike price. Once a foreign currency option has expired worthless, the foreign currency option contract itself expires and neither the buyer nor the seller have any further obligation to the other party.
The Forex Option Seller - The foreign currency option seller may also be called the "writer" or "grantor" of a foreign currency option contract. The seller of a foreign currency option is contractually obligated to take the opposite underlying foreign currency spot position if the buyer exercises his right. In return for the premium paid by the buyer, the seller assumes the risk of taking a possible adverse position at a later point in time in the foreign currency spot market.
Initially, the foreign currency option seller collects the premium paid by the foreign currency option buyer (the buyer's funds will immediately be transferred into the seller's foreign currency trading account). The foreign currency option seller must have the funds in his or her account to cover the initial margin requirement. If the markets move in a favorable direction for the seller, the seller will not have to post any more funds for his foreign currency options other than the initial margin requirement. However, if the markets move in an unfavorable direction for the foreign currency options seller, the seller may have to post additional funds to his or her foreign currency trading account to keep the balance in the foreign currency trading account above the maintenance margin requirement.
Just like the buyer, the foreign currency option seller has the choice to either offset (buy back) the foreign currency option contract in the options market prior to expiration, or the seller can choose to hold the foreign currency option contract until expiration. If the foreign currency options seller holds the contract until expiration, one of two scenarios will occur: (1) the seller will take the opposite underlying foreign currency spot position if the buyer exercises the option or (2) the seller will simply let the foreign currency option expire worthless (keeping the entire premium) if the strike price is out-of-the-money.
Please note that "puts" and "calls" are separate foreign currency options contracts and are NOT the opposite side of the same transaction. For every put buyer there is a put seller, and for every call buyer there is a call seller. The foreign currency options buyer pays a premium to the foreign currency options seller in every option transaction.
Forex Call Option - A foreign exchange call option gives the foreign exchange options buyer the right, but not the obligation, to purchase a specific foreign exchange spot contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the foreign exchange option buyer pays to the foreign exchange option seller for the foreign exchange option contract rights is called the option "premium."
Please note that "puts" and "calls" are separate foreign exchange options contracts and are NOT the opposite side of the same transaction. For every foreign exchange put buyer there is a foreign exchange put seller, and for every foreign exchange call buyer there is a foreign exchange call seller. The foreign exchange options buyer pays a premium to the foreign exchange options seller in every option transaction.
The Forex Put Option - A foreign exchange put option gives the foreign exchange options buyer the right, but not the obligation, to sell a specific foreign exchange spot contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the foreign exchange option buyer pays to the foreign exchange option seller for the foreign exchange option contract rights is called the option "premium."
Please note that "puts" and "calls" are separate foreign exchange options contracts and are NOT the opposite side of the same transaction. For every foreign exchange put buyer there is a foreign exchange put seller, and for every foreign exchange call buyer there is a foreign exchange call seller. The foreign exchange options buyer pays a premium to the foreign exchange options seller in every option transaction.
Plain Vanilla Forex Options - Plain vanilla options generally refer to standard put and call option contracts traded through an exchange (however, in the case of forex option trading, plain vanilla options would refer to the standard, generic forex option contracts that are traded through an over-the-counter (OTC) forex options dealer or clearinghouse). In simplest terms, vanilla forex options would be defined as the buying or selling of a standard forex call option contract or a forex put option contract.
Exotic Forex Options - To understand what makes an exotic forex option "exotic," you must first understand what makes a forex option "non-vanilla." Plain vanilla forex options have a definitive expiration structure, payout structure and payout amount. Exotic forex option contracts may have a change in one or all of the above features of a vanilla forex option. It is important to note that exotic options, since they are often tailored to a specific's investor's needs by an exotic forex options broker, are generally not very liquid, if at all.
Intrinsic & Extrinsic Value - The price of an FX option is calculated into two separate parts, the intrinsic value and the extrinsic (time) value.
The intrinsic value of an FX option is defined as the difference between the strike price and the underlying FX spot contract rate (American Style Options) or the FX forward rate (European Style Options). The intrinsic value represents the actual value of the FX option if exercised. Please note that the intrinsic value must be zero (0) or above - if an FX option has no intrinsic value, then the FX option is simply referred to as having no (or zero) intrinsic value (the intrinsic value is never represented as a negative number). An FX option with no intrinsic value is considered "out-of-the-money," an FX option having intrinsic value is considered "in-the-money," and an FX option with a strike price at, or very close to, the underlying FX spot rate is considered "at-the-money."
The extrinsic value of an FX option is commonly referred to as the "time" value and is defined as the value of an FX option beyond the intrinsic value. A number of factors contribute to the calculation of the extrinsic value including, but not limited to, the volatility of the two spot currencies involved, the time left until expiration, the riskless interest rate of both currencies, the spot price of both currencies and the strike price of the FX option. It is important to note that the extrinsic value of FX options erodes as its expiration nears. An FX option with 60 days left to expiration will be worth more than the same FX option that has only 30 days left to expiration. Because there is more time for the underlying FX spot price to possibly move in a favorable direction, FX options sellers demand (and FX options buyers are willing to pay) a larger premium for the extra amount of time.
Volatility - Volatility is considered the most important factor when pricing forex options and it measures movements in the price of the underlying. High volatility increases the probability that the forex option could expire in-the-money and increases the risk to the forex option seller who, in turn, can demand a larger premium. An increase in volatility causes an increase in the price of both call and put options.
Delta - The delta of a forex option is defined as the change in price of a forex option relative to a change in the underlying forex spot rate. A change in a forex option's delta can be influenced by a change in the underlying forex spot rate, a change in volatility, a change in the riskless interest rate of the underlying spot currencies or simply by the passage of time (nearing of the expiration date).
The delta must always be calculated in a range of zero to one (0-1.0). Generally, the delta of a deep out-of-the-money forex option will be closer to zero, the delta of an at-the-money forex option will be near .5 (the probability of exercise is near 50%) and the delta of deep in-the-money forex options will be closer to 1.0. In simplest terms, the closer a forex option's strike price is relative to the underlying spot forex rate, the higher the delta because it is more sensitive to a change in the underlying rate.
Forex option trading has emerged as an alternative investment vehicle for many traders and investors. As an investment tool, forex option trading provides both large and small investors with greater flexibility when determining the appropriate forex trading and hedging strategies to implement.
Most forex options trading is conducted via telephone as there are only a few forex brokers offering online forex option trading platforms.
Forex Option Defined - A forex option is a financial currency contract giving the forex option buyer the right, but not the obligation, to purchase or sell a specific forex spot contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the forex option buyer pays to the forex option seller for the forex option contract rights is called the forex option "premium."
The Forex Option Buyer - The buyer, or holder, of a foreign currency option has the choice to either sell the foreign currency option contract prior to expiration, or he or she can choose to hold the foreign currency options contract until expiration and exercise his or her right to take a position in the underlying spot foreign currency. The act of exercising the foreign currency option and taking the subsequent underlying position in the foreign currency spot market is known as "assignment" or being "assigned" a spot position.
The only initial financial obligation of the foreign currency option buyer is to pay the premium to the seller up front when the foreign currency option is initially purchased. Once the premium is paid, the foreign currency option holder has no other financial obligation (no margin is required) until the foreign currency option is either offset or expires.
On the expiration date, the call buyer can exercise his or her right to buy the underlying foreign currency spot position at the foreign currency option's strike price, and a put holder can exercise his or her right to sell the underlying foreign currency spot position at the foreign currency option's strike price. Most foreign currency options are not exercised by the buyer, but instead are offset in the market before expiration.
Foreign currency options expires worthless if, at the time the foreign currency option expires, the strike price is "out-of-the-money." In simplest terms, a foreign currency option is "out-of-the-money" if the underlying foreign currency spot price is lower than a foreign currency call option's strike price, or the underlying foreign currency spot price is higher than a put option's strike price. Once a foreign currency option has expired worthless, the foreign currency option contract itself expires and neither the buyer nor the seller have any further obligation to the other party.
The Forex Option Seller - The foreign currency option seller may also be called the "writer" or "grantor" of a foreign currency option contract. The seller of a foreign currency option is contractually obligated to take the opposite underlying foreign currency spot position if the buyer exercises his right. In return for the premium paid by the buyer, the seller assumes the risk of taking a possible adverse position at a later point in time in the foreign currency spot market.
Initially, the foreign currency option seller collects the premium paid by the foreign currency option buyer (the buyer's funds will immediately be transferred into the seller's foreign currency trading account). The foreign currency option seller must have the funds in his or her account to cover the initial margin requirement. If the markets move in a favorable direction for the seller, the seller will not have to post any more funds for his foreign currency options other than the initial margin requirement. However, if the markets move in an unfavorable direction for the foreign currency options seller, the seller may have to post additional funds to his or her foreign currency trading account to keep the balance in the foreign currency trading account above the maintenance margin requirement.
Just like the buyer, the foreign currency option seller has the choice to either offset (buy back) the foreign currency option contract in the options market prior to expiration, or the seller can choose to hold the foreign currency option contract until expiration. If the foreign currency options seller holds the contract until expiration, one of two scenarios will occur: (1) the seller will take the opposite underlying foreign currency spot position if the buyer exercises the option or (2) the seller will simply let the foreign currency option expire worthless (keeping the entire premium) if the strike price is out-of-the-money.
Please note that "puts" and "calls" are separate foreign currency options contracts and are NOT the opposite side of the same transaction. For every put buyer there is a put seller, and for every call buyer there is a call seller. The foreign currency options buyer pays a premium to the foreign currency options seller in every option transaction.
Forex Call Option - A foreign exchange call option gives the foreign exchange options buyer the right, but not the obligation, to purchase a specific foreign exchange spot contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the foreign exchange option buyer pays to the foreign exchange option seller for the foreign exchange option contract rights is called the option "premium."
Please note that "puts" and "calls" are separate foreign exchange options contracts and are NOT the opposite side of the same transaction. For every foreign exchange put buyer there is a foreign exchange put seller, and for every foreign exchange call buyer there is a foreign exchange call seller. The foreign exchange options buyer pays a premium to the foreign exchange options seller in every option transaction.
The Forex Put Option - A foreign exchange put option gives the foreign exchange options buyer the right, but not the obligation, to sell a specific foreign exchange spot contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the foreign exchange option buyer pays to the foreign exchange option seller for the foreign exchange option contract rights is called the option "premium."
Please note that "puts" and "calls" are separate foreign exchange options contracts and are NOT the opposite side of the same transaction. For every foreign exchange put buyer there is a foreign exchange put seller, and for every foreign exchange call buyer there is a foreign exchange call seller. The foreign exchange options buyer pays a premium to the foreign exchange options seller in every option transaction.
Plain Vanilla Forex Options - Plain vanilla options generally refer to standard put and call option contracts traded through an exchange (however, in the case of forex option trading, plain vanilla options would refer to the standard, generic forex option contracts that are traded through an over-the-counter (OTC) forex options dealer or clearinghouse). In simplest terms, vanilla forex options would be defined as the buying or selling of a standard forex call option contract or a forex put option contract.
Exotic Forex Options - To understand what makes an exotic forex option "exotic," you must first understand what makes a forex option "non-vanilla." Plain vanilla forex options have a definitive expiration structure, payout structure and payout amount. Exotic forex option contracts may have a change in one or all of the above features of a vanilla forex option. It is important to note that exotic options, since they are often tailored to a specific's investor's needs by an exotic forex options broker, are generally not very liquid, if at all.
Intrinsic & Extrinsic Value - The price of an FX option is calculated into two separate parts, the intrinsic value and the extrinsic (time) value.
The intrinsic value of an FX option is defined as the difference between the strike price and the underlying FX spot contract rate (American Style Options) or the FX forward rate (European Style Options). The intrinsic value represents the actual value of the FX option if exercised. Please note that the intrinsic value must be zero (0) or above - if an FX option has no intrinsic value, then the FX option is simply referred to as having no (or zero) intrinsic value (the intrinsic value is never represented as a negative number). An FX option with no intrinsic value is considered "out-of-the-money," an FX option having intrinsic value is considered "in-the-money," and an FX option with a strike price at, or very close to, the underlying FX spot rate is considered "at-the-money."
The extrinsic value of an FX option is commonly referred to as the "time" value and is defined as the value of an FX option beyond the intrinsic value. A number of factors contribute to the calculation of the extrinsic value including, but not limited to, the volatility of the two spot currencies involved, the time left until expiration, the riskless interest rate of both currencies, the spot price of both currencies and the strike price of the FX option. It is important to note that the extrinsic value of FX options erodes as its expiration nears. An FX option with 60 days left to expiration will be worth more than the same FX option that has only 30 days left to expiration. Because there is more time for the underlying FX spot price to possibly move in a favorable direction, FX options sellers demand (and FX options buyers are willing to pay) a larger premium for the extra amount of time.
Volatility - Volatility is considered the most important factor when pricing forex options and it measures movements in the price of the underlying. High volatility increases the probability that the forex option could expire in-the-money and increases the risk to the forex option seller who, in turn, can demand a larger premium. An increase in volatility causes an increase in the price of both call and put options.
Delta - The delta of a forex option is defined as the change in price of a forex option relative to a change in the underlying forex spot rate. A change in a forex option's delta can be influenced by a change in the underlying forex spot rate, a change in volatility, a change in the riskless interest rate of the underlying spot currencies or simply by the passage of time (nearing of the expiration date).
The delta must always be calculated in a range of zero to one (0-1.0). Generally, the delta of a deep out-of-the-money forex option will be closer to zero, the delta of an at-the-money forex option will be near .5 (the probability of exercise is near 50%) and the delta of deep in-the-money forex options will be closer to 1.0. In simplest terms, the closer a forex option's strike price is relative to the underlying spot forex rate, the higher the delta because it is more sensitive to a change in the underlying rate.
Advantages of Trading FOREX Over Stocks and Commodities
There are many advantages to Trading FOREX as your main income generator. Let’s start by something that may be worrying you already.
“Do I need a Diploma or some kind of Certification to trade FOREX?” The answer is this:
When attempting to make more profit than losses on the fluctuation of exchange rates between major currencies (i.e., Trading the FOREX), nobody is going to ask you for a diploma, a formal license or verify the amount of hours you've spent studying the Foreign exchange market and banking industry. All you need is the proper training.
But this is not the only advantage you get when trading FOREX, compared to other ways of investment and speculation; i.e. Stocks and Commodities. You have a whole bunch of advantages over these other options that will be enumerated in the following paragraphs.
The Main Benefits of Trading the FX Spot Market:
1): FOREX is the largest financial market in the world.
With a daily trading volume of over $1.5 trillion, the spot FOREX market can absorb trading sizes that dwarf the capacity of any other market. In fact, when compared with the $50 billion daily market for equities or the $30 billion futures market, it becomes quickly apparent this gives you, and millions of other FOREX traders, almost infinite trading liquidity and flexibility.
2): FOREX is a TRUE 24-hour market.
The FOREX Market never sleeps. Trading positions can be entered and exited at any moment - around the globe, around the clock, six days a week. There is no waiting for an opening bell as in the case of trading stocks. It is a 24- hour, continuous electronic (ONLINE) currency exchange that never closes. This is very desirable for you if you want to trade on a part-time basis, because you can choose when you want to trade: morning, noon or night.
3): There is never a Bear Market in FOREX.
You can have access to a seamless, mutually-inclusive (two- way) exchange of currencies. Meaning, because currencies trade in "pairs" (for example, US dollar vs. yen or US dollar vs. Swiss franc), one side of every currency pair (for example, USD/JPY - JPY = YEN) is constantly moving in relation to the other. Thus, when you buy a particular currency, you are actually simultaneously selling the other currency in that particular pair. As the market moves, one of the currencies will increase in value versus the other. Of course, it is up to you to choose the correct currency to be long or short. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. This means you have equal potential to profit in both a rising or falling market.
4): High Leverage - up to 200:1 Leverage.
You are permitted to trade foreign currencies on a highly leveraged basis - up to 200 times your investment with some brokers. This is primarily attributed to the higher levels of liquidity within the currency markets. Standard 100,000- unit currency lots can be traded with as little as 1% margin, or $1,000. Mini FX accounts are permitted to trade with just 0.5% margin -- in other words, just $50 allows you to control a 10,000-unit currency position. Futures traders, who are accustomed to margin requirements generally equal to 5%-8% of the contract value, will immediately recognize that the FOREX market provides much greater leverage, and for stock traders, who must post at least 50% margin, there’s no comparison. If you are looking for an efficient use of trading capital, this is it!
5): Price Movements Are Highly Predictable.
Although currency prices in the FX market may be volatile, they generally repeat themselves in relatively predictable cycles, creating trends. The strong trends that foreign currencies develop are a significant advantage for traders who use the correct "technical" methods.
Unlike stocks, currencies rarely spend much time in tight trading ranges and have the tendency to develop strong trends. Over 80% of volume is speculative in nature and, as a result, the market frequently overshoots and then corrects itself. As a technically-trained trader, you can easily identify new trends and breakouts, which provide for multiple opportunities to enter and exit positions.
6:) Commission-free Trading and Low Transaction Cost
When you trade FOREX, through one of our recommended brokers (this info is in our private resources section), you'll do it totally commission-free! These brokers don't charge commissions to trade or to maintain an account, and that goes for all clients trading the FOREX through them, regardless of your account balance or trading volume. Even Mini FX traders can buy and sell currencies online, commission-free.
What about trading fees? There are none of the usual fees to which futures and equity traders are accustomed -- no exchange or clearing fees, no N_F_A or S_E_C fees. Because currencies trade over-the-counter (OTC), via a global electronic network -- in FOREX, what you see is what you get, allowing you to make quick decisions on your trades without having to worry or account for fees that may affect your profit/loss or slippage.
In the equities markets, you must pay both a commission and exchange fees. The over-the-counter structure of the FX market eliminates exchange and clearing fees, which in turn lowers transaction costs.
So, if FOREX broker don't charge commissions, how do they make money? Like all traded financial products, over-the- counter currency trading involves a bid/ask spread, which represents the prices at which your counterparty is willing to trade. Because the currency market offers round-the-clock liquidity, you receive tight, competitive spreads both intra-day and night. Stock traders can be more vulnerable to liquidity risk and typically receive wider trading spreads, especially during after-hours trading.
7): Instantaneous Order Execution and Market Transparency.
Market transparency is highly desired in any trading environment. The greater the market transparency, the more efficient the market becomes. Unlike other markets where transparency is compromised (like in the Enron scandal), FOREX markets are highly transparent (i.e., analyzing countries, and having access to real-time research / news, is easier than companies).
Because of this transparency, as an FX trader, you will be able to exercise risk management strategies in accordance to the fundamental and technical indicators we teach at RapidForex.com
The FX market offers the highest level of market transparency out of all the financial markets. Because of this, order execution and fill confirmation usually occur in just 1-2 seconds. Markets that do not offer executable prices and force traders to absorb slippage obviously compromise the trader's profit potential considerably.
In the forex world, order execution is all-electronic and because you'll be trading via an Internet-based platform, instantaneous execution is routine. There are no exchanges, no traditional open-outcry pits, no floor brokers, and consequently, no delays.
“Do I need a Diploma or some kind of Certification to trade FOREX?” The answer is this:
When attempting to make more profit than losses on the fluctuation of exchange rates between major currencies (i.e., Trading the FOREX), nobody is going to ask you for a diploma, a formal license or verify the amount of hours you've spent studying the Foreign exchange market and banking industry. All you need is the proper training.
But this is not the only advantage you get when trading FOREX, compared to other ways of investment and speculation; i.e. Stocks and Commodities. You have a whole bunch of advantages over these other options that will be enumerated in the following paragraphs.
The Main Benefits of Trading the FX Spot Market:
1): FOREX is the largest financial market in the world.
With a daily trading volume of over $1.5 trillion, the spot FOREX market can absorb trading sizes that dwarf the capacity of any other market. In fact, when compared with the $50 billion daily market for equities or the $30 billion futures market, it becomes quickly apparent this gives you, and millions of other FOREX traders, almost infinite trading liquidity and flexibility.
2): FOREX is a TRUE 24-hour market.
The FOREX Market never sleeps. Trading positions can be entered and exited at any moment - around the globe, around the clock, six days a week. There is no waiting for an opening bell as in the case of trading stocks. It is a 24- hour, continuous electronic (ONLINE) currency exchange that never closes. This is very desirable for you if you want to trade on a part-time basis, because you can choose when you want to trade: morning, noon or night.
3): There is never a Bear Market in FOREX.
You can have access to a seamless, mutually-inclusive (two- way) exchange of currencies. Meaning, because currencies trade in "pairs" (for example, US dollar vs. yen or US dollar vs. Swiss franc), one side of every currency pair (for example, USD/JPY - JPY = YEN) is constantly moving in relation to the other. Thus, when you buy a particular currency, you are actually simultaneously selling the other currency in that particular pair. As the market moves, one of the currencies will increase in value versus the other. Of course, it is up to you to choose the correct currency to be long or short. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. This means you have equal potential to profit in both a rising or falling market.
4): High Leverage - up to 200:1 Leverage.
You are permitted to trade foreign currencies on a highly leveraged basis - up to 200 times your investment with some brokers. This is primarily attributed to the higher levels of liquidity within the currency markets. Standard 100,000- unit currency lots can be traded with as little as 1% margin, or $1,000. Mini FX accounts are permitted to trade with just 0.5% margin -- in other words, just $50 allows you to control a 10,000-unit currency position. Futures traders, who are accustomed to margin requirements generally equal to 5%-8% of the contract value, will immediately recognize that the FOREX market provides much greater leverage, and for stock traders, who must post at least 50% margin, there’s no comparison. If you are looking for an efficient use of trading capital, this is it!
5): Price Movements Are Highly Predictable.
Although currency prices in the FX market may be volatile, they generally repeat themselves in relatively predictable cycles, creating trends. The strong trends that foreign currencies develop are a significant advantage for traders who use the correct "technical" methods.
Unlike stocks, currencies rarely spend much time in tight trading ranges and have the tendency to develop strong trends. Over 80% of volume is speculative in nature and, as a result, the market frequently overshoots and then corrects itself. As a technically-trained trader, you can easily identify new trends and breakouts, which provide for multiple opportunities to enter and exit positions.
6:) Commission-free Trading and Low Transaction Cost
When you trade FOREX, through one of our recommended brokers (this info is in our private resources section), you'll do it totally commission-free! These brokers don't charge commissions to trade or to maintain an account, and that goes for all clients trading the FOREX through them, regardless of your account balance or trading volume. Even Mini FX traders can buy and sell currencies online, commission-free.
What about trading fees? There are none of the usual fees to which futures and equity traders are accustomed -- no exchange or clearing fees, no N_F_A or S_E_C fees. Because currencies trade over-the-counter (OTC), via a global electronic network -- in FOREX, what you see is what you get, allowing you to make quick decisions on your trades without having to worry or account for fees that may affect your profit/loss or slippage.
In the equities markets, you must pay both a commission and exchange fees. The over-the-counter structure of the FX market eliminates exchange and clearing fees, which in turn lowers transaction costs.
So, if FOREX broker don't charge commissions, how do they make money? Like all traded financial products, over-the- counter currency trading involves a bid/ask spread, which represents the prices at which your counterparty is willing to trade. Because the currency market offers round-the-clock liquidity, you receive tight, competitive spreads both intra-day and night. Stock traders can be more vulnerable to liquidity risk and typically receive wider trading spreads, especially during after-hours trading.
7): Instantaneous Order Execution and Market Transparency.
Market transparency is highly desired in any trading environment. The greater the market transparency, the more efficient the market becomes. Unlike other markets where transparency is compromised (like in the Enron scandal), FOREX markets are highly transparent (i.e., analyzing countries, and having access to real-time research / news, is easier than companies).
Because of this transparency, as an FX trader, you will be able to exercise risk management strategies in accordance to the fundamental and technical indicators we teach at RapidForex.com
The FX market offers the highest level of market transparency out of all the financial markets. Because of this, order execution and fill confirmation usually occur in just 1-2 seconds. Markets that do not offer executable prices and force traders to absorb slippage obviously compromise the trader's profit potential considerably.
In the forex world, order execution is all-electronic and because you'll be trading via an Internet-based platform, instantaneous execution is routine. There are no exchanges, no traditional open-outcry pits, no floor brokers, and consequently, no delays.
Why Demo Account Performance Is Often Better Than Real Account Performance
Over the past several years, the popularity of online currency trading has grown substantially. Each day, online FX brokerage firms attract new investors - each of them lining up with a glint in their eye, lured in by promises of easy money. Most of these companies allow you to sign up for a free demo account which lets you place mock trades using their trading platform to get a feel for the excitement of currency trading. In the casual world of free demo accounts - many young traders find they are able to garner impressive profits without a significant amount of effort. It almost seems too good to be true. But transferring this success from a demo account to a real account is far less common. Why is this? The actual trading platform behaves the exact same way, the market doesn't care whether you're a demo or real trader - so what is different? It's you who has changed. Not your personality, not even your trading style - but the factors that affect you are different.
What is the key factor to trading success?
The search for the "Holy Grail" of trading has been a common theme throughout the history of markets. There are a variety of different techniques. Those whom are inclined towards number crunching and pattern recognition may prefer technical analysis, whereas those more focused on the big picture, logical macro perspective prefer fundamental analysis. Then there are specific methodologies like swing trading, trend following or even more esoteric ideas like the Elliot Wave theory. Which one is best? There are examples of very successful traders using each methodology.
Since most new traders lose money - perhaps the more appropriate question to ask is, "What is the key factor to trading failure?"
Greed and Fear
Trading is an atmosphere rich in the porous emotions of greed and fear. The current price of a given security or financial instrument at any point in time can be thought of as the confluence of greed (bulls) and fear (bears). These two emotions make up the core of humanity itself. When market information is released, trading can be a high intensity experience. Sensing danger, your body releases adrenaline that acts to accentuate both your greed (fight) and your fear (flight). Because these emotions are so strong, they can cause you to act irrationally, ignore your system, stated set of rules or trading plan and to act upon impulse. Indeed, this is a genetically programmed response - but it is often also the trader's downfall, especially when he's playing with much better capitalized, more sophisticated and experienced foes that know how to manipulate those emotions.
When you are a trader - you are always under the influence of at least one of these two emotions, even if you don't have any trades on.
Impact of fear and greed on your trading
If the market's going up and you're in - greed is telling you to buy more and fear is telling you to take your profits while you still can. If it's going down, fear of being wrong makes you hold onto a losing position - and then greed sometimes convinces you to "average down" your position (and buy more) so it'll be easier for you to come back.
If the market's going up and you're not invested - fear is telling you that you're missing out on easy money but it's your greed that causes you to get in just after the greatest increase (just when its about to reverse course). If the market's going down and you're not invested - greed is telling you to get in as the price is cheap, while fear reminds you that you'll miss out on this opportunity if you don't act quickly.
Perhaps if we just felt greed, or just felt fear we would be able to control our emotions a little better. But when both of these little devils whisper into our ears at the same time - it is often impossible not to listen.
The Thrill of Greed
The first time you try FX trading - you will feel the thrill of greed. It is an ecstatic experience, your brain flush with neurotransmitters and your mind giddy with visions of untold riches about to be reaped. Greed is bold, aggressive and incredibly exciting. It can take hold of you both mentally and physically. Just imagine the possibilities!
This greed is what draws us into FX trading in the first place - the dream of easy money and 100:1 or 200:1 margin rates. It inspires us and causes us to forego rational thinking in favour of reckless abandon.
In the movie Wall Street, Gordon Gecko says, "Greed is good", but it is also very dangerous - especially if you are unable to recognize when greed is the one doing the talking. Greed is also one of the most common techniques used to manipulate people. Every get rich quick scheme, promising untold riches for no money down takes advantage of your natural predisposition to throw all logic and sense out the window when greed pays a visit. The argument starts to appear very compelling and you ignore what would otherwise be clear warning signs. Like drunk goggles, greed can mislead you and when you eventually wake up you are often in a very precarious position.
The Fear of Losing
Fear can be equally as dangerous. The most potent and easily manipulated form of fear is your fear of admitting that you are wrong. Fear of having your precious ego bruised. This fear can cause people to do incredibly stupid things. The funny thing about this world is that everyone thinks that they are right. Most people would rather lose thousands of dollars than admit they are wrong. It is easy to feel ashamed of trading losses and live in denial but this is self-destructive behaviour. By denying the problem exists, you fail to take steps address it and only ensure that it will continue in the future.
Demo Trading
Demo trading is a great way to get started in foreign exchange trading. It is identical to real trading, except that you're using "pretend" money. Demo trading allows you to get a taste for what type of events move markets and how they move. It encourages you to learn more about geopolitics, macroeconomics and global finance and these are all incredibly positive things.
Demo trading also introduces you to the rapture of greed. Trading is a means to one of the purest, most raw and potent forms of greed. The whole point of trading is to make money and the more money you make - the stronger the pull of your greed becomes. It is intoxicating and can take complete control of you.
But demo trading does not introduce you to fear. There is no fear when you are demo trading. It is like you have a perpetual get out of jail free card. If you start losing badly on a demo account - simply start a new one. There is no accountability for your trading failures and only recognition of your trading success.
So your demo account does not teach you how to handle the emotion of fear. This emotion is most likely going to lead to your downfall. Greed may get you overextended, but fear will stop you from cutting your losses. You may think that fear of losing money would cause you to cut your losses, but the stronger emotion is fear of being wrong and that causes you to hold on to your losing position - until it's all gone.
There is also the issue of account size. Many demo accounts give you $50,000 to play with. This type of capitalization allows you to buy 5 lots (500K) of EURUSD pretty easily. If goes up 20 pips you've made $1000. Nice one. But when you open your real account - it's more likely that you put $5000 or $10000 in there to begin with. Now you're dealing with a 50K lot, which means you'll take $100 out of a 20-pip movement. But mentally you are used to getting $1000 for that movement so you usually end up risking more. Next thing you know - your 200K position has turned against you 50 pips and you've lost $1000. That's real money you just lost. You can't just start another account.
The capitalization of the demo account is sufficient to sustain losses and still come out on top. But your real account is likely to be undercapitalized and if you're trying to achieve returns similar to what you got on your demo account - you are going to blow up very quickly.
Being honest with yourself
Ultimately, while providing an excellent introduction to FX trading - demo accounts do not accurately predict whether you'll be successful trading real money. Markets are dominated by psychology and often go against what fundamental logic or technical indicators suggest should happen. The single most critical factor in your trading success will be your ability to control your emotions of greed and fear. These emotions cloud your judgment and cause you to trade recklessly. Demo accounts introduce you to the emotion of greed, but by their very nature they are risk free and therefore there is no fear involved. They are also likely to be better capitalized than your real money account, which misleads you with respect to the amount of returns you can expect to earn.
For all of these reasons, demo accounts allow you to avoid being honest with yourself and this is perhaps the most important factor of all. You need to know your edge and your limits and in order to know these - you must be honest with yourself.
This being said, demo accounts are still very entertaining and educational and I highly recommend opening one to anyone who's interested in getting a taste of the exciting world of FX trading. It's a great way to learn more about economics, global politics and yourself.
What is the key factor to trading success?
The search for the "Holy Grail" of trading has been a common theme throughout the history of markets. There are a variety of different techniques. Those whom are inclined towards number crunching and pattern recognition may prefer technical analysis, whereas those more focused on the big picture, logical macro perspective prefer fundamental analysis. Then there are specific methodologies like swing trading, trend following or even more esoteric ideas like the Elliot Wave theory. Which one is best? There are examples of very successful traders using each methodology.
Since most new traders lose money - perhaps the more appropriate question to ask is, "What is the key factor to trading failure?"
Greed and Fear
Trading is an atmosphere rich in the porous emotions of greed and fear. The current price of a given security or financial instrument at any point in time can be thought of as the confluence of greed (bulls) and fear (bears). These two emotions make up the core of humanity itself. When market information is released, trading can be a high intensity experience. Sensing danger, your body releases adrenaline that acts to accentuate both your greed (fight) and your fear (flight). Because these emotions are so strong, they can cause you to act irrationally, ignore your system, stated set of rules or trading plan and to act upon impulse. Indeed, this is a genetically programmed response - but it is often also the trader's downfall, especially when he's playing with much better capitalized, more sophisticated and experienced foes that know how to manipulate those emotions.
When you are a trader - you are always under the influence of at least one of these two emotions, even if you don't have any trades on.
Impact of fear and greed on your trading
If the market's going up and you're in - greed is telling you to buy more and fear is telling you to take your profits while you still can. If it's going down, fear of being wrong makes you hold onto a losing position - and then greed sometimes convinces you to "average down" your position (and buy more) so it'll be easier for you to come back.
If the market's going up and you're not invested - fear is telling you that you're missing out on easy money but it's your greed that causes you to get in just after the greatest increase (just when its about to reverse course). If the market's going down and you're not invested - greed is telling you to get in as the price is cheap, while fear reminds you that you'll miss out on this opportunity if you don't act quickly.
Perhaps if we just felt greed, or just felt fear we would be able to control our emotions a little better. But when both of these little devils whisper into our ears at the same time - it is often impossible not to listen.
The Thrill of Greed
The first time you try FX trading - you will feel the thrill of greed. It is an ecstatic experience, your brain flush with neurotransmitters and your mind giddy with visions of untold riches about to be reaped. Greed is bold, aggressive and incredibly exciting. It can take hold of you both mentally and physically. Just imagine the possibilities!
This greed is what draws us into FX trading in the first place - the dream of easy money and 100:1 or 200:1 margin rates. It inspires us and causes us to forego rational thinking in favour of reckless abandon.
In the movie Wall Street, Gordon Gecko says, "Greed is good", but it is also very dangerous - especially if you are unable to recognize when greed is the one doing the talking. Greed is also one of the most common techniques used to manipulate people. Every get rich quick scheme, promising untold riches for no money down takes advantage of your natural predisposition to throw all logic and sense out the window when greed pays a visit. The argument starts to appear very compelling and you ignore what would otherwise be clear warning signs. Like drunk goggles, greed can mislead you and when you eventually wake up you are often in a very precarious position.
The Fear of Losing
Fear can be equally as dangerous. The most potent and easily manipulated form of fear is your fear of admitting that you are wrong. Fear of having your precious ego bruised. This fear can cause people to do incredibly stupid things. The funny thing about this world is that everyone thinks that they are right. Most people would rather lose thousands of dollars than admit they are wrong. It is easy to feel ashamed of trading losses and live in denial but this is self-destructive behaviour. By denying the problem exists, you fail to take steps address it and only ensure that it will continue in the future.
Demo Trading
Demo trading is a great way to get started in foreign exchange trading. It is identical to real trading, except that you're using "pretend" money. Demo trading allows you to get a taste for what type of events move markets and how they move. It encourages you to learn more about geopolitics, macroeconomics and global finance and these are all incredibly positive things.
Demo trading also introduces you to the rapture of greed. Trading is a means to one of the purest, most raw and potent forms of greed. The whole point of trading is to make money and the more money you make - the stronger the pull of your greed becomes. It is intoxicating and can take complete control of you.
But demo trading does not introduce you to fear. There is no fear when you are demo trading. It is like you have a perpetual get out of jail free card. If you start losing badly on a demo account - simply start a new one. There is no accountability for your trading failures and only recognition of your trading success.
So your demo account does not teach you how to handle the emotion of fear. This emotion is most likely going to lead to your downfall. Greed may get you overextended, but fear will stop you from cutting your losses. You may think that fear of losing money would cause you to cut your losses, but the stronger emotion is fear of being wrong and that causes you to hold on to your losing position - until it's all gone.
There is also the issue of account size. Many demo accounts give you $50,000 to play with. This type of capitalization allows you to buy 5 lots (500K) of EURUSD pretty easily. If goes up 20 pips you've made $1000. Nice one. But when you open your real account - it's more likely that you put $5000 or $10000 in there to begin with. Now you're dealing with a 50K lot, which means you'll take $100 out of a 20-pip movement. But mentally you are used to getting $1000 for that movement so you usually end up risking more. Next thing you know - your 200K position has turned against you 50 pips and you've lost $1000. That's real money you just lost. You can't just start another account.
The capitalization of the demo account is sufficient to sustain losses and still come out on top. But your real account is likely to be undercapitalized and if you're trying to achieve returns similar to what you got on your demo account - you are going to blow up very quickly.
Being honest with yourself
Ultimately, while providing an excellent introduction to FX trading - demo accounts do not accurately predict whether you'll be successful trading real money. Markets are dominated by psychology and often go against what fundamental logic or technical indicators suggest should happen. The single most critical factor in your trading success will be your ability to control your emotions of greed and fear. These emotions cloud your judgment and cause you to trade recklessly. Demo accounts introduce you to the emotion of greed, but by their very nature they are risk free and therefore there is no fear involved. They are also likely to be better capitalized than your real money account, which misleads you with respect to the amount of returns you can expect to earn.
For all of these reasons, demo accounts allow you to avoid being honest with yourself and this is perhaps the most important factor of all. You need to know your edge and your limits and in order to know these - you must be honest with yourself.
This being said, demo accounts are still very entertaining and educational and I highly recommend opening one to anyone who's interested in getting a taste of the exciting world of FX trading. It's a great way to learn more about economics, global politics and yourself.
Sunday, October 26, 2008
Forex Trading - Anyone Can Learn to Win But 95% of Traders Lose Why?
Forex trading is simple to understand and easy to learn yet, 95% of traders lose. There are two main reasons for this and we will look at both here...
First let's start with a fact to make you think:
30 years ago 95% of traders lost and 95% lose today despite the huge advances in communications, speed of data, quality of news and the power of computers and there testing power - the same ratio lose, so all the advances haven't helped.
You can't beat Forex with technology and the fact is simple systems work best and always have, as they have fewer elements to break than complicated ones.
So if you work hard or try and be clever it doesn't guarantee you success.
You may now well be asking...
If it only takes a simple system to win, anyone can do that and yes they can - but they must learn to apply it with discipline.
Discipline is the key!
Most traders can never trade in a disciplined fashion and the reasons they can't are they require that, not only do you need a good forex education but you are fighting your emotions when you trade and let them get the better of you and you will lose.
Normal behaviour we take for granted in society is fatal in forex markets. Let's look at some examples to illustrate this:
- You need to trade in isolation, away from the herd and this is hard, as we are like to be with the majority and not feel on our own.
- You cannot consult an expert, as trading success comes from within - your knowledge and the confidence you have in it and an expert can never give you that.
- There are no set rules in the market, you make your own, trust them and survive by them.
- We all hate losing, it wounds our ego but unless you learn to lose and keep your losses small you will never win.
Now all the above make trading a unique challenge.
Sure you can become disciplined - but don't let anyone tell you its easy - it isn't.
Of course, you wouldn't expect it to be, with the rewards on offer - but if you are disciplined and you have a sound logical method, applying it with discipline can bring you rewards which can change your financial future forever.
The choice is yours:
You can learn Forex trading the right way, or you can listen to the so called gurus and experts, who tell you it's a walk in the park and lose.
Make an effort - invest in a sound Forex education and you will have confidence and discipline and win - it's as simple as that. You can do it if you want to and the choice is yours.
Avoid Forex Gambling - Proper Money Management
A mentor of mine once taught me, "the difference between gambling and investing is education". In Forex, possibly more than anything else, this statement stands true. I would like to add one aspect to that statement though. The difference between Forex Trading and Forex Gambling is not only education, but proper a money management plan.
So what do I mean when I say "a proper money management plan you may ask? Well, learning how to trade Forex is more than just studying technical analysis, creating a Forex trading system, and trading that system. Even the best Forex trading system will lose with out proper money management. A money management plan is a plan for how the total account balance will be affected but each individual trade in a trading system. Your money management plan gets you through the losing periods and back to winning.
A money management plan should include several key components.- What percent of my overall account balance will I risk on every trade? This number can vary depending on the system and signal types. It should however be consistent across every trade. For instance, lets say you have a moving average system that takes trades off of both a one hour chart and a day chart. Your day signals may be higher probability signals but come less often. Your money management rules may call for risking 1% of the total account balance on every daily signal and 1/2% of the total balance on the hourly signals.
- What is my maximum daily and overall maximum drawdown? Some plans look at what a system's maximum drawdown has been over the last few years as well as the average daily maximum drawdown. The plan then could include a rule that states I will stop trading today if my account balance draws down 2%. If the system as a whole draws down more than 25% at anytime I will stop trading. This is your maximum risk threshold. A daily maximum helps you stop trading when emotions may get the best of you and the overall maximum drawdown helps you determine at what point I may need to reassess the effectiveness of my system.
- At what intervals will I withdraw profits from my account? I am not talking about taking profit on individual trades. I am talking about actually pulling profits from your trading account. Pulling profits must be balanced with compounding profits. There is a delicate balance between the rule as to when profits should be withdrawn depends on the investor and his/her trading strategy. My Forex money management plan calls for withdrawing 50% of profits on a quarterly basis. Some may take profits on a monthly basis and others yearly.
- What is my maximum Margin level? This refers to over trading. Some traders may think, I have all this available margin, why not use it? This can be a dangerous mentality though. Every dollar margined puts at risk the overall balance of the account. You may make money faster but you WILL lose it faster. Using too much of your available margin puts you in the realm of gambling. Markets can move quickly and even if you have a stop-loss that is suppose to keep you from losing more than a small percent of your account balance, drastic news could move a currency far past your stop-loss resulting in a much larger loss than your money management plan had anticipated. Keep at least 50% of your margin available for use. Never trade less than $1000 with a micro account, $10000 with a mini account, and $100,000 with a standard account. Your money management plan should have rules in place in the event margin falls below certain levels.
Forex Currency Trading - How to Success on Forex on the European Markets
Forex currency trading is a specialized task and is not based on the trial and error method. It is distinct from the traditional trading that involves buying and selling of a product or service. FOREX currency trading for beginners is not for everyone, but it is for the investor who is ready to step forward in an effort to make profits that are the dreams and envies of those nearby. You can develop into a better and more profitable trader by applying some of the more imperative forex currency trading rules consistently with an appropriate amount of discipline. There are few principles that can help to perk up your chances of success if they are understood, practiced, and implemented in your trading on a regular basis and these rules have been learned in the trenches, mostly through testing and scrutinizing the common mistakes nearly every trader makes when starting out in the forex currency trading business.
Investing in the foreign exchange market can be both an exhilarating and rewarding experience. Coming out with high profit gains can give you a rush and at the same time, an enormous amount of satisfaction derived from earning a lot through simply studying and understanding how forex currency trading works. Investors may lower their exposure to risk by employing risk-reducing strategies such as 'stop-loss' or 'limit' orders.
Successful traders are always learning and growing.Finding useful resources that provide good information, solid advice, and/or proven concepts is sometimes difficult to do. There is much information out there that is, at best, irrelevant, and at worst, erroneous. Successful traders use a combination to make more accurate predictions. Once you have the knowledge of how the forex currency trading works open a demo account and paper trade to practice until you have what it takes to make a consistent profit.
European currencies had a number of crises because of the attempts to adjust their rates towards one another artificially. French frank and German mark used to create the basis for the Continental European currencies and formed the European currency system. Euro traders need to recognize that even if the European economy is growing, the trading basis is for the dollar to rebound because European productivity is significantly less than American levels. The pattern for the euro has been a reversion to its trend after a news shock. European markets open in frankfurt at 2:00, while London opens at 3:00. New york forex markets open at 8:00.
Friday, October 17, 2008
Forex Trading Systems Are Taking Over the Market, But Which One Produces the Most Bang For the Buck?
Private investors entering the Forex markets has been exploding with tremendous growth and those financiers wanted, needed and required software based trading systems that supplied them with the same tools that banks use to gather data, process it and recommend trades. Thus began the commercial Forex trading system market for the private trader who wanted to compete on equal footing with the big players. The newcomers had already taken time to learn Forex trading and realized when they opened their first brokerage account that they were quickly overwhelmed with information.
To satisfy this demand long time lucrative professional FX traders teamed up with software engineers and began research, designing, developing and marketing the first batch of products. Since the initial explosion of these systems to the general public new players have entered the market attempting to improve on what there predecessors had started. The factors above are responsible for the incredible amount of competition between the different firms and as a consequence of this an enormous increase in the quality of the systems. And the beneficiary of all this competition is the end user whom has enjoyed unprecedented improvements to there profits due to the fact the systems ability to recommended rewarding trades has increased significantly.
The only aspect of the equation the developers of the currency trading systems have not been accomplish so far is an automated robot that is able to produce profitable results continuously. The wise private investor quickly found a solution to this by combining two or more software systems. Utilizing this technique they are able to simulate the same devices the large financial institutions trade profitably with. The systems employed by these extremely intelligent undisclosed capitalist are a trend based system and a signals based system. The users of this procedure quickly discovered that by combining the two separate pieces of software they were able to track a currencies movement and detect when one was repositioning itself. Once each of those could be established the profits for the successful implementers of the process went through the roof.
The answer to the question which Forex trading system produces the most bang for the buck to quite a few peoples surprise was not one singular system but a combination of two of the most popular types of trading systems. When somebody wants to learn currency trading they find it is not a difficult endeavor. What is complicated though is making a profit at it. The real players in the market realize the potential for huge cash profits is to great to leave any thing to chance and employ any and every tool that can to get there little chunk of the change. If you are presently trading in the markets or are contemplating it in the future then it is imperative that have every tool that can possibly help you and enter the game with your guns blazing taking no prisoners.
Monday, October 13, 2008
The Secrets of Top 5% Forex Traders
There are basically two category of forex traders. There are the elite traders which forms the top 5% of the cream and there are the average Joe which form the rest of the pack. So what set these two groups apart? Well there are several key differences which the elite traders and the average traders have. Thus if you wish to be successful like those in the top 5% category, you have to learn to find out what are the main strengths. In this article we will show you a few secrets of the top 5 % forex traders have in common.
1. Forex is their labor of love
One of the factors which sets apart a good trader from the average trader is their dedication to their work. When a person is passionate, they will make efforts to know more about what they are doing. Another benefit coming because of passion is that they will recall better the information that they learned. This is also why sometimes the top 5 % forex traders can act quickly to circumstances based on the information they recall. Thus if you wish to be a good trader, you must first of all feel passion for Forex.
2. They manage their emotions
The best traders in the Forex market have an unique quality of being able to divorce their emotions from their trading. They don't not follow the market sentiments nor allows the market to dictate their emotions and influence their decision making process. Warren Buffet once said, if you cannot stand and watch your investment holdings depreciate by 50% without flinching, then you should not be in the stock market. What Warren Buffet said is very correct. If emotions are allowed to influence or judgment, then our investment decision will not be objective.
3. Knowing how to manage risk.
Keep in mind that this doesn't mean they always limit their risks as much as possible. On the contrary, the most successful traders risk thousands on certain trades because they know what they stand to gain.
A lot of the times, what stops a trader from trading is not just lack of investment capital. It is also the willingness to want to take risk on a trade. This is where the leader of the pack differ from the rest of the pack. Therefore if you wish to excel in forex trading, you will need to take calculated risk.
4. They keep trying
In everything that we do, we must be persistence to pursue it. However in the forex market, you will require a little more persistence. This is because you are dealing with real money and every effort that you make is costing you money. In most other case, even if your persistency do not pay off, you will lose just some time for your efforts. Having said so, you mustn't let the time that you failed to discourage you. Rather you should take stock of the situation, learn from it and move on and keep trying.
Of course not everyone have all the traits to be where the top 5% traders are today. But we have to remember that everyone work to get to where they are. The successful ones certainly wasn't born to be a top trader. Somewhere along they learn to be better than the rest and that how they differentiate themselves from everyone.
The 3 Things You Got to Know About Your Broker Before Your Trade
Before you can trade Forex, you will have to have a broker. There is a myriad selection to choose from. You have brokerage firms from all around the world, from the US from Europe, Asia even Africa! The trick to a successful trading venture is to choose the right broker from the start. In order to choose that though, you will have to know a few things and learn what to look for. It will also be necessary to compare the different characteristics of each to see which one is most suitable to you. Like any good partnership, a relationship with your broker must be based on trust and good quality. Keep in mind the tips below when you make your selection.
Without a Forex broker you will not be able to make any trades. There are many different brokers, all of who claim to be the best for you and making a decision for one over another is not easy. There are some standard criteria that should be used for comparing and choosing.
First: The pips spread. This is a sensitive chord in the hearts of all traders and brokers. We traders feel that the lower the spread the better, while brokers seem to feel that a higher spread is better. Well the truth is that the spread is not as important as you think it is. What is truly important is that the spread is fixed and does not change! A change in the pip spread when you least expect it is disastrous for your trade. Imagine that you are in the midst of a trade and you placed your stop loss at 5 pips from your entry, suddenly there is a sharp movement in your charts and before you know it your loss has been hit. You blink your eyes a couple of times, and you see the price back where it was seconds ago. Has that ever happen to you before? It has hit me so many times when I first started that it stopped being funny. After I did a quick switch to a new broker all these strange sudden stop loss hits disappeared. A fix spread gives the trader room to plan a strategy that will increase the probability of a successful trade. You can nail down all the uncertainties and focus on the important things like making more money.
Second: Speed of order fills. Another area that you have to look out for as the last thing you want to do is that when you see a set up and decide to trade, the broker sits on your order. Your set up comes and it goes, and with that goes your chance at profits! Unless you are scalping a few seconds wait is acceptable, anything more than 20 seconds is totally out! You want your orders filled and if your broker can't do that it doesn't make any sense for you to actually pay them a commission at all does it?
Third: Reliability. A lot can be said about bad brokers with lousy reputations. In fact if you do a study on the different brokers you will realize that many professional traders do not use the charts that good brokerages provide. Most prefer to use other charting software and then place their orders with the broker. Of course we will still use their charts as an entry point indicator but frankly a broker is there to focus on filling trades not provide great charts. This leads us to our last point of reliability, you want to be with a brokerage that will pay you your profits you want to be able to access your account and fund it easily. If you choose to withdraw YOUR money then there shouldn't be a hassle at all. It is your money after all! Watch out for brokerages that demand you place a minimum amount in your account at all times before they allow you to withdraw. If you fall below that minimum the only way to get your money back is to go through a lengthy process of closing down your account before you see your cash.
Most online brokers provide good service and often it is when a new trader not understanding the terms and conditions which causes all these misunderstanding. Make it easy on your pocket, read all the fine print and should the brokers pull a fast on have no fear, go to the regulatory offices and seek redress. But if you had done your research before signing up you will not be in that spot in the first place!
Sunday, October 12, 2008
How to Get the Most Out of Your Crash Course Forex Trading Workshop?
Introduction - The Science of Learning
There really are only two kinds of trading workshops, one that wants to teach you trading and
the other that just wants to skim you of your money. With enough due diligence, most of us
would be able to find good forex trading schools out there that actually teach because they
believe in helping you through your learning experience.
However, even for the best schools these days, the market for Forex Education has become very
competitive, and the way most companies stay ahead is by compacting their education process.
It results in lower overheads for the main trainer and these savings are passed on to the client.
Unfortunately, it then becomes like one of those seminars that you attend the whole weekend
and come out all dazed. Somewhere in there, you knew that there was lots of content, but yet
you feel dazed because you are stuck at where to start.
This is because most workshop attendees have the false belief that the learning begins and
ends over the workshop weekend. There is an expectation that they are equipped to go trade on
their own after two days of theory lessons.
The reality starts to set in when they encounter hiccups in their first few trades, they
suddenly realise that they are so many things they do not know. Yet, it seems too troublesome
to re-read the whole manual.
Consequently, most retail traders then give up on the whole process after being demoralized
by the sense of overwhelm.
Identify the Areas that will really make a difference to you
Hence, to avoid coming out star-gazed at your next Forex Trading Workshop, you should set up
a plan for yourself to revise and study your notes in a structured manner beyond the weekend.
This is the best way for you to systematically reinforce and implement the learning lessons
into your life. Furthermore, the split-up sessions would give you time to master each level
before you move on to the next level!
Create your own Homework Schedule
You can start planning your "tutorial" schedule during the weekend workshop itself! Firstly,
separate the material content into 8 main areas. You can usually just take what is listed on
the content and separate it into 8 parts. Most course providers would have created the
contents with some basic flow.
Next, be aware to highlight segments that you feel you really need to read up further or mull
on it further.
It is essential that this whole process is done during the workshop proper itself, because
you will forget the essential parts once the workshop is over! Research has found that we
only retain approximately 7% of anything we hear. In trading terms, that would mean a really
large sum of money to lose!
Now that you have marked out all the key areas, and categorised the content into 8 major
segments, you need to wait for break time to pull out your organizer.
You will want to give yourself at least an hour a week to read through the segments and
another hour to work on the homework for that segment. Alternatively, with the advent of the
internet and wikipedia, you can even research more on each topic.
The essence is that good traders build on a solid foundation and it is the depth of the
journey that matters rather than the speed at which you get there! History is littered with
glorious hyper-speed trading success stories who crashed as fast as they rocketed to fame.
Focus on Practice. Its like exercise, we don't feel like doing it. But the most growth will
come at the last push-up
You will want to ensure that there is a lot of practice in all the skills that have a direct
impact on your trading, even if your instructor did not spend time doing it! Nothing is so
simple in trading that you do not need to practice it.
For example, many instructors will skim over Support Resistance lines and instead focus on
secret strategies that they are excited to teach you. Nonetheless, you would be amazed how
much you would learn by doing years of historical work on support resistance since all
indicators would inevitably be affected by support resistance lines.
You can test your own confidence level by doing support resistance lines for other
instruments like stock indices, and commodity charts, thus building a robust confidence in
your ability to swiftly and effectively pick out patterns!
Troublesome, but small when you think long term
At this point you might begin to ask yourself why would you even want to go for a course if
there is so much work to do by yourself? Well, our optimum learning process does not change
regardless of where we live or how we live. When we want to learn anything new, we need to
space it out with repetitions until we get the entire process in our daily habit system.
Research has found that once you do anything for 3 months, it becomes a habit rather than an
experience. Our whole life is essentially made up of the habits that we live every single
day. Successful traders like successful people have very empowering and profitable habits on
a daily basis, to continually activate and refine their trading prowess.
There really are only two kinds of trading workshops, one that wants to teach you trading and
the other that just wants to skim you of your money. With enough due diligence, most of us
would be able to find good forex trading schools out there that actually teach because they
believe in helping you through your learning experience.
However, even for the best schools these days, the market for Forex Education has become very
competitive, and the way most companies stay ahead is by compacting their education process.
It results in lower overheads for the main trainer and these savings are passed on to the client.
Unfortunately, it then becomes like one of those seminars that you attend the whole weekend
and come out all dazed. Somewhere in there, you knew that there was lots of content, but yet
you feel dazed because you are stuck at where to start.
This is because most workshop attendees have the false belief that the learning begins and
ends over the workshop weekend. There is an expectation that they are equipped to go trade on
their own after two days of theory lessons.
The reality starts to set in when they encounter hiccups in their first few trades, they
suddenly realise that they are so many things they do not know. Yet, it seems too troublesome
to re-read the whole manual.
Consequently, most retail traders then give up on the whole process after being demoralized
by the sense of overwhelm.
Identify the Areas that will really make a difference to you
Hence, to avoid coming out star-gazed at your next Forex Trading Workshop, you should set up
a plan for yourself to revise and study your notes in a structured manner beyond the weekend.
This is the best way for you to systematically reinforce and implement the learning lessons
into your life. Furthermore, the split-up sessions would give you time to master each level
before you move on to the next level!
Create your own Homework Schedule
You can start planning your "tutorial" schedule during the weekend workshop itself! Firstly,
separate the material content into 8 main areas. You can usually just take what is listed on
the content and separate it into 8 parts. Most course providers would have created the
contents with some basic flow.
Next, be aware to highlight segments that you feel you really need to read up further or mull
on it further.
It is essential that this whole process is done during the workshop proper itself, because
you will forget the essential parts once the workshop is over! Research has found that we
only retain approximately 7% of anything we hear. In trading terms, that would mean a really
large sum of money to lose!
Now that you have marked out all the key areas, and categorised the content into 8 major
segments, you need to wait for break time to pull out your organizer.
You will want to give yourself at least an hour a week to read through the segments and
another hour to work on the homework for that segment. Alternatively, with the advent of the
internet and wikipedia, you can even research more on each topic.
The essence is that good traders build on a solid foundation and it is the depth of the
journey that matters rather than the speed at which you get there! History is littered with
glorious hyper-speed trading success stories who crashed as fast as they rocketed to fame.
Focus on Practice. Its like exercise, we don't feel like doing it. But the most growth will
come at the last push-up
You will want to ensure that there is a lot of practice in all the skills that have a direct
impact on your trading, even if your instructor did not spend time doing it! Nothing is so
simple in trading that you do not need to practice it.
For example, many instructors will skim over Support Resistance lines and instead focus on
secret strategies that they are excited to teach you. Nonetheless, you would be amazed how
much you would learn by doing years of historical work on support resistance since all
indicators would inevitably be affected by support resistance lines.
You can test your own confidence level by doing support resistance lines for other
instruments like stock indices, and commodity charts, thus building a robust confidence in
your ability to swiftly and effectively pick out patterns!
Troublesome, but small when you think long term
At this point you might begin to ask yourself why would you even want to go for a course if
there is so much work to do by yourself? Well, our optimum learning process does not change
regardless of where we live or how we live. When we want to learn anything new, we need to
space it out with repetitions until we get the entire process in our daily habit system.
Research has found that once you do anything for 3 months, it becomes a habit rather than an
experience. Our whole life is essentially made up of the habits that we live every single
day. Successful traders like successful people have very empowering and profitable habits on
a daily basis, to continually activate and refine their trading prowess.
Wednesday, October 8, 2008
Automated Forex Robot - Get One That's FREE Easy to Use and Made Millions!
If you are considering buying an automated forex robot, there are many to choose from but most will lose you money, as they only have simulated track records. In this article we will give you a system that's free, is simple to understand and made millions!
Before we look at our free automated forex robot, let's look at why it beats the vast majority of sold ones.
Beware of the Back Test!
The ones you see advertised heavily online are sold with a back tested track record and of course anyone can make up a track record, knowing all the facts but the acid test is real profits in the market.
The free forex robot we are going to look at here, has been making big profits for over 25 years also, it's based on timeless logic and will continue to work.
The System
The system itself was developed by one of the great traders of all time - Richard Donchian, when he noticed the importance of the 4 week cycle in the commodity and currency markets and the system is called - The 4 Week Rule.
Its only one rule and here it is:
Execute a long trading signal, on any break to a new 4 week high. Reverse your position to a short, when you hit a 4 week low. Continue to stop and reverse, on 4 week highs and lows and always maintain a position in the market.
Simple and Effective
That's it and you're probably thinking - that's really simple! Does it make money?
The answer is yes it does. Many people think that complex systems make money but it's the simple ones that do because they are more robust with fewer elements to break.
Why the System Works and Will Continue to do So
It's based on very sound principles of market behaviour which will NEVER change.
The first principle is that markets will always have big trends up or down. Of course currency markets trend for long periods, sometimes years and this system will get you in and keep you in, all the major trends.
The second principle is, most trends start from new market highs and lows and this system is based on buying and selling these breaks for big profits.
It also has other important advantages which are:
1. It doesn't take long to trade and you can easily execute your trading signals in around 15 - 20 minutes per day and you don't have to watch the market.
2. You don't have to think - the signal is clear cut, all you have to do is place it in the market.
So what are the downsides of the system?
This is a trend following system, so when markets move sideways, it will generate losses but you can add a filter and exit the trade on a 1 or 2 week high or low and then wait for the next 4 week signal to get back in.
Both methods will work but using the filter smoothes swings in account equity.
You Need Discipline
The other problem with the system is you need the right mindset to follow it and most traders have a real problem following long term trend following systems. Its clear cut and you must follow the signals as given and stick with it - longer term it wins but requires patience and discipline to follow.
A Simple Proven Route to Profits
This system has been around for decades and while simple, it simply delivers big long term gains and that's more than can be said for the numerous junk automated forex robots that are sold online - lots of hype and no substance! This one has no hype but lots of profits so know which one I would rather trade!
All you want to know about Forex Trading
Forex Trading: a Beginner's Guide
The forex market is the world's largest international currency trading market operating non-stop during the working week. Most forex trading is done by professionals such as bankers. Generally forex trading is done through a forex broker - but there is nothing to stop anyone trading currencies. Forex currency trading allows buyers and sellers to buy the currency they need for their business and sellers who have earned currency to exchange what they have for a more convenient currency. The world's largest banks dominate forex and according to a survey in The Wall Street Journal Europe, the ten most active traders who are engaged in forex trading account for almost 73% of trading volume.
However, a sizeable proportion of the remainder of forex trading is speculative with traders building up an investment which they wish to liquidate at some stage for profit. While a currency may increase or decrease in value relative to a wide range of currencies, all forex trading transactions are based upon currency pairs. So, although the Euro may be 'strong' against a basket of currencies, traders will be trading in just one currency pair and may simply concern themselves with the Euro/US Dollar ( EUR/USD) ratio. Changes in relative values of currencies may be gradual or triggered by specific events such as are unfolding at the time of writing this - the toxic debt crisis.
Because the markets for currencies are global, the volumes traded every day are vast. For the large corporate investors, the great benefits of trading on Forex are:
- Enormous liquidity - over $4 trillion per day, that's $4,000,000,000. This means that there's always someone ready to trade with you
- Every one of the world's free currencies are traded - this means that you may trade the currency you want at any time
- Twenty four - hour trading during the 5-day working week
- Operations are global which mean that you can trade with any part of the world at any time
From the point of view of the smaller trader there's lots of benefits too, such as:
- A rapidly-changing market - that's one which is always changing and offering the chance to make money
- Very well developed mechanisms for controlling risk
- Ability to go long or short - this means that you can make money either in rising or falling markets
- Leverage trading - meaning that you can benefit from large-volume trading while having a relatively-low capital base
- Lots of options for zero-commission trading
How the forex Market Works
As forex is all about foreign exchange, all transactions are made up from a currency pair - say, for instance, the Euro and the US Dollar. The basic tool for trading forex is the exchange rate which is expressed as a ratio between the values of the two currencies such as EUR/USD = 1.4086. This value, which is referred to as the 'forex rate' means that, at that particular time, one Euro would be worth 1.4086 US Dollars. This ratio is always expressed to 4 decimal places which means that you could see a forex rate of EUR/USD = 1.4086 or EUR/USD = 1.4087 but never EUR/USD = 1.40865. The rightmost digit of this ratio is referred to as a 'pip'. So, a change from EUR/USD = 1.4086 to EUR/USD = 1.4088 would be referred to as a change of 2 pips. One pip, therefore is the smallest unit of trade.
With the forex rate at EUR/USD = 1.4086, an investor purchasing 1000 Euros using dollars would pay $1,408.60. If the forex rate then changed to EUR/USD = 1.5020, the investor could sell their 1000 Euros for $1,502.00 and bank the $93.40 as profit. If this doesn't seem to be large amount to you, you have to put the sum into context. With a rising or falling market, the forex rate does not simply change in a uniform way but oscillates and profits can be taken many times per day as a rate oscillates around a trend.
When you're expecting the value EUR/USD to fall, you might trade the other way by selling Euros for dollars and buying then back when the forex rate has changed to your advantage.
Is forex Risky?
When you trade on forex as in any form of currency trading, you're in the business of currency speculation and it is just that - speculation. This means that there is some risk involved in forex currency trading as in any business but you might and should, take steps to minimise this. You can always set a limit to the downside of any trade, that means to define the maximum loss that you are prepared to accept if the market goes against you - and it will on occasions.
The best insurance against losing your shirt on the forex market is to set out to understand what you're doing totally. Search the internet for a good forex trading tutorial and study it in detail- a bit of good forex education can go a long way!. When there's bits you don't understand, look for a good forex trading forum and ask lots and lots of questions. Many of the people who habitually answer your queries on this will have a good forex trading blog and this will probably not only give you answers to your questions but also provide lots of links to good sites. Be vigilant, however, watch out for forex trading scams. Don't be too quick to part with your money and investigate anything very well before you shell out any hard-earned!
The forex Trading Systems
While you may be right in being cautious about any forex trading system that's advertised, there are some good ones around. Most of them either utilise forex charts and by means of these, identify forex trading signals which tell the trader when to buy or sell. These signals will be made up of a particular change in a forex rate or a trend and these will have been devised by a forex trader who has studied long-term trends in the market so as to identify valid signals when they occur. Many of the systems will use forex trading software which identifies such signals from data inputs which are gathered automatically from market information sources. Some utilise automated forex trading software which can trigger trades automatically when the signals tell it to do so. If these sound too good to be true to you, look around for online forex trading systems which will allow you undertake some dummy trading to test them out. by doing this you can get some forex trading training by giving them a spin before you put real money on the table.
How Much do you Need to Start off with?
This is a bit of a 'How long is a piece of string?' question but there are ways for to be beginner to dip a toe into the water without needing a fortune to start with. The minimum trading size for most trades on forex is usually 100,000 units of any currency and this volume is referred to as a standard "lot". However, there are many firms which offer the facility to purchase in dramatically-smaller lots than this and a bit of internet searching will soon locate these. There's many adverts quoting only a couple of hundred dollars to get going! You will often see the term acciones trading forex and this is just a general term which covers the small guy trading forex. Small-scale trading facilities such as these are often called as forex mini trading.
Where do You Start?
The single most obvious answer is of course - on the internet! Online forex trading gives you direct access to the forex market and there's lots and lots of companies out there who are in business just to deal with you online. Be vigilant, do spend the time to get some good forex trading education, again this can be provided online and set up your dummy account to trade before you attempt to go live. If you take care and take your time, there's no reason why you shouldn't be successful in forex trading so, have patience and stick at it!
Professional Forex Trading - The Insider So Called Secrets How the Pros Make Consistent Profits
I am going to be up front with you and say that in Forex trading - as in most things in life - there really are no secrets. I know that may sound boring, but it is true.
If you want something startling and "NEW" please point your browser to Amazon and buy the latest book on Forex trading. As for the rest who know better please read on and see what the real secrets are to Trading The Forex Like A Pro
Success Secret #1: Can I Get A Little Understanding...
The first thing you should strive to achieve is a solid grasp of how the markets work and why they move. This is the basics of being able to make intelligent trading decisions.
It is this intrinsic understanding of market forces and construction that allow you to visualize the entire problem and make a decisive conclusion. It is why doctors spend a majority of medical school learning biology and the construction of the body so that they can visualize the "why" behind the symptom.
Spend your time wisely and learn how this whole thing works.
Success Secret #2: Pick A Philosophy and Stick With It...
Once you have a grasp of the who what when where and why behind the Forex markets you should now pick a trading philosophy that best makes sense of it all for you. Read that again, the one that best makes sense of it all - FOR YOU.
Fundamental Forex Traders Philosophy
For instance some people are fundamental traders.
Fundamental forex traders will look for an overview of currency movements and a broad picture of the economic conditions.
Fundamental traders study the market strengths and weaknesses by knowing and understanding underlying factors that affect the market movements. Due to the global environment of the Forex, Fundamental Analysis is largely focused on news catalysis's than the strengths and weaknesses of the currencies themselves. Though more detailed Fundamental traders will want to understand the global economy as well as the affects of news on the markets.
The Philosophy of Technical Forex Traders
Technical traders by contrast base their trading upon the belief that the market follows a predictable set of patterns which have been well established over time. Because of this fact Technical Forex traders believe that future movements in the market can be predicted by analyzing and charting historical data to produce a series of models which can be used to predict future patterns.
In other words technical analysis is a method of predicting price movements by looking at purely market-generated data instead of economic influence, or news events.
Technical traders' tools include real time charts, and graphs. Their objective is to read specific chart patterns to see where they think the market might go next. There are known patterns and tools, like Fibonacci studies, that traders use each day to analyze these price movements.
Secret #3 Money Management The Fountainhead Of Profits...
The last critical factor to trading like a pro is money management. It has been said that if you knew nothing other than money management you could succeed even with the worst trading system in the world. This may be a bit of an over statement but it is close to the truth that managing money is a critical component to success in Forex trading.
Forex money management is a way of life for the prudent investor. Practice money management and you just might be one of 5 out of 100 that will be in a position to make money from Forex Trading.
Forex money management is all about taking calculated risks at the right time and defending your cash on hand. It is about managing risks versus rewards and adjusting market position size in relationship to account equity.
Forex money management is part and parcel of any good trading system. The performance of a forex trading system, in terms of profits, draw down, or any other parameter you would like to measure, depends on both the trading system itself and the money management rules it follows.
Forex money management forces a consistent monitoring of a trader's position and to accept the losses when necessary. Most traders quite honestly completely overlook this aspect of trading. And that is sad because it is the one thing about forex trading that you have complete control over, as compared to the markets themselves.
If you are wanting to take your trading to the next level then getting your hands on some tools can make a real difference in your training and actual trading.
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