Because currencies are traded in pairs and exchanged one against the other when traded, the rate at which they are exchanged is called the exchange rate. The majority of the currencies are traded against the US dollar (USD). The four next-most traded currencies are the Euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP) and the Swiss franc (CHF). These five currencies make up the majority of the market and are called the major currencies or "the Majors". Some sources also include the Australian dollar (AUD) within the group of major currencies.
The first currency in the exchange pair is referred to as the base currency and the second currency as the counter term or quote currency. The counter term or quote currency is thus the numerator in the ratio, and the base currency is the denominator. The value of the base currency (denominator) is always 1. Therefore, the exchange rate tells a buyer how much of the counter term or quote currency must be paid to obtain one unit of the base currency. The exchange rate also tells a seller how much is received in the counter term or quote currency when selling one unit of the base currency. For example, an exchange rate for EUR/USD of 1.2083 specifies to the buyer of euros that 1.2083 USD must be paid to obtain 1 euro.
At any given point, time and place, if an investor buys any currency and immediately sells it - and no change in the exchange rate has occurred - the investor will lose money. The reason for this is that the bid price, which represents how much will be received in the counter or quote currency when selling one unit of the base currency, is always lower than the ask price, which represents how much must be paid in the counter or quote currency when buying one unit of the base currency. For instance, the EUR/USD bid/ask currency rates at your bank may be 1.2015/1.3015, representing a spread of 1000 pips (also called points, one pip = 0.0001), which is very high in comparison to the bid/ask currency rates that online Forex investors commonly encounter, such as 1.2015/1.2020, with a spread of 5 pips. In general, smaller spreads are better for Forex investors since even they require a smaller movement in exchange rates in order to profit from a trade.
Margin
Banks and/or online trading providers need collateral to ensure that the investor can pay in case of a loss. The collateral is called the margin and is also known as minimum security in Forex markets. In practice, it is a deposit to the trader's account that is intended to cover any currency trading losses in the future.
Margin enables private investors to trade in markets that have high minimum units of trading by allowing traders to hold a much larger position than their account value. Margin trading also enhances the rate of profit, but can also enhance the rate of loss if the investor makes the wrong decision.
Leveraged financing
Leveraged financing, i.e., the use of credit, such as a trade purchased on a margin, is very common in Forex. The loan/leveraged in the margined account is collateralized by your initial deposit. This may result in being able to control USD 100,000 for as little as USD 1,000.
There are three ways private investors can trade in Forex directly or indirectly:
The spot market
Forwards and futures
Options
A spot transaction
A spot transaction is a straightforward exchange of one currency for another. The spot rate is the current market price, also called the benchmark price. Spot transactions do not require immediate settlement, or payment "on the spot." The settlement date, or "value date," is the second business day after the "deal date" (or "trade date") on which the transaction is agreed to by the two traders. The two-day period provides time to confirm the agreement and arrange the clearing and necessary debiting and crediting of bank accounts in various international locations.
Forwards and Futures
Forwards make up about 46% of currency trading. A forward transaction is an agreement between two parties whereby one party buys a currency at a particular price by a certain date that is greater than two business days (a spot transaction).
A future contract is a forward contract with fixed currency amounts and maturity dates. They are traded on future exchanges and not through the interbank foreign exchange market.
Options
A currency option is similar to a futures contract in that it involves a fixed currency transaction at some future date in time. However the buyer of the option is only purchasing the right but not the obligation to purchase a fixed amount of currency at a fixed price by a certain date in future. The price is known as the premium and is lost if the buyer does not exercise the option.
Risks
Although Forex trading can lead to very profitable results, there are risks involved: exchange rate risks, interest rate risks, credit risks, and country risks. Approximately 80% of all currency transactions last a period of seven days or less, while more than 40% last fewer than two days. Given the extremely short lifespan of the typical trade, technical indicators heavily influence entry, exit and order placement decisions
Nov 12, 2009
Forex risk management strategies
The Forex market behaves differently from other markets! The speed, volatility, and enormous size of the Forex market are unlike anything else in the financial world. Beware: the Forex market is uncontrollable - no single event, individual, or factor rules it. Enjoy trading in the perfect market! Just like any other speculative business, increased risk entails chances for a higher profit/loss.
Currency markets are highly speculative and volatile in nature. Any currency can become very expensive or very cheap in relation to any or all other currencies in a matter of days, hours, or sometimes, in minutes. This unpredictable nature of the currencies is what attracts an investor to trade and invest in the currency market.
But ask yourself, "How much am I ready to lose?" When you terminated, closed or exited your position, did you understand the risks and taken steps to avoid them? Let's look at some foreign exchange risk management issues that may come up in your day-to-day foreign exchange transactions.
Unexpected corrections in currency exchange rates
Wild variations in foreign exchange rates
Volatile markets offering profit opportunities
Lost payments
Delayed confirmation of payments and receivables
Divergence between bank drafts received and the contract price
These are areas that every trader should cover both BEFORE and DURING a trade.
Exit the Forex market at profit targets
Take profit take orders, allow Forex traders to exit the Forex market at pre-determined profit targets. If you are short (sold) a currency pair, the system will only allow you to place a limit order below the current market price because this is the profit zone. Similarly, if you are long (bought) the currency pair, the system will only allow you to place a take profit order above the current market price. Take profit orders help create a disciplined trading methodology and make it possible for traders to walk away from the computer without continuously monitoring the market.
Control risk by capping losses
Stop/loss orders allow traders to set an exit point for a losing trade. If you are short a currency pair, the stop/loss order should be placed above the current market price. If you are long the currency pair, the stop/loss order should be placed below the current market price. Stop/loss orders help traders control risk by capping losses. Stop/loss orders are counter-intuitive because you do not want them to be hit; however, you will be happy that you placed them! When logic dictates, you can control greed.
Where should I place my stop and take profit orders?
As a general rule of thumb, traders should set stop/loss orders closer to the opening price than take profit orders. If this rule is followed, a trader needs to be right less than 50% of the time to be profitable. For example, a trader that uses a 30 pip stop/loss and 100-pip take profit orders, needs only to be right 1/3 of the time to make a profit. Where the trader places the stop and take profit will depend on how risk-adverse he is. Stop/loss orders should not be so tight that normal market volatility triggers the order. Similarly, take profit orders should reflect a realistic expectation of gains based on the market's trading activity and the length of time one wants to hold the position. In initially setting up and establishing the trade, the trader should look to change the stop loss and set it at a rate in the 'middle ground' where they are not overexposed to the trade, and at the same time, not too close to the market.
Trading foreign currencies is a demanding and potentially profitable opportunity for trained and experienced investors. However, before deciding to participate in the Forex market, you should soberly reflect on the desired result of your investment and your level of experience. Warning! Do not invest money you cannot afford to lose.
So, there is significant risk in any foreign exchange deal. Any transaction involving currencies involves risks including, but not limited to, the potential for changing political and/or economic conditions, that may substantially affect the price or liquidity of a currency.
Moreover, the leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of your initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin call within the time prescribed, your position will be liquidated and you will be responsible for any resulting losses. 'Stop-loss' or 'limit' order strategies may lower an investor's exposure to risk.
Easy-Forex foreign exchange technology links around-the-clock to the world's foreign currency exchange trading floors to get the lowest foreign currency rates and to take every opportunity to make or settle a transaction.
Avoiding/lowering risk when trading Forex:
Trade like a technical analyst. Understanding the fundamentals behind an investment also requires understanding the technical analysis method. When your fundamental and technical signals point to the same direction, you have a good chance to have a successful trade, especially with good money management skills. Use simple support and resistance technical analysis, Fibonacci Retracement and reversal days. Be disciplined. Create a position and understand your reasons for having that position, and establish stop loss and profit taking levels. Discipline includes hitting your stops and not following the temptation to stay with a losing position that has gone through your stop/loss level. When you buy, buy high. When you sell, sell higher. Similarly, when you sell, sell low. When you buy, buy lower. Rule of thumb: In a bull market, be long or neutral - in a bear market, be short or neutral. If you forget this rule and trade against the trend, you will usually cause yourself to suffer psychological worries, and frequently, losses. And never add to a losing position. On Easy-Forex the trader can change their trade orders as many times as they wish free of charge, either as a stop loss or as a take profit. The trader can also close the trade manually without a stop loss or profit take order being hit. Many successful traders set their stop loss price beyond the rate at which they made the trade so that the worst that can happen is that they get stopped out and make a profit.
Currency markets are highly speculative and volatile in nature. Any currency can become very expensive or very cheap in relation to any or all other currencies in a matter of days, hours, or sometimes, in minutes. This unpredictable nature of the currencies is what attracts an investor to trade and invest in the currency market.
But ask yourself, "How much am I ready to lose?" When you terminated, closed or exited your position, did you understand the risks and taken steps to avoid them? Let's look at some foreign exchange risk management issues that may come up in your day-to-day foreign exchange transactions.
Unexpected corrections in currency exchange rates
Wild variations in foreign exchange rates
Volatile markets offering profit opportunities
Lost payments
Delayed confirmation of payments and receivables
Divergence between bank drafts received and the contract price
These are areas that every trader should cover both BEFORE and DURING a trade.
Exit the Forex market at profit targets
Take profit take orders, allow Forex traders to exit the Forex market at pre-determined profit targets. If you are short (sold) a currency pair, the system will only allow you to place a limit order below the current market price because this is the profit zone. Similarly, if you are long (bought) the currency pair, the system will only allow you to place a take profit order above the current market price. Take profit orders help create a disciplined trading methodology and make it possible for traders to walk away from the computer without continuously monitoring the market.
Control risk by capping losses
Stop/loss orders allow traders to set an exit point for a losing trade. If you are short a currency pair, the stop/loss order should be placed above the current market price. If you are long the currency pair, the stop/loss order should be placed below the current market price. Stop/loss orders help traders control risk by capping losses. Stop/loss orders are counter-intuitive because you do not want them to be hit; however, you will be happy that you placed them! When logic dictates, you can control greed.
Where should I place my stop and take profit orders?
As a general rule of thumb, traders should set stop/loss orders closer to the opening price than take profit orders. If this rule is followed, a trader needs to be right less than 50% of the time to be profitable. For example, a trader that uses a 30 pip stop/loss and 100-pip take profit orders, needs only to be right 1/3 of the time to make a profit. Where the trader places the stop and take profit will depend on how risk-adverse he is. Stop/loss orders should not be so tight that normal market volatility triggers the order. Similarly, take profit orders should reflect a realistic expectation of gains based on the market's trading activity and the length of time one wants to hold the position. In initially setting up and establishing the trade, the trader should look to change the stop loss and set it at a rate in the 'middle ground' where they are not overexposed to the trade, and at the same time, not too close to the market.
Trading foreign currencies is a demanding and potentially profitable opportunity for trained and experienced investors. However, before deciding to participate in the Forex market, you should soberly reflect on the desired result of your investment and your level of experience. Warning! Do not invest money you cannot afford to lose.
So, there is significant risk in any foreign exchange deal. Any transaction involving currencies involves risks including, but not limited to, the potential for changing political and/or economic conditions, that may substantially affect the price or liquidity of a currency.
Moreover, the leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of your initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin call within the time prescribed, your position will be liquidated and you will be responsible for any resulting losses. 'Stop-loss' or 'limit' order strategies may lower an investor's exposure to risk.
Easy-Forex foreign exchange technology links around-the-clock to the world's foreign currency exchange trading floors to get the lowest foreign currency rates and to take every opportunity to make or settle a transaction.
Avoiding/lowering risk when trading Forex:
Trade like a technical analyst. Understanding the fundamentals behind an investment also requires understanding the technical analysis method. When your fundamental and technical signals point to the same direction, you have a good chance to have a successful trade, especially with good money management skills. Use simple support and resistance technical analysis, Fibonacci Retracement and reversal days. Be disciplined. Create a position and understand your reasons for having that position, and establish stop loss and profit taking levels. Discipline includes hitting your stops and not following the temptation to stay with a losing position that has gone through your stop/loss level. When you buy, buy high. When you sell, sell higher. Similarly, when you sell, sell low. When you buy, buy lower. Rule of thumb: In a bull market, be long or neutral - in a bear market, be short or neutral. If you forget this rule and trade against the trend, you will usually cause yourself to suffer psychological worries, and frequently, losses. And never add to a losing position. On Easy-Forex the trader can change their trade orders as many times as they wish free of charge, either as a stop loss or as a take profit. The trader can also close the trade manually without a stop loss or profit take order being hit. Many successful traders set their stop loss price beyond the rate at which they made the trade so that the worst that can happen is that they get stopped out and make a profit.
Forex candlestick chart patterns
This article provides insight into Candlestick patterns that can be extracted from Foreign exchange charts. A candlestick chart is a style of bar-chart used primarily to demonstrate price movements over a certain time period.
Doji
A name for candlesticks that provide information on their own and feature in a number of important patterns. Dojis form when the body of the candle is minimal as market's open and close are virtually equal.
Hammer
A price pattern in candlestick charting that occurs when the market trades significantly lower than its opening, but rallies later in the day to close either above or close to its opening price. This pattern forms a hammer-shaped candlestick.
Inverted hammer
A price pattern in candlestick charting that occurs when a security trades significantly higher after its opening, but gives up most of all of its intraday gain to close well off of its high. Gravestone - The market gaps open above the previous day's close in an uptrend. It rallies to a new high, then loses strength and closes near its low: a bearish change of momentum. Confirmation of the trend reversal would be an opening below the body of the Shooting Star on the next trading day. If the open and the close are identical, the indicator is considered a Gravestone Doji. The Gravestone Doji has a higher reliability associated with it than a Shooting Star.
Shooting star
A candlestick indicating a reversal. The previous day's candle has a very large body. On the day the shooting star occurs, the price (generally) opens higher than the previous day's close, then jumps well above the opening price during the day, but closes lower than the opening price.
Three white soldiers
Three white soldiers is a bullish reversal pattern that forms with three consecutive long white candlesticks. After a decline, the three white soldiers pattern signals a change in sentiment and reversal of trend from bearish to bullish. Further bullish confirmation is not required, but there is sometimes a test of support established by the reversal.
Three black crows
A bearish reversal pattern consisting of three consecutive black bodies where each day opens higher than the previous day's low, and closes near, but below, the previous low.
This information was provided
Doji
A name for candlesticks that provide information on their own and feature in a number of important patterns. Dojis form when the body of the candle is minimal as market's open and close are virtually equal.
Hammer
A price pattern in candlestick charting that occurs when the market trades significantly lower than its opening, but rallies later in the day to close either above or close to its opening price. This pattern forms a hammer-shaped candlestick.
Inverted hammer
A price pattern in candlestick charting that occurs when a security trades significantly higher after its opening, but gives up most of all of its intraday gain to close well off of its high. Gravestone - The market gaps open above the previous day's close in an uptrend. It rallies to a new high, then loses strength and closes near its low: a bearish change of momentum. Confirmation of the trend reversal would be an opening below the body of the Shooting Star on the next trading day. If the open and the close are identical, the indicator is considered a Gravestone Doji. The Gravestone Doji has a higher reliability associated with it than a Shooting Star.
Shooting star
A candlestick indicating a reversal. The previous day's candle has a very large body. On the day the shooting star occurs, the price (generally) opens higher than the previous day's close, then jumps well above the opening price during the day, but closes lower than the opening price.
Three white soldiers
Three white soldiers is a bullish reversal pattern that forms with three consecutive long white candlesticks. After a decline, the three white soldiers pattern signals a change in sentiment and reversal of trend from bearish to bullish. Further bullish confirmation is not required, but there is sometimes a test of support established by the reversal.
Three black crows
A bearish reversal pattern consisting of three consecutive black bodies where each day opens higher than the previous day's low, and closes near, but below, the previous low.
This information was provided
The explosion of the Euro market
The rapid development of the Eurodollar market, where US dollars are deposited in banks outside the US, was a major mechanism for speeding up Forex trading. Likewise, Euro markets are those where assets are deposited outside the currency of origin.
The Eurodollar market first came into being in the 1950s when the Soviet Union's oil revenue -- all in US dollars -- was being deposited outside the US in fear of being frozen by US regulators. This resulted in a vast offshore pool of dollars outside the control of US authorities. The US government therefore imposed laws to restrict dollar lending to foreigners. Euro markets then became particularly attractive because they had fewer regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euro markets an advantageous place for holding excess liquidity, providing short-term loans and financing imports and exports.
London was and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London's convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euro market.
The Eurodollar market first came into being in the 1950s when the Soviet Union's oil revenue -- all in US dollars -- was being deposited outside the US in fear of being frozen by US regulators. This resulted in a vast offshore pool of dollars outside the control of US authorities. The US government therefore imposed laws to restrict dollar lending to foreigners. Euro markets then became particularly attractive because they had fewer regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euro markets an advantageous place for holding excess liquidity, providing short-term loans and financing imports and exports.
London was and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London's convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euro market.
Subscribe to:
Posts (Atom)
