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Sunday, December 30, 2007

Forex trading tool

For newcomers to survive in any tricky business, they will need to have some tools to guide them and help them till they get hold of the operations and have things more under control. Just like when we have to prepare a report in a spreadsheet, we need help from software that will help put in charts and diagrams relevant to the data. Such is the case in foreign exchange trade as well, where beginners will need to get hold of different tools to help them stay safe, and at the same time make profits. They can learn by observing their friends or colleagues, but there is only so much learning they will gain. It is better to adopt a forex trading tool to show them the ropes and teach them on how to follow the market and trends. There is no one perfect tool available but a combination of various tools will usually do the trick.

Following the trends is one of the forex trading tool that many investors adopt. The trendlines do not directly help in the trade, but provide signals and indicators that the investor needs to read to understand how the market is faring. The weekly three trendline is a strategy within this tool that mark the gap in support and resistance levels. As most of the trade is carried out on the basis of speculation and forecasting the future, the tools will definitely give them a heads up in this trade filled with risk.

These tools are only a guide and the investor can use them as a basis but not rely on them completely and blindly follow their output. At times the tools might also not predict the turn of events accurately as everything in the forex market is volatile and sometimes unpredictable. The investor however can take tips from the tools and strategies and use their gut instinct too when they invest or want to pull out of an order.

Some of the forex trading tools available to investors are:

1.Calculate Risk -

The risk probability calculator (RPC) is used to compute the currency pairs that will yield high returns and those that are bound to dip. It will also tell the investor to an extent as to what is the likely profit they will earn if they make a particular trade

2. Pivot point calculations -

There are some experienced investors who will talk of prices that are nearing the edge of support and resistance levels. These prices are a good indication of how the market is going to be in the future and whether it will change or remain stable. The mode by which the support and resistance levels are calculated is called the pivot point. This is a strategic tool that most investors adopt to help them keep on top of things and be aware of the prices and changes occurring.

3. Calculation of PIP values-

The percentage in points is what PIP is in forex trade and it is the smallest increment which will give details about profits that could be earned.

posted by Mary David @ 7:39 AM 0 Comments

forex online trading course

In every walk of life, there are people who are experts at what they do and there are others who struggle to get their holding right. It cannot be expected that everyone will act and operate the same way and so if a person is having difficulty they must seek assistance from someone who has already been there and learnt the ropes. This will help them to do their job or task better, in fact this is something all of us need to adopt and follow. It is not degrading to seek external help to perform an activity. And one must also recognize and accept that each one of us has a different style of operating and this depends on their comfort levels. For a person new to forex trading, they can avail themselves to one of the many course forex online trading available on the worldwide web. This will help them to learn and understand about the trade and the market and then he or she can decide if they are still interested in it or not. Enrolling in an online course means you are getting ready to do some learning, most of which will be on your own with the guidance of a book or online tutor.

There are certain things that one should keep in mind while adopting the course forex online trading to be successful in your forex trading:

1. Course rules -

The terms and conditions mentioned on the course forex online trading need to be read through before registering with the same. Make sure to check if there are any hidden clauses that will bind you to the company once you complete the course and also the fee charged and what all it includes.

2. Helping hand -

The course they are undergoing will only be a helping hand and not something that guarantees profits every time one makes an investment. The user should not blindly follow whatever is mentioned there but use their own thinking abilities and then only make decisions. They need to follow the guidelines to be able to protect themselves from heavy losses or burning their fingers too deep.

3. Trading style -

It is essential for a person to practice investing in the forex trade using different styles and finding their own personal unique style. This will be the one that helps them understand the market better and make predictions based on that which they play freely. If they find a tool that generates automated reports and charts, they can make use of them to add value to their investment choices.

4. Control -

Self control and control over the transactions will come in handy as one needs to be aware of what is happening around them. Whenever a person makes a sale they need to recognize the currency pair that is faring well and go for it. At the same time, if they have had a streak of luck, they must not instantly put in all the profits into the next pair available. They must take the necessary time and make the calculations that need to be done before investing.

posted by Mary David @ 7:36 AM 0 Comments

Forex currency trading beginner

Tired of working long hours? Are you bored of performing the same routine jobs day after day? Are you seeking more monetary benefits out of your employment but are not getting any at your current place of work? If you answered YES to all these questions, then it is time for a change. You can take your time in choosing a different career option or simply look for another company that satisfies your needs. Today, there are more people working from home earning more than those who go to a corporate office. This is because the venues open for earning from home are plenty and there is no dearth for people as well. There have been many who were into the big corporate world but have quit their jobs to take up forex trading as a full time business and are extremely happy in it. The only thing essential here is to be grounded, and be aware of all that is occurring around you in the world. Since money is dealt with and that too between countries, the political, economic conditions and the market's psychology should be monitored to note for changes. This will have a direct impact on the currency rate and in turn on your profits.

For forex currency trading beginners, they need to first get hold of a course or someone who will guide them as they learn the steps involved in profitable forex trading. They also must get it into their head that they are not going to be rich overnight as such a miracle is usually not possible. Just like it takes a while for a person to become a doctor and a student to become a lawyer, it takes time and one needs to be patient with forex trading. For a forex currency trading beginner, he needs to think with his head and not with his heart as it might be exciting to see profits initially, but it is not how it will be always. It takes time for a investor to mature and he needs to get as much experience as he can by using the various facilities available. The mini accounts are a wonderful way of playing in the forex trade while keeping one's risk low and being assured of a fixed amount of return. It might not be much, but it is a way to learn the ropes and make sure that you do not slip and fall by being in a hurry.

The forex currency trading beginner must not at any cost compare himself with a seasoned player as this will demotivate him. Once you open a live account and begin trading, you will realize that the 10 pips you have earned make a world of difference. Just like in any activity in our life, we initially need to be wary, taking baby steps till we are confident of what we are doing. Here too we need to follow the same principles. This way, we will remain steady and make better decisions, coming out a winner in the long run.

posted by Mary David @ 7:34 AM 0 Comments

Monday, December 10, 2007

Introduction to Currency Exchange and the FX Market

What is Currency Exchange?


Currency exchange is the trading of one currency against another. Professionals refer to this as foreign exchange, but may also use the acronyms Forex or FX.

The Need for Currency Exchange

Currency exchange is necessary in numerous circumstances.

Consumers typically come into contact with currency exchange when they travel. They go to a bank or currency exchange bureau to convert one currency (typically, their "home currency") into another (i.e., the currency of the country they intend to travel to) so they can pay for goods and services in the foreign country. Consumers may also purchase goods in a foreign country or via the Internet with their credit card, in which case they will find that the amount they paid in the foreign currency will have been converted to their home currency on their credit card statement. Although each such currency exchange is a relatively small transaction, the aggregate of all such transactions is significant.

Businesses typically have to convert currencies when they conduct business outside their home country. For example, if they export goods to another country and receive payment in the currency of that foreign country, then the payment must often be converted back to the home currency. Similarly, if they have to import goods or services, then businesses will often have to pay in a foreign currency, requiring them to first convert their home currency into the foreign currency. Large companies convert huge amounts of currency each year; for example, a company such as General Electric (GE) converts tens of billions of dollars each year. The timing of when they convert can have a large affect on their balance sheet and "bottom line.

Investors and speculators require currency exchange whenever they trade in any foreign investment, be that equities, bonds, bank deposits, or real estate. For example, when a Swedish investor buys shares in Sun Microsystems on the NASDAQ, she will have to pay for the shares in U.S. Dollars and likely have to convert Swedish Krona to U.S. Dollars. Similarly, a Japanese real estate investor who sells a New York property may well want to convert the proceeds of the sale in U.S. Dollars to Japanese Yen.

Investors and speculators also trade currencies directly in order to benefit from movements in the currency exchange markets. For example, if an American investor believes that the Japanese economy is strengthening and as a result expects the Japanese Yen to appreciate in value (i.e., go up relative to other currencies), then she may want to buy Japanese Yen and take what is referred to as a long position. Similarly, if an American investor believes that the Euro will go down over time, then she may want to sell Euro to take a short position. Interestingly, investors and speculators can profit equally from currencies becoming stronger (by taking a long position) or from currencies becoming weaker (by taking a short position). Speculators are often day traders, trying to take advantage of market movements in very short time periods; buying a currency and then selling it again may happen within hours or even minutes. They are attracted to currency trading for numerous reasons, including (i) the size and daily volatility of the market, which gives them unparalleled excitement, (ii) the almost perfect liquidity of the currency exchange market, (iii) the fact that the currency exchange market is "open" 24 hours a day market, and (vi) the fact that currencies can be traded with no brokerage charges.Commercial and Investment Banks trade currencies as a service for their commercial banking, deposit and lending customers. These institutions also generally participate in the currency market for hedging and proprietary trading purposes.

Governments and central banks trade currencies to improve trading conditions or to intervene in an attempt to adjust economic or financial imbalances. Although they do not trade for speculative reasons --- they are a non-profit organization --- they often tend to be profitable, since they generally trade on a long-term basis.

Currency Exchange Rates and Spreads

Currency exchange rates are determined by the currency exchange market. (The currency exchange market is described further below.) A currency exchange rate is always quoted for a currency pair using ISO code abbreviations. For example, EUR/USD refers to the two currencies Euro (the European currency) and U.S. Dollar. The first is referred to as the base currency, while the second as the quote currency. The EUR/USD exchange rate specifies how many US Dollars you have to pay to buy one Euro, or conversely how many US Dollars you obtain when you sell one Euro. More generally, if buying, an exchange rate specifies how much you have to pay in the quote currency to obtain one unit of the base currency, and if selling, the exchange rate specifies how much you get in the quote currency when selling one unit of the base currency.

A currency exchange rate is typically given as a pair consisting of a bid price and an ask price. The ask price applies when buying a currency pair and represents what has to be paid in the quote currency to obtain one unit of the base currency. The bid price applies when selling and represents what will be obtained in the quote currency when selling one unit of the base currency. The bid price is always lower than the ask price.

In the currency market, the following abbreviation for the currency exchange rate pair is used:

0.8423/28

The first component (before the slash) refers to the bid price (what you obtain in USD when you sell EUR), and in this case includes four digits after the decimal point. The second component (after the slash) is used to obtain the ask price (what you have to pay in USD if you buy EUR). The ask price is obtained by increasing the first component until the last two decimal places are equal to the digits in the second component. In this example, the ask price is 0.8428. As another example, 0.8498/03 refers to a bid price of 0.8498 and an ask price of 0.8503. (Note that for some exchange rates it is customary to quote rates in units of 100, as is the case with USD/JPY.)

The difference between the bid and the ask price is referred to as the spread. When trading large amounts of $1M or higher, the spread obtained in a quote is typically 5 basis points or PIPs, with each basis point referring to 0.0001 (or 0.01 when, say, the Yen is involved). In the example above, the spread is 0.0005 or 5 PIPs. When trading smaller amounts, the spread may be larger; for example, when trading less than $100,000, spreads of 50-200 PIPs are common. Credit card companies typically apply a spread of 200-300 PIPs. Banks and exchange bureaus typically use a spread in the range of 200-1000 PIPs (in addition to charging a commission). For investors and speculators, a lower spread translates into easier profit taking due to movements in exchange rates.

The Currency Exchange Market

The currency exchange market is an inter-bank or inter-dealer market that was established in 1971 when floating exchange rates began to materialize. In addition, it is an Over-The-Counter market, meaning that transactions are conducted between any two counter parties that agree to trade via the telephone or electronic network. Trading is thus not centralized, as is the case with many stock markets (i.e., NYSE, ASE, CME) or as the case for currency futures and currency options, which trade on special exchanges. Dealers often "advertise" exchange rates using a distribution network, such as the one provided by Reuters or Bridge. Dealers then use the information obtained there (or directly) to "agree" to a rate and a trade.

The major dealing centers today are: London, with about 30% of the market, New York, with 20%, Tokyo, with 12%, Zurich, Frankfurt, Hong Kong and Singapore, with about 7% each, followed by Paris and Sydney with 3% each.

In terms of trading volume, the currency exchange market is the worlds largest market, with daily trading volumes in excess of $1.5 trillion US dollars. This is orders of magnitude larger than the bond or stock market. For example, the New York Stock Exchange has a daily trading volume of approximately $60 billion. Thus, the currency exchange market is by far the most liquid market in the world today. Because of the volume in trading, it is impossible for individuals or companies to affect the exchange rates. In fact, even central banks and governments find it increasingly difficult to affect the exchange rates of the most liquid currencies, such as the US dollar, Japanese Yen, Euro, Swiss Frank, Canadian Dollar or Australian Dollar.

The currency exchange market is a true 24-hour market, 5 days a week. There are dealers in every major time zone. Trading begins Monday morning in Sydney (which corresponds to 3pm EST, Sunday) and then daily moves around the globe through the various trading centers until closing Friday evening at 4:30pm EST in New York.

Today, over 85% of all currency exchange transactions involve a few major currencies: the US Dollar (USD), Japanese Yen (JPY), Euro (EUR), Swiss Frank (CHF), British Pound (GBP), Canadian Dollar (CAD), and Australian Dollar (AUD). In the currency exchange market, most of the currencies are traded only against the US Dollar. The term cross rate refers to an exchange rate between two non-dollar currencies. Trading between two non-dollar currencies usually occurs by first trading one against the US Dollar and then trading the US Dollar against the second non-dollar currency. Because of this, the spread in the exchange rate between two non-dollar currencies is often higher. (There are a few non-dollar currencies that are traded directly, such as GBP/EUR or EUR/CHF.) The following directly traded currency pairs make up the vast majority of the trading volume and are thus considered to be the most important ones: EUR/USD, USD/JPY, EUR/JPY, USD/CAD, EUR/GBP, GBP/USD, USD/CHF, AUD/USD, and AUD/JPY.

How currency trading is done traditionally

Currency trading is always done with currency pairs, such as EUR/USD, and so it is useful to consider the currency pair as an instrument, which can be bought or sold.
  • Buying the currency pair implies buying the first, base currency and selling (short) an equivalent amount of the second, quote currency (to pay for the base currency). (It is not necessary for the trader to own the quote currency prior to selling, as it is sold short.) A speculator buys a currency pair, if she believes the base currency will go up relative to the quote currency, or equivalently that the corresponding exchange rate will go up.
  • Selling the currency pair implies selling the first, base currency (short), and buying the second, quote currency. A speculator sells a currency pair, if she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency.

After buying a currency pair, the trader will have an open position in the currency pair. Right after such a transaction, the value of the position will be close to zero, because the value of the base currency is more or less equal to the value of the equivalent amount of the quote currency. In fact, the value will be slightly negative, because of the spread involved.

In todays currency market, a trade goes through a three-step process:

  1. the trader communicates the currency pair and the amount he/she would like to trade with another dealer.
  2. the dealer responds with a bid and an ask price
  3. the trader responds to the bid and ask price with one of:
    1. buy (by saying "Mine" or "I buy" or "I take")
    2. sell (by saying "yours" or "I give you" or "I sell")
    3. refuse.

The transaction occurs if the final response is either a buy or a sell. The dealer is required to quote a "good" market price, since he does not know whether the trader will buy or sell.

The currency exchange market described above is referred to as the spot market and the transaction described is referred to as a spot deal. A spot deal consists of a bilateral contract between a party delivering a specified amount of a given currency against receiving a specified amount of another currency from a second counter party, based on an agreed exchange rate, within two business days of the deal date, which is referred to as the settlement date. (The settlement date for USD/CAD is one business day after the deal date.) Speculators rarely deliver, however. Instead, they use what is referred to as a rollover swap. The rollover swap is designed to allow the changing of an old deal date to the current date by simultaneously closing an open position for todays date and opening the same position for the next day at a price reflecting the interest rate differential between the two currencies.

When a trader buys or sells a currency pair, the value of the currency pair, as an instrument, initially is close to zero. This is because (in the case of a buy) the quote currency is sold to buy an equivalent amount of the base currency. As the market rates fluctuate, however, the value of the currency pair position held will also fluctuate. Thus, if the rate for the currency pair goes down, the speculators long position will lose in value and become negative. To ensure that the speculator can carry the risk for the case where the position results in a loss, banks or dealers typically require sufficient collateral to cover those losses. This collateral is typically referred to as margin.

To limit down-side risk, traders often specify a Stop-Loss rate for each open trade. The Stop-Loss specifies that the trade should be closed automatically when the currency exchange rate for the currency pair in question reaches a certain threshold. For long positions, the Stop-Loss rate is always lower than the current exchange rate; for short positions, it is always higher. Traders, at times, also specify a Take-Profit rate for their trades in order to lock in a profit when the exchange rate reaches a certain threshold. For long positions, the Take-Profit rate must be above the current rate, while for short positions, it must be below the current rate.

A trader may also leave an order with a bank, broker or dealer. These so called leave orders are orders that a trade should be executed (in the future) when certain market conditions occur. There are three types of leave orders:

  1. entry orders: specifies that a currency pair should be traded when it reaches a certain exchange rate. Entry orders are used when the trade would not offset a current position.
  2. take-profit orders: are used to clear a position by buying (or selling) the currency pair of the position when the exchange rate reaches a specified level.
  3. stop-loss orders: are used to clear a position by buying (or selling) the currency pair of the position when the exchange rate reaches a specified level.

posted by Mary David @ 3:26 AM 0 Comments