International commerce has rapidly increased as the internet has provided a new and more transparent marketplace for individuals and entities alike to conduct international business and trading activities. Significant changes in the international economic and political landscape have led to uncertainty regarding the direction of foreign exchange rates. This uncertainty leads to volatility and the need for an effective vehicle to hedge foreign exchange rate risk and/or interest rate changes while, at the same time, effectively ensuring a future financial position.
Each entity and/or individual that has exposure to foreign exchange rate risk will have specific foreign exchange hedging needs and this website can not possibly cover every existing foreign exchange hedging situation. Therefore, we will cover the more common reasons that a foreign exchange hedge is placed and show you how to properly hedge foreign exchange rate risk.
Foreign Exchange Rate Risk Exposure - Foreign exchange rate risk exposure is common to virtually all who conduct international business and/or trading. Buying and/or selling of goods or services denominated in foreign currencies can immediately expose you to foreign exchange rate risk. If a firm price is quoted ahead of time for a contract using a foreign exchange rate that is deemed appropriate at the time the quote is given, the foreign exchange rate quote may not necessarily be appropriate at the time of the actual agreement or performance of the contract. Placing a foreign exchange hedge can help to manage this foreign exchange rate risk.
Interest Rate Risk Exposure - Interest rate exposure refers to the interest rate differential between the two countries' currencies in a foreign exchange contract. The interest rate differential is also roughly equal to the "carry" cost paid to hedge a forward or futures contract. As a side note, arbitragers are investors that take advantage when interest rate differentials between the foreign exchange spot rate and either the forward or futures contract are either to high or too low. In simplest terms, an arbitrager may sell when the carry cost he or she can collect is at a premium to the actual carry cost of the contract sold. Conversely, an arbitrager may buy when the carry cost he or she may pay is less than the actual carry cost of the contract bought. Either way, the arbitrager is looking to profit from a small price discrepancy due to interest rate differentials.
Foreign Investment / Stock Exposure - Foreign investing is considered by many investors as a way to either diversify an investment portfolio or seek a larger return on investment(s) in an economy believed to be growing at a faster pace than investment(s) in the respective domestic economy. Investing in foreign stocks automatically exposes the investor to foreign exchange rate risk and speculative risk. For example, an investor buys a particular amount of foreign currency (in exchange for domestic currency) in order to purchase shares of a foreign stock. The investor is now automatically exposed to two separate risks. First, the stock price may go either up or down and the investor is exposed to the speculative stock price risk. Second, the investor is exposed to foreign exchange rate risk because the foreign exchange rate may either appreciate or depreciate from the time the investor first purchased the foreign stock and the time the investor decides to exit the position and repatriates the currency (exchanges the foreign currency back to domestic currency). Therefore, even if a speculative profit is achieved because the foreign stock price rose, the investor could actually net lose money if devaluation of the foreign currency occurred while the investor was holding the foreign stock (and the devaluation amount was greater than the speculative profit). Placing a foreign exchange hedge can help to manage this foreign exchange rate risk.
Hedging Speculative Positions - Foreign currency traders utilize foreign exchange hedging to protect open positions against adverse moves in foreign exchange rates, and placing a foreign exchange hedge can help to manage foreign exchange rate risk. Speculative positions can be hedged via a number of foreign exchange hedging vehicles that can be used either alone or in combination to create entirely new foreign exchange hedging strategies.
John Nobile - Senior Account Executive
CFOS/FX - Online Forex Spot and Options Brokerage
Article Source: http://EzineArticles.com/?expert=John_Nobile
Monday, June 11, 2007
Types of Foreign Currency Hedging Vehicles
The following are some of the most common types of foreign currency hedging vehicles used in today's markets as a foreign currency hedge. While retail forex traders typically use foreign currency options as a hedging vehicle. Banks and commercials are more likely to use options, swaps, swaptions and other more complex derivatives to meet their specific hedging needs.
Spot Contracts - A foreign currency contract to buy or sell at the current foreign currency rate, requiring settlement within two days.
As a foreign currency hedging vehicle, due to the short-term settlement date, spot contracts are not appropriate for many foreign currency hedging and trading strategies. Foreign currency spot contracts are more commonly used in combination with other types of foreign currency hedging vehicles when implementing a foreign currency hedging strategy.
For retail investors, in particular, the spot contract and its associated risk are often the underlying reason that a foreign currency hedge must be placed. The spot contract is more often a part of the reason to hedge foreign currency risk exposure rather than the foreign currency hedging solution.
Forward Contracts - A foreign currency contract to buy or sell a foreign currency at a fixed rate for delivery on a specified future date or period.
Foreign currency forward contracts are used as a foreign currency hedge when an investor has an obligation to either make or take a foreign currency payment at some point in the future. If the date of the foreign currency payment and the last trading date of the foreign currency forwards contract are matched up, the investor has in effect "locked in" the exchange rate payment amount.
* Important: Please note that forwards contracts are different than futures contracts. Foreign currency futures contracts have standard contract sizes, time periods, settlement procedures and are traded on regulated exchanges throughout the world. Foreign currency forwards contracts may have different contract sizes, time periods and settlement procedures than futures contracts. Foreign currency forwards contracts are considered over-the-counter (OTC) due to the fact that there is no centralized trading location and transactions are conducted directly between parties via telephone and online trading platforms at thousands of locations worldwide.
Foreign Currency Options - A financial foreign currency contract giving the buyer the right, but not the obligation, to purchase or sell a specific foreign currency contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the foreign currency option buyer pays to the foreign currency option seller for the foreign currency option contract rights is called the option "premium."
A foreign currency option can be used as a foreign currency hedge for an open position in the foreign currency spot market. Foreign currency options can also be used in combination with other foreign currency spot and options contracts to create more complex foreign currency hedging strategies. There are many different foreign currency option strategies available to both commercial and retail investors.
Interest Rate Options - A financial interest rate contract giving the buyer the right, but not the obligation, to purchase or sell a specific interest rate contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the interest rate option buyer pays to the interest rate option seller for the foreign currency option contract rights is called the option "premium." Interest rate option contracts are more often used by interest rate speculators, commercials and banks rather than by retail forex traders as a foreign currency hedging vehicle.
Foreign Currency Swaps - A financial foreign currency contract whereby the buyer and seller exchange equal initial principal amounts of two different currencies at the spot rate. The buyer and seller exchange fixed or floating rate interest payments in their respective swapped currencies over the term of the contract. At maturity, the principal amount is effectively re-swapped at a predetermined exchange rate so that the parties end up with their original currencies. Foreign currency swaps are more often used by commercials as a foreign currency hedging vehicle rather than by retail forex traders.
Interest Rate Swaps - A financial interest rate contracts whereby the buyer and seller swap interest rate exposure over the term of the contract. The most common swap contract is the fixed-to-float swap whereby the swap buyer receives a floating rate from the swap seller, and the swap seller receives a fixed rate from the swap buyer. Other types of swap include fixed-to-fixed and float-to-float. Interest rate swaps are more often utilized by commercials to re-allocate interest rate risk exposure.
John Nobile - Senior Account Executive
CFOS/FX - Online Forex Spot and Options Brokerage
Article Source: http://EzineArticles.com/?expert=John_Nobile
Spot Contracts - A foreign currency contract to buy or sell at the current foreign currency rate, requiring settlement within two days.
As a foreign currency hedging vehicle, due to the short-term settlement date, spot contracts are not appropriate for many foreign currency hedging and trading strategies. Foreign currency spot contracts are more commonly used in combination with other types of foreign currency hedging vehicles when implementing a foreign currency hedging strategy.
For retail investors, in particular, the spot contract and its associated risk are often the underlying reason that a foreign currency hedge must be placed. The spot contract is more often a part of the reason to hedge foreign currency risk exposure rather than the foreign currency hedging solution.
Forward Contracts - A foreign currency contract to buy or sell a foreign currency at a fixed rate for delivery on a specified future date or period.
Foreign currency forward contracts are used as a foreign currency hedge when an investor has an obligation to either make or take a foreign currency payment at some point in the future. If the date of the foreign currency payment and the last trading date of the foreign currency forwards contract are matched up, the investor has in effect "locked in" the exchange rate payment amount.
* Important: Please note that forwards contracts are different than futures contracts. Foreign currency futures contracts have standard contract sizes, time periods, settlement procedures and are traded on regulated exchanges throughout the world. Foreign currency forwards contracts may have different contract sizes, time periods and settlement procedures than futures contracts. Foreign currency forwards contracts are considered over-the-counter (OTC) due to the fact that there is no centralized trading location and transactions are conducted directly between parties via telephone and online trading platforms at thousands of locations worldwide.
Foreign Currency Options - A financial foreign currency contract giving the buyer the right, but not the obligation, to purchase or sell a specific foreign currency contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the foreign currency option buyer pays to the foreign currency option seller for the foreign currency option contract rights is called the option "premium."
A foreign currency option can be used as a foreign currency hedge for an open position in the foreign currency spot market. Foreign currency options can also be used in combination with other foreign currency spot and options contracts to create more complex foreign currency hedging strategies. There are many different foreign currency option strategies available to both commercial and retail investors.
Interest Rate Options - A financial interest rate contract giving the buyer the right, but not the obligation, to purchase or sell a specific interest rate contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the interest rate option buyer pays to the interest rate option seller for the foreign currency option contract rights is called the option "premium." Interest rate option contracts are more often used by interest rate speculators, commercials and banks rather than by retail forex traders as a foreign currency hedging vehicle.
Foreign Currency Swaps - A financial foreign currency contract whereby the buyer and seller exchange equal initial principal amounts of two different currencies at the spot rate. The buyer and seller exchange fixed or floating rate interest payments in their respective swapped currencies over the term of the contract. At maturity, the principal amount is effectively re-swapped at a predetermined exchange rate so that the parties end up with their original currencies. Foreign currency swaps are more often used by commercials as a foreign currency hedging vehicle rather than by retail forex traders.
Interest Rate Swaps - A financial interest rate contracts whereby the buyer and seller swap interest rate exposure over the term of the contract. The most common swap contract is the fixed-to-float swap whereby the swap buyer receives a floating rate from the swap seller, and the swap seller receives a fixed rate from the swap buyer. Other types of swap include fixed-to-fixed and float-to-float. Interest rate swaps are more often utilized by commercials to re-allocate interest rate risk exposure.
John Nobile - Senior Account Executive
CFOS/FX - Online Forex Spot and Options Brokerage
Article Source: http://EzineArticles.com/?expert=John_Nobile
Approaching the Markets
I recently received this letter, and thought you might like to see how another currency trader approaches the markets.
"I approach the markets as a game of probabilities. As far as I'm concerned, that's the only way to navigate the currency markets.
"What I mean by a game of probabilities is this: I do as much as I can when figuring my fundamental and technical analysis. I read and study all I can. And I do this with discipline, focus, and consistency. I do this to try to gain an edge.
"But I know there is never such thing as 100% certainty. You can never have enough brain power or computing power to harness the mind of the market. It's not because the computing power isn't available - it is. It's because the players in the market do not make "rational" decisions all the time.
"When push comes to shove, the big moves in the market are driven by good old fear and greed, the base human emotions. The fear and greed and irrationality of millions of players can't be modeled with much degree of certainty. That's a problem for economists and experts who believe they can create some type of Holy Grail model to forecast price action. They simply don't have the mathematics available yet to get their arms around irrationality in a modeling scenario. And there is no reason to think they'll be able to factor in human emotions anytime soon.
"'If you are going to use probability to model a financial market, you had better use the right kind of probability. Real markets are wild. Their price fluctuations can be hair-raising - far greater and more damaging than the mild variations of orthodox finance,'" writes Benoit Mandelbrot, The Misbehavior of Markets. Note: Benoit Mandelbrot is the person who created fractal mathematics. He is a brilliant man, to say the least. And he has been shunned to a degree because he has never bought into financial orthodoxy that starts out with 'the rational man.'
"Bingo! 'Real markets are wild.' The massive volatility we've already witnessed in the currency market, after only the days of trading this year, prove Mandelbrot right once again.
"So, does this mean we should be defeatist and believe we can never win? Absolutely not! But it does mean you need to develop a reliable system to help you recognize when it makes sense to trade. Or in other words, you need a system that pushes the probability of success in your favor. Here's what I do to help make currency trading decisions.
"My methodology is a three-step approach:
"1) I watch the key macro themes around the world. I continually ask: where is the money flowing around the globe? What countries or regions are hot? What assets are investments flowing into? Is it stocks or bonds or commodities, or some combination of these? Why are assets flowing in those particular investments? Is it interest rates or economic growth, or geopolitics? These are the type of questions you need to ask in order to develop an understanding of the macro themes.
"2) I look at the technical pictures-charts! First I look at the weekly trends, then daily, then intraday (if it is a very short-term trade). Keep in mind, the tighter the timeframe you analyze on a chart, the more random the movements may be. In other words, these short-term movements you see could be just noise, so you can't always try to match your broad macro themes to the daily charts. Use your weekly charts to confirm your macro view. Charts are especially helpful when you're looking at intermarket relationships. For example, you can see if there's a clear relationship between gold and the U.S. dollar. Often those two move almost as a mirror image of one another. When gold goes up, the dollar goes down, and visa versa. I continuously compare commodities, bonds, and equities against the move of the dollar to see if there is a relationship. Noticing these relationships can definitely give you an edge in the markets.
"3) I try to judge what the sentiment is in the markets. I ask myself, are too many players doing the same thing? This is extremely important, because you don't want to be late to the party when investing. When everyone has bought, there is no one left to support prices, and they can fall of their own weight. I also look at surveys, open interest, and volume to gauge sentiment.
"Yes, it's a lot of work. But this is my system that has evolved over the years and suits me well. I'm confident that if I do my homework and apply my system consistently, I'll win over time. And the same system can work for you too."
Joe Ross
Trading Educators Inc
Joe Ross has been trading for more than 50 years, and is a well known Master Trader. He has survived all the up and downs of the markets because of his adaptable trading style, using a low-risk approach that produces consistent profits.
Joe is the creator of the Ross hook, and has set new standards for low-risk trading with his concept of "The Law of Charts™." Joe was a private trader for most of his life. In the mid 80's he shift his focus and decided to share his knowledge. After his recovery, he founded Trading Educators in 1988 to teach aspiring traders how to make profits using his trading approach. He has written 12 major books on trading. All of them have become classics and have been translated into many different languages.
Joe holds a Bachelor of Science degree in Business Administration from the University of California at Los Angeles. He did his Masters work in Computer Sciences at the George Washington University extension in Norfolk, VA. Joe still tutors, teaches, writes, and trades regularly. Joe is still an active and integral part of Trading Educators.
Article Source: http://EzineArticles.com/?expert=Joe_Ross
"I approach the markets as a game of probabilities. As far as I'm concerned, that's the only way to navigate the currency markets.
"What I mean by a game of probabilities is this: I do as much as I can when figuring my fundamental and technical analysis. I read and study all I can. And I do this with discipline, focus, and consistency. I do this to try to gain an edge.
"But I know there is never such thing as 100% certainty. You can never have enough brain power or computing power to harness the mind of the market. It's not because the computing power isn't available - it is. It's because the players in the market do not make "rational" decisions all the time.
"When push comes to shove, the big moves in the market are driven by good old fear and greed, the base human emotions. The fear and greed and irrationality of millions of players can't be modeled with much degree of certainty. That's a problem for economists and experts who believe they can create some type of Holy Grail model to forecast price action. They simply don't have the mathematics available yet to get their arms around irrationality in a modeling scenario. And there is no reason to think they'll be able to factor in human emotions anytime soon.
"'If you are going to use probability to model a financial market, you had better use the right kind of probability. Real markets are wild. Their price fluctuations can be hair-raising - far greater and more damaging than the mild variations of orthodox finance,'" writes Benoit Mandelbrot, The Misbehavior of Markets. Note: Benoit Mandelbrot is the person who created fractal mathematics. He is a brilliant man, to say the least. And he has been shunned to a degree because he has never bought into financial orthodoxy that starts out with 'the rational man.'
"Bingo! 'Real markets are wild.' The massive volatility we've already witnessed in the currency market, after only the days of trading this year, prove Mandelbrot right once again.
"So, does this mean we should be defeatist and believe we can never win? Absolutely not! But it does mean you need to develop a reliable system to help you recognize when it makes sense to trade. Or in other words, you need a system that pushes the probability of success in your favor. Here's what I do to help make currency trading decisions.
"My methodology is a three-step approach:
"1) I watch the key macro themes around the world. I continually ask: where is the money flowing around the globe? What countries or regions are hot? What assets are investments flowing into? Is it stocks or bonds or commodities, or some combination of these? Why are assets flowing in those particular investments? Is it interest rates or economic growth, or geopolitics? These are the type of questions you need to ask in order to develop an understanding of the macro themes.
"2) I look at the technical pictures-charts! First I look at the weekly trends, then daily, then intraday (if it is a very short-term trade). Keep in mind, the tighter the timeframe you analyze on a chart, the more random the movements may be. In other words, these short-term movements you see could be just noise, so you can't always try to match your broad macro themes to the daily charts. Use your weekly charts to confirm your macro view. Charts are especially helpful when you're looking at intermarket relationships. For example, you can see if there's a clear relationship between gold and the U.S. dollar. Often those two move almost as a mirror image of one another. When gold goes up, the dollar goes down, and visa versa. I continuously compare commodities, bonds, and equities against the move of the dollar to see if there is a relationship. Noticing these relationships can definitely give you an edge in the markets.
"3) I try to judge what the sentiment is in the markets. I ask myself, are too many players doing the same thing? This is extremely important, because you don't want to be late to the party when investing. When everyone has bought, there is no one left to support prices, and they can fall of their own weight. I also look at surveys, open interest, and volume to gauge sentiment.
"Yes, it's a lot of work. But this is my system that has evolved over the years and suits me well. I'm confident that if I do my homework and apply my system consistently, I'll win over time. And the same system can work for you too."
Joe Ross
Trading Educators Inc
Joe Ross has been trading for more than 50 years, and is a well known Master Trader. He has survived all the up and downs of the markets because of his adaptable trading style, using a low-risk approach that produces consistent profits.
Joe is the creator of the Ross hook, and has set new standards for low-risk trading with his concept of "The Law of Charts™." Joe was a private trader for most of his life. In the mid 80's he shift his focus and decided to share his knowledge. After his recovery, he founded Trading Educators in 1988 to teach aspiring traders how to make profits using his trading approach. He has written 12 major books on trading. All of them have become classics and have been translated into many different languages.
Joe holds a Bachelor of Science degree in Business Administration from the University of California at Los Angeles. He did his Masters work in Computer Sciences at the George Washington University extension in Norfolk, VA. Joe still tutors, teaches, writes, and trades regularly. Joe is still an active and integral part of Trading Educators.
Article Source: http://EzineArticles.com/?expert=Joe_Ross
Forex Education - 6 Essential books All Traders Should Read
If you want good forex education forget buying an e-book from a vendor for $100 or so, who has never made money in his life and get down to your bookstore and get some forex education from traders who have walked the walk - rather than simply talk the talk!
Of over 600 books I read, I have picked six that are essential reading for any trader and you can get them for $100 bucks or so, which could be the best money you ever invested.
So check out the books below and make them part of your forex education.
1. Market Wizards - by Jack Schwager
Interviews with the top traders in the world. A look at everyday life of people who make a living trading – this is simply a classic and I still find myself visiting it after 20 years and re reading it.
If you can’t learn from such trading legends as Richard Dennis, Paul Tudor Jones, William O'Neil, and Marty Schwartz – then you can’t learn from anyone!
2. The New Market Wizards - by Jack Schwager
More interviews with top traders from around the world. This book is the same format as Market Wizards and brings together some top traders and again benefits from Schwager’s great interview technique.
3. Trader Vic--Methods of a Wall Street Master Victor Sperandeo
This is perhaps one of my favorite books and you will see why after reading it, he has been such a consistent trader and his focus on long term results, money management and long term trend following are essential reading - his "2B" test technique, it is worth the price of the book alone.
4. The Zurich Axioms: Investment Secrets of the Swiss Bankers – Max Günter
I picked this book up and read it in one sitting - an absolutely fantastic, if un-conventional book!
If you have accepted investment wisdoms such as diversify to make gains be prepared to re consider your view.
It’s the type of book that is so easy to read, yet gets your adrenalin pumping with every page, until you’re buzzing at the end and want to turn on your computer and trade!
5. What I Learned Losing a Million Dollars (Hardcover) Jim Paul and Brendan Moynihan
An inspiring story of a real person who lost a million and a half bucks and tells his tale, with great insight including, even contemplating suicide at one point. If you don’t think emotions get the better of you in trading this book will show you how they can.
There are too few books that tell us how to avoid losing money they all ocncentrate on how easy it is to make money and thats what makes this book so unique.
All the mistakes that forex and other traders make are outlined, explained, and amusingly told in this boo.
The book gives you an affinity with the author which brings makes his message even more powerful.
This book is not an outline of how to trade, but how to get the right mindset.
These are lessons about how we accept a trading loss, how to learn from losing trades, and finally how each of us can be tempted to rationalize losses.
6. Technical Analysis - by Jack Schwager
There are loads of books on technical analysis and this is simply to most complete guide you can get.
It’s more of a reference book than an entertaining read, but as with all Schwagers books there is a wealth of knowledge you can tap into – Everything you need to know about technical analysis is here and the fact that I picked over John Murphy's work shows how highly I rate it.
So there you have it six different but essential reading for all traders novice or pro.
These six books together, present a great mix of forex education and I personally feel all traders should read these books.
I hope you enjoy the above books as much as I did and that they give you some great forex education and a head start in your quest for currency trading success.
5 FREE Trader PDF's + More Essential Trader Tools
Get all the support you need to trade like a pro with our FREE Trader PDF's free demo account, $100 minimum investment, tight pip spreads, and 24-hour professional support.
Grab your FREE PDF's NOW: http://www.bestonlineforexbroker.com
Article Source: http://EzineArticles.com/?expert=Kelly_Price
Of over 600 books I read, I have picked six that are essential reading for any trader and you can get them for $100 bucks or so, which could be the best money you ever invested.
So check out the books below and make them part of your forex education.
1. Market Wizards - by Jack Schwager
Interviews with the top traders in the world. A look at everyday life of people who make a living trading – this is simply a classic and I still find myself visiting it after 20 years and re reading it.
If you can’t learn from such trading legends as Richard Dennis, Paul Tudor Jones, William O'Neil, and Marty Schwartz – then you can’t learn from anyone!
2. The New Market Wizards - by Jack Schwager
More interviews with top traders from around the world. This book is the same format as Market Wizards and brings together some top traders and again benefits from Schwager’s great interview technique.
3. Trader Vic--Methods of a Wall Street Master Victor Sperandeo
This is perhaps one of my favorite books and you will see why after reading it, he has been such a consistent trader and his focus on long term results, money management and long term trend following are essential reading - his "2B" test technique, it is worth the price of the book alone.
4. The Zurich Axioms: Investment Secrets of the Swiss Bankers – Max Günter
I picked this book up and read it in one sitting - an absolutely fantastic, if un-conventional book!
If you have accepted investment wisdoms such as diversify to make gains be prepared to re consider your view.
It’s the type of book that is so easy to read, yet gets your adrenalin pumping with every page, until you’re buzzing at the end and want to turn on your computer and trade!
5. What I Learned Losing a Million Dollars (Hardcover) Jim Paul and Brendan Moynihan
An inspiring story of a real person who lost a million and a half bucks and tells his tale, with great insight including, even contemplating suicide at one point. If you don’t think emotions get the better of you in trading this book will show you how they can.
There are too few books that tell us how to avoid losing money they all ocncentrate on how easy it is to make money and thats what makes this book so unique.
All the mistakes that forex and other traders make are outlined, explained, and amusingly told in this boo.
The book gives you an affinity with the author which brings makes his message even more powerful.
This book is not an outline of how to trade, but how to get the right mindset.
These are lessons about how we accept a trading loss, how to learn from losing trades, and finally how each of us can be tempted to rationalize losses.
6. Technical Analysis - by Jack Schwager
There are loads of books on technical analysis and this is simply to most complete guide you can get.
It’s more of a reference book than an entertaining read, but as with all Schwagers books there is a wealth of knowledge you can tap into – Everything you need to know about technical analysis is here and the fact that I picked over John Murphy's work shows how highly I rate it.
So there you have it six different but essential reading for all traders novice or pro.
These six books together, present a great mix of forex education and I personally feel all traders should read these books.
I hope you enjoy the above books as much as I did and that they give you some great forex education and a head start in your quest for currency trading success.
5 FREE Trader PDF's + More Essential Trader Tools
Get all the support you need to trade like a pro with our FREE Trader PDF's free demo account, $100 minimum investment, tight pip spreads, and 24-hour professional support.
Grab your FREE PDF's NOW: http://www.bestonlineforexbroker.com
Article Source: http://EzineArticles.com/?expert=Kelly_Price
Forex Trading Strategy - The Ultimate Momentum Indicator for Huge Profits
Many traders in their forex trading strategy simply pick levels and buy or sell into them and hope they hold. This simply sees them lose, as they are hoping levels will hold and NOT acting on confirmation of price momentum to put the odds in their favor.
Here we are going to look at the ultimate momentum indicator that will help you time your trading signals with laser accuracy.
The momentum indicator we are referring to is the stochastic and it simply should be considered by anyone serious about making money in forex trading.
The logic
Of the stochastic is based on the assumption, that when a market is rising, it will tend to close near the highs of the session - and when a market falls, it tends to close near the lows.
Lets look at the calculation – although you don’t need to understand just as you don’t need to understand an internal combustion engine to drive a car – you can look at it visually which we will return to in a minute first:
The Calculation
The stochastic oscillator is plotted as two lines called %K, a fast line and %D, a slow line.
• %K line is more sensitive than %D
• %D line is a moving average of %K
• %D line gives the trading signals
It’s actually similar to the way a moving average is plotted.
Therefore consider %K as a fast moving average, and %D as a slow moving average.
The lines are plotted on a scale of 1 to 100 scale.
"Trigger" lines are normally drawn on stochastics charts at the 80% and 20% level – this indicates when markets are overbought, or oversold and a trading signal maybe generated.
Using Stochastics
The best way to get a feel for stochastics and how they can help your forex trading strategy is to look at them – you can see them free on many services and a good one is futuresource.com
The 80% value is normally used as an overbought signal, while the 20% is used as an oversold signal.
The signals are even more reliable if a forex trader waits until the %K, and %D lines turn upward, below 5% before buying - and in conversely, above 95% before selling.
The most reliable way to trade stochastics is to use the above as a warning sign and wait for the stochastic lines to cross with bullish or bearish divergence.
For example, buy when the %K line rises above the %D line, and sell when the %K line falls below the %D line.
Beware of short-term crossovers these can generate a false signal and cause losses.
The best crossover is generated when the %K line intersects, “after” the peak of the %D line.
Don’t worry if it sounds confusing it becomes much easier when you look at the set up on a chart service such as the one we referred to earlier and you will soon be getting the hang of them.
Why they are so valuable
Because they allow you to shift the odds in your favor instead of relying on hope when you trade into support or resistance you will shift the odds in your favor by knowing the strength of price momentum.
Stochastics are the ultimate timing tool for traders and allow you to enter your trading signals with the odds on your side. In any forex trading strategy you need to trade the odds and the stochastic is a powerful weapon that you can use for currency trading success.
Discover the stochastic indicator and you may be glad you did.
GRAB 3 X FREE TRADER & FREE TRADER PROFITS NEWSLETTER
On all aspects of becoming a profitable trader including features, downloads and some critical FREE Trader PDF's and more FREE forex education visit our website at http://www.net-planet.org/index.html
Article Source: http://EzineArticles.com/?expert=Kelly_Price
Here we are going to look at the ultimate momentum indicator that will help you time your trading signals with laser accuracy.
The momentum indicator we are referring to is the stochastic and it simply should be considered by anyone serious about making money in forex trading.
The logic
Of the stochastic is based on the assumption, that when a market is rising, it will tend to close near the highs of the session - and when a market falls, it tends to close near the lows.
Lets look at the calculation – although you don’t need to understand just as you don’t need to understand an internal combustion engine to drive a car – you can look at it visually which we will return to in a minute first:
The Calculation
The stochastic oscillator is plotted as two lines called %K, a fast line and %D, a slow line.
• %K line is more sensitive than %D
• %D line is a moving average of %K
• %D line gives the trading signals
It’s actually similar to the way a moving average is plotted.
Therefore consider %K as a fast moving average, and %D as a slow moving average.
The lines are plotted on a scale of 1 to 100 scale.
"Trigger" lines are normally drawn on stochastics charts at the 80% and 20% level – this indicates when markets are overbought, or oversold and a trading signal maybe generated.
Using Stochastics
The best way to get a feel for stochastics and how they can help your forex trading strategy is to look at them – you can see them free on many services and a good one is futuresource.com
The 80% value is normally used as an overbought signal, while the 20% is used as an oversold signal.
The signals are even more reliable if a forex trader waits until the %K, and %D lines turn upward, below 5% before buying - and in conversely, above 95% before selling.
The most reliable way to trade stochastics is to use the above as a warning sign and wait for the stochastic lines to cross with bullish or bearish divergence.
For example, buy when the %K line rises above the %D line, and sell when the %K line falls below the %D line.
Beware of short-term crossovers these can generate a false signal and cause losses.
The best crossover is generated when the %K line intersects, “after” the peak of the %D line.
Don’t worry if it sounds confusing it becomes much easier when you look at the set up on a chart service such as the one we referred to earlier and you will soon be getting the hang of them.
Why they are so valuable
Because they allow you to shift the odds in your favor instead of relying on hope when you trade into support or resistance you will shift the odds in your favor by knowing the strength of price momentum.
Stochastics are the ultimate timing tool for traders and allow you to enter your trading signals with the odds on your side. In any forex trading strategy you need to trade the odds and the stochastic is a powerful weapon that you can use for currency trading success.
Discover the stochastic indicator and you may be glad you did.
GRAB 3 X FREE TRADER & FREE TRADER PROFITS NEWSLETTER
On all aspects of becoming a profitable trader including features, downloads and some critical FREE Trader PDF's and more FREE forex education visit our website at http://www.net-planet.org/index.html
Article Source: http://EzineArticles.com/?expert=Kelly_Price
Forex Trading Tips
Why do hundreds of thousands online traders and investors trade the forex market every day, and how do they make money doing it?
This two-part report clearly and simply details essential tips on how to avoid typical pitfalls and start making more money in your forex trading.
1. Trade pairs, not currencies - Like any relationship, you have to know both sides. Success or failure in forex trading depends upon being right about both currencies and how they impact one another, not just one.
2. Knowledge is Power - When starting out trading forex online, it is essential that you understand the basics of this market if you want to make the most of your investments.
The main forex influencer is global news and events. For example, say an ECB statement is released on European interest rates which typically will cause a flurry of activity. Most newcomers react violently to news like this and close their positions and subsequently miss out on some of the best trading opportunities by waiting until the market calms down. The potential in the forex market is in the volatility, not in its tranquility.
3. Unambitious trading - Many new traders will place very tight orders in order to take very small profits. This is not a sustainable approach because although you may be profitable in the short run (if you are lucky), you risk losing in the longer term as you have to recover the difference between the bid and the ask price before you can make any profit and this is much more difficult when you make small trades than when you make larger ones.
4. Over-cautious trading - Like the trader who tries to take small incremental profits all the time, the trader who places tight stop losses with a retail forex broker is doomed. As we stated above, you have to give your position a fair chance to demonstrate its ability to produce. If you don't place reasonable stop losses that allow your trade to do so, you will always end up undercutting yourself and losing a small piece of your deposit with every trade.
5. Independence - If you are new to forex, you will either decide to trade your own money or to have a broker trade it for you. So far, so good. But your risk of losing increases exponentially if you either of these two things:
Interfere with what your broker is doing on your behalf (as his strategy might require a long gestation period);
Seek advice from too many sources - multiple input will only result in multiple losses. Take a position, ride with it and then analyse the outcome - by yourself, for yourself.
6. Tiny margins - Margin trading is one of the biggest advantages in trading forex as it allows you to trade amounts far larger than the total of your deposits. However, it can also be dangerous to novice traders as it can appeal to the greed factor that destroys many forex traders. The best guideline is to increase your leverage in line with your experience and success.
7. No strategy - The aim of making money is not a trading strategy. A strategy is your map for how you plan to make money. Your strategy details the approach you are going to take, which currencies you are going to trade and how you will manage your risk. Without a strategy, you may become one of the 90% of new traders that lose their money.
8. Trading Off-Peak Hours - Professional FX traders, option traders, and hedge funds posses a huge advantage over small retail traders during off-peak hours (between 2200 CET and 1000 CET) as they can hedge their positions and move them around when there is far small trade volume is going through (meaning their risk is smaller). The best advice for trading during off peak hours is simple - don't.
9. The only way is up/down - When the market is on its way up, the market is on its way up. When the market is going down, the market is going down. That's it. There are many systems which analyse past trends, but none that can accurately predict the future. But if you acknowledge to yourself that all that is happening at any time is that the market is simply moving, you'll be amazed at how hard it is to blame anyone else.
10. Trade on the news - Most of the really big market moves occur around news time. Trading volume is high and the moves are significant; this means there is no better time to trade than when news is released. This is when the big players adjust their positions and prices change resulting in a serious currency flow.
11. Exiting Trades - If you place a trade and it's not working out for you, get out. Don't compound your mistake by staying in and hoping for a reversal. If you're in a winning trade, don't talk yourself out of the position because you're bored or want to relieve stress; stress is a natural part of trading; get used to it.
12. Don't trade too short-term - If you are aiming to make less than 20 points profit, don't undertake the trade. The spread you are trading on will make the odds against you far too high.
13. Don't be smart - The most successful traders I know keep their trading simple. They don't analyse all day or research historical trends and track web logs and their results are excellent.
14. Tops and Bottoms - There are no real "bargains" in trading foreign exchange. Trade in the direction the price is going in and you're results will be almost guaranteed to improve.
15. Ignoring the technicals- Understanding whether the market is over-extended long or short is a key indicator of price action. Spikes occur in the market when it is moving all one way.
16. Emotional Trading - Without that all-important strategy, you're trades essentially are thoughts only and thoughts are emotions and a very poor foundation for trading. When most of us are upset and emotional, we don't tend to make the wisest decisions. Don't let your emotions sway you.
17. Confidence - Confidence comes from successful trading. If you lose money early in your trading career it's very difficult to regain it; the trick is not to go off half-cocked; learn the business before you trade. Remember, knowledge is power.
The second and final part of this report clearly and simply details more essential tips on how to avoid the pitfalls and start making more money in your forex trading.
1. Take it like a man - If you decide to ride a loss, you are simply displaying stupidity and cowardice. It takes guts to accept your loss and wait for tomorrow to try again. Sticking to a bad position ruins lots of traders - permanently. Try to remember that the market often behaves illogically, so don't get commit to any one trade; it's just a trade. One good trade will not make you a trading success; it's ongoing regular performance over months and years that makes a good trader.
2. Focus - Fantasising about possible profits and then "spending" them before you have realised them is no good. Focus on your current position(s) and place reasonable stop losses at the time you do the trade. Then sit back and enjoy the ride - you have no real control from now on, the market will do what it wants to do.
3. Don't trust demos - Demo trading often causes new traders to learn bad habits. These bad habits, which can be very dangerous in the long run, come about because you are playing with virtual money. Once you know how your broker's system works, start trading small amounts and only take the risk you can afford to win or lose.
4. Stick to the strategy - When you make money on a well thought-out strategic trade, don't go and lose half of it next time on a fancy; stick to your strategy and invest profits on the next trade that matches your long-term goals.
5. Trade today - Most successful day traders are highly focused on what's happening in the short-term, not what may happen over the next month. If you're trading with 40 to 60-point stops focus on what's happening today as the market will probably move too quickly to consider the long-term future. However, the long-term trends are not unimportant; they will not always help you though if you're trading intraday.
6. The clues are in the details - The bottom line on your account balance doesn't tell the whole story. Consider individual trade details; analyse your losses and the telling losing streaks. Generally, traders that make money without suffering significant daily losses have the best chance of sustaining positive performance in the long term.
7. Simulated Results - Be very careful and wary about infamous "black box" systems. These so-called trading signal systems do not often explain exactly how the trade signals they generate are produced. Typically, these systems only show their track record of extraordinary results - historical results. Successfully predicting future trade scenarios is altogether more complex. The high-speed algorithmic capabilities of these systems provide significant retrospective trading systems, not ones which will help you trade effectively in the future.
8. Get to know one cross at a time - Each currency pair is unique, and has a unique way of moving in the marketplace. The forces which cause the pair to move up and down are individual to each cross, so study them and learn from your experience and apply your learning to one cross at a time.
9. Risk Reward - If you put a 20 point stop and a 50 point profit your chances of winning are probably about 1-3 against you. In fact, given the spread you're trading on, it's more likely to be 1-4. Play the odds the market gives you.
10. Trading for Wrong Reasons - Don't trade if you are bored, unsure or reacting on a whim. The reason that you are bored in the first place is probably because there is no trade to make in the first place. If you are unsure, it's probably because you can't see the trade to make, so don't make one.
11. Zen Trading- Even when you have taken a position in the markets, you should try and think as you would if you hadn't taken one. This level of detachment is essential if you want to retain your clarity of mind and avoid succumbing to emotional impulses and therefore increasing the likelihood of incurring losses. To achieve this, you need to cultivate a calm and relaxed outlook. Trade in brief periods of no more than a few hours at a time and accept that once the trade has been made, it's out of your hands.
12. Determination - Once you have decided to place a trade, stick to it and let it run its course. This means that if your stop loss is close to being triggered, let it trigger. If you move your stop midway through a trade's life, you are more than likely to suffer worse moves against you. Your determination must be show itself when you acknowledge that you got it wrong, so get out.
13. Short-term Moving Average Crossovers - This is one of the most dangerous trade scenarios for non professional traders. When the short-term moving average crosses the longer-term moving average it only means that the average price in the short run is equal to the average price in the longer run. This is neither a bullish nor bearish indication, so don't fall into the trap of believing it is one.
14. Stochastic - Another dangerous scenario. When it first signals an exhausted condition that's when the big spike in the "exhausted" currency cross tends to occur. My advice is to buy on the first sign of an overbought cross and then sell on the first sign of an oversold one. This approach means that you'll be with the trend and have successfully identified a positive move that still has some way to go. So if percentage K and percentage D are both crossing 80, then buy! (This is the same on sell side, where you sell at 20).
15. One cross is all that counts - EURUSD seems to be trading higher, so you buy GBPUSD because it appears not to have moved yet. This is dangerous. Focus on one cross at a time - if EURUSD looks good to you, then just buy EURUSD.
16. Wrong Broker - A lot of FOREX brokers are in business only to make money from yours. Read forums, blogs and chats around the net to get an unbiased opinion before you choose your broker.
17. Too bullish - Trading statistics show that 90% of most traders will fail at some point. Being too bullish about your trading aptitude can be fatal to your long-term success. You can always learn more about trading the markets, even if you are currently successful in your trades. Stay modest, and keep your eyes open for new ideas and bad habits you might be falling in to.
18. Interpret forex news yourself - Learn to read the source documents of forex news and events - don't rely on the interpretations of news media or others.
John Gaines
online trading, currency trading, financial service
A veteran of online trading, John Gaines offers the financial services industry his perspectives and expertise on a variety of trading systems and financial instruments, including forex, CFDs, futures, options and stocks.
Article Source: http://EzineArticles.com/?expert=John_Gaines
This two-part report clearly and simply details essential tips on how to avoid typical pitfalls and start making more money in your forex trading.
1. Trade pairs, not currencies - Like any relationship, you have to know both sides. Success or failure in forex trading depends upon being right about both currencies and how they impact one another, not just one.
2. Knowledge is Power - When starting out trading forex online, it is essential that you understand the basics of this market if you want to make the most of your investments.
The main forex influencer is global news and events. For example, say an ECB statement is released on European interest rates which typically will cause a flurry of activity. Most newcomers react violently to news like this and close their positions and subsequently miss out on some of the best trading opportunities by waiting until the market calms down. The potential in the forex market is in the volatility, not in its tranquility.
3. Unambitious trading - Many new traders will place very tight orders in order to take very small profits. This is not a sustainable approach because although you may be profitable in the short run (if you are lucky), you risk losing in the longer term as you have to recover the difference between the bid and the ask price before you can make any profit and this is much more difficult when you make small trades than when you make larger ones.
4. Over-cautious trading - Like the trader who tries to take small incremental profits all the time, the trader who places tight stop losses with a retail forex broker is doomed. As we stated above, you have to give your position a fair chance to demonstrate its ability to produce. If you don't place reasonable stop losses that allow your trade to do so, you will always end up undercutting yourself and losing a small piece of your deposit with every trade.
5. Independence - If you are new to forex, you will either decide to trade your own money or to have a broker trade it for you. So far, so good. But your risk of losing increases exponentially if you either of these two things:
Interfere with what your broker is doing on your behalf (as his strategy might require a long gestation period);
Seek advice from too many sources - multiple input will only result in multiple losses. Take a position, ride with it and then analyse the outcome - by yourself, for yourself.
6. Tiny margins - Margin trading is one of the biggest advantages in trading forex as it allows you to trade amounts far larger than the total of your deposits. However, it can also be dangerous to novice traders as it can appeal to the greed factor that destroys many forex traders. The best guideline is to increase your leverage in line with your experience and success.
7. No strategy - The aim of making money is not a trading strategy. A strategy is your map for how you plan to make money. Your strategy details the approach you are going to take, which currencies you are going to trade and how you will manage your risk. Without a strategy, you may become one of the 90% of new traders that lose their money.
8. Trading Off-Peak Hours - Professional FX traders, option traders, and hedge funds posses a huge advantage over small retail traders during off-peak hours (between 2200 CET and 1000 CET) as they can hedge their positions and move them around when there is far small trade volume is going through (meaning their risk is smaller). The best advice for trading during off peak hours is simple - don't.
9. The only way is up/down - When the market is on its way up, the market is on its way up. When the market is going down, the market is going down. That's it. There are many systems which analyse past trends, but none that can accurately predict the future. But if you acknowledge to yourself that all that is happening at any time is that the market is simply moving, you'll be amazed at how hard it is to blame anyone else.
10. Trade on the news - Most of the really big market moves occur around news time. Trading volume is high and the moves are significant; this means there is no better time to trade than when news is released. This is when the big players adjust their positions and prices change resulting in a serious currency flow.
11. Exiting Trades - If you place a trade and it's not working out for you, get out. Don't compound your mistake by staying in and hoping for a reversal. If you're in a winning trade, don't talk yourself out of the position because you're bored or want to relieve stress; stress is a natural part of trading; get used to it.
12. Don't trade too short-term - If you are aiming to make less than 20 points profit, don't undertake the trade. The spread you are trading on will make the odds against you far too high.
13. Don't be smart - The most successful traders I know keep their trading simple. They don't analyse all day or research historical trends and track web logs and their results are excellent.
14. Tops and Bottoms - There are no real "bargains" in trading foreign exchange. Trade in the direction the price is going in and you're results will be almost guaranteed to improve.
15. Ignoring the technicals- Understanding whether the market is over-extended long or short is a key indicator of price action. Spikes occur in the market when it is moving all one way.
16. Emotional Trading - Without that all-important strategy, you're trades essentially are thoughts only and thoughts are emotions and a very poor foundation for trading. When most of us are upset and emotional, we don't tend to make the wisest decisions. Don't let your emotions sway you.
17. Confidence - Confidence comes from successful trading. If you lose money early in your trading career it's very difficult to regain it; the trick is not to go off half-cocked; learn the business before you trade. Remember, knowledge is power.
The second and final part of this report clearly and simply details more essential tips on how to avoid the pitfalls and start making more money in your forex trading.
1. Take it like a man - If you decide to ride a loss, you are simply displaying stupidity and cowardice. It takes guts to accept your loss and wait for tomorrow to try again. Sticking to a bad position ruins lots of traders - permanently. Try to remember that the market often behaves illogically, so don't get commit to any one trade; it's just a trade. One good trade will not make you a trading success; it's ongoing regular performance over months and years that makes a good trader.
2. Focus - Fantasising about possible profits and then "spending" them before you have realised them is no good. Focus on your current position(s) and place reasonable stop losses at the time you do the trade. Then sit back and enjoy the ride - you have no real control from now on, the market will do what it wants to do.
3. Don't trust demos - Demo trading often causes new traders to learn bad habits. These bad habits, which can be very dangerous in the long run, come about because you are playing with virtual money. Once you know how your broker's system works, start trading small amounts and only take the risk you can afford to win or lose.
4. Stick to the strategy - When you make money on a well thought-out strategic trade, don't go and lose half of it next time on a fancy; stick to your strategy and invest profits on the next trade that matches your long-term goals.
5. Trade today - Most successful day traders are highly focused on what's happening in the short-term, not what may happen over the next month. If you're trading with 40 to 60-point stops focus on what's happening today as the market will probably move too quickly to consider the long-term future. However, the long-term trends are not unimportant; they will not always help you though if you're trading intraday.
6. The clues are in the details - The bottom line on your account balance doesn't tell the whole story. Consider individual trade details; analyse your losses and the telling losing streaks. Generally, traders that make money without suffering significant daily losses have the best chance of sustaining positive performance in the long term.
7. Simulated Results - Be very careful and wary about infamous "black box" systems. These so-called trading signal systems do not often explain exactly how the trade signals they generate are produced. Typically, these systems only show their track record of extraordinary results - historical results. Successfully predicting future trade scenarios is altogether more complex. The high-speed algorithmic capabilities of these systems provide significant retrospective trading systems, not ones which will help you trade effectively in the future.
8. Get to know one cross at a time - Each currency pair is unique, and has a unique way of moving in the marketplace. The forces which cause the pair to move up and down are individual to each cross, so study them and learn from your experience and apply your learning to one cross at a time.
9. Risk Reward - If you put a 20 point stop and a 50 point profit your chances of winning are probably about 1-3 against you. In fact, given the spread you're trading on, it's more likely to be 1-4. Play the odds the market gives you.
10. Trading for Wrong Reasons - Don't trade if you are bored, unsure or reacting on a whim. The reason that you are bored in the first place is probably because there is no trade to make in the first place. If you are unsure, it's probably because you can't see the trade to make, so don't make one.
11. Zen Trading- Even when you have taken a position in the markets, you should try and think as you would if you hadn't taken one. This level of detachment is essential if you want to retain your clarity of mind and avoid succumbing to emotional impulses and therefore increasing the likelihood of incurring losses. To achieve this, you need to cultivate a calm and relaxed outlook. Trade in brief periods of no more than a few hours at a time and accept that once the trade has been made, it's out of your hands.
12. Determination - Once you have decided to place a trade, stick to it and let it run its course. This means that if your stop loss is close to being triggered, let it trigger. If you move your stop midway through a trade's life, you are more than likely to suffer worse moves against you. Your determination must be show itself when you acknowledge that you got it wrong, so get out.
13. Short-term Moving Average Crossovers - This is one of the most dangerous trade scenarios for non professional traders. When the short-term moving average crosses the longer-term moving average it only means that the average price in the short run is equal to the average price in the longer run. This is neither a bullish nor bearish indication, so don't fall into the trap of believing it is one.
14. Stochastic - Another dangerous scenario. When it first signals an exhausted condition that's when the big spike in the "exhausted" currency cross tends to occur. My advice is to buy on the first sign of an overbought cross and then sell on the first sign of an oversold one. This approach means that you'll be with the trend and have successfully identified a positive move that still has some way to go. So if percentage K and percentage D are both crossing 80, then buy! (This is the same on sell side, where you sell at 20).
15. One cross is all that counts - EURUSD seems to be trading higher, so you buy GBPUSD because it appears not to have moved yet. This is dangerous. Focus on one cross at a time - if EURUSD looks good to you, then just buy EURUSD.
16. Wrong Broker - A lot of FOREX brokers are in business only to make money from yours. Read forums, blogs and chats around the net to get an unbiased opinion before you choose your broker.
17. Too bullish - Trading statistics show that 90% of most traders will fail at some point. Being too bullish about your trading aptitude can be fatal to your long-term success. You can always learn more about trading the markets, even if you are currently successful in your trades. Stay modest, and keep your eyes open for new ideas and bad habits you might be falling in to.
18. Interpret forex news yourself - Learn to read the source documents of forex news and events - don't rely on the interpretations of news media or others.
John Gaines
online trading, currency trading, financial service
A veteran of online trading, John Gaines offers the financial services industry his perspectives and expertise on a variety of trading systems and financial instruments, including forex, CFDs, futures, options and stocks.
Article Source: http://EzineArticles.com/?expert=John_Gaines
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