20th November 2011

The Origins of Forex

If you don’t know the origins of the forex market don’t feel bad; even some of the most experienced forex traders don’t know any of the history of the market.  However, knowing the history of any market tends to make for a more efficient and educated investor.

The forex market, also known as the foreign exchange market, was established in 1971.  It is a cash-bank market and was formed when the United States went off the gold standard, which was adopted in the early 1930s.  The U.S. abandoned the gold standard after the 1929 stock market crash and the British Pound (GBP) became stronger than the American dollar (USD).

Before the forex market came about, there were other times when paper money (like the USD) could be traded for gold.  Known as the Classical Gold Standard, this period lasted throughout much of the 19th century and ended around the onset of World War I.  The gold standard simply means that the value of the local currency is set based on the value of gold.

The gold standard period allowed unrestricted capital mobility.  It also contributed to the stability of the traded currency pairs.  During this time, any countries that participated were required to abide by various rules and restrictions.

Under the gold standard model, the central banks would back their paper money with gold.  In theory, the currencies backed in this manner would maintain a certain level of stability and not fall prey to inflation.  As we all know, this hasn’t always been the case.  As the years went by, investors and financial experts developed the forex market as we know it today.

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16th November 2011

Why Forex Rates Fluctuate

Currency Rate Changes

The currency rates in the foreign exchange market change daily, and can often change several times during the day.  There are several reasons for the fluctuations, but professional and private forex traders make their profits by basing their trades around changes in currency valuations.  Since the forex market is a 24-hour global market, currency rates are subject to frequent changes, according to the economic, political, and social conditions in each country that participates in the market. 

Market Conditions

Conditions within the forex market are one factor that may affect currency rates.  If one country’s currency rises or declines sharply during trading, this can influence the relative value of other currencies.  As an example, if the Japanese Yen grows in value overnight due to the strength of the Asian markets, the value of Western currencies such as the United States Dollar (USD) and the British Pound (GBP) may decline simultaneously.  Conversely, if the British Pound’s value rises suddenly, this may cause the value of other currencies to decrease. 

Economic Indicators

A nation’s economic outlook also has a strong impact on the value of its currency.  The country’s gross domestic product, the national unemployment rate, the amount of debt a country owes to other nations and the projected future for the economy all influence the worth of the national currency. 

National Stability

Countries that are experiencing strong political or social upheavals generally have weak currency values during these times of change.  Areas of the world where the government or the financial industry is in turmoil may be considered high-risk environments in which forex traders may not want to invest.  When these events happen, traders who are holding currencies in these countries may sell their shares quickly, causing the value of the currency to go down. 

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13th November 2011

Analysing the Forex Market

When analysing the Forex market, there are two main options – traders can choose between using a technique known as fundamental analysis or the alternative option, technical analysis.

Fundamental Analysis

Fundamental analysis involves the exploration and investigation of multifaceted aspects of global culture. For example, the focus here is on the political, economic and social forces that have an impact on supply and demand worldwide. Large-scale and general economic indicators are used to make assumptions and judgements, leading to trading decisions based on the fullest possible available information. These include data on unemployment, interest rates, the rates of economic growth and inflation. Usually, it is possible to access much of this information for free. For example, CitiFX reviews outline the excellent quality of Forex news and information available via Citigroup, which is behind the CitiFX Pro trading platform.

In terms of how this information is interpreted, the short answer is that this is highly subjective – individual traders will consider the different types of data in different ways and weight their importance and relevance accordingly.

Technical Analysis

Traders who engage in technical analysis study the movement of currency prices and often use historical data to try to predict future outcomes. The theory at work here is that the price of a currency already reflects the relevant and available market data and a simple study of price movements will enable traders to make informed and sound trading decisions.

This is where charts become important tools of the trade, as they are employed to establish patterns and identify as a route to securing opportunities for profit. Technical analysts search the Forex markets for recognisable trends and advocate the identification of these trends as early as possible as the route to success.

Which is Best?

There is no right answer. Technical Analysis is generally preferred by most traders because it involves following trends and charts and is capable of covering a good number of currency pairs, as opposed to Fundamental Analysis which can mean wading through a considerable amount of market data that is relevant to a lesser number of currency pairs.

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9th November 2011

Should You Trade Alone or in a Group?

Do you collaborate well with people, and are you interested in learning more about forex first-hand? If so, trading as part of a group might be a great idea. A Forex club or group can give you access to resources you might not otherwise have. There may be members of the group, for example, who are citizens of the countries you are trading currency pairs in. If so, they can give you first-hand information about the health of their country’s currency. In addition, members who are more experienced traders will happily mentor you if you are new to forex.

With a forex club, all members share both the risk of trading together and the goal of making money. Risk is minimised for investors of the group, because everyone pools his or her money and absorbs the risk of the trade as part of the group. Shared resources can also mean bigger currency purchases and therefore the potential for greater profit.

In addition to the financial leverage the group provides, it also offers greater intellectual leverage for trades. Members can debate the pros and cons of a certain strategy, with more experienced members offering perspective and wisdom. Shared opinions about strategy may mean greater success, especially if successful forex traders within the group endorse them. Similarly, poorly thought out strategies and opinions will quickly be analysed and picked apart, which adds to the knowledge of all involved.

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2nd November 2011

What Moves the Online Currency Trading Market?

The hardest thing to understand about the online currency trading market is what actually affects it. Every individual currency is affected by events in the currency’s country and even those of other countries. While you can rely on technical analysis, which uses trends to forecast trades, another method relies on the news that actually affects how currencies fluctuate. This method is called fundamental analysis.

The Fundamental Considerations

There are four major fundamental considerations. These include political conditions, monetary flows, major economic news and market psychology. Each of these factors has a significant effect on the value of currencies. A single change can change the value of a currency in less than an hour.

All types of political events including internal, regional and international events change the values of currencies. Often before major votes, elections and times of political instability, currency values become highly volatile. This affects not only the single country, those around it and those who trade with the country.

The trade flow of a country changes the amount of money going in and out of the country. When companies merge, shut down or demand of products change, the value of a currency can rise or fall. This often creates temporary changes, which are hard to catch in technical analysis.

Any major economic changes affect currencies. From changes in policies to unemployment, the state of a country’s economy is the biggest factor in affecting online currency trading. Economic events happen on a daily and sometimes hourly basis.

Even rumours can greatly affect the value of currencies when trading forex. The possibility of a major political or economic event is often enough to cause traders to avoid a currency, weakening it. Traders look for safer or less risky trades, until currencies stabilise.

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25th October 2011

Choosing an Online Forex Trading Broker

Before you start investing in the forex market, you should take the time to find a suitable broker. An online forex trading broker helps put your trades into the system and can even provide advice on what is best for you. While brokers are less popular than in the past due to more advanced electronic online trading platforms, they are still useful, especially for beginners who know little about how to input and exit trades.

The best way to choose an online broker is by knowing which questions to ask. It also pays to know your needs. Not all brokers offer the same types or varieties of trades. One thing that is crucial to look at is the size of the broker. This means access to better prices and quality execution of trades. The sooner your trades are executed, the sooner you can take advantage of the possible profits. Bigger brokers have the benefit of size on their side, so you get better service.

Who Executes Orders

Two of the most common ways rates are quoted are dealing desk and no dealing desk. Orders are executed differently, depending on which your online FX trading broker uses. Dealing desk means your broker handles your orders, but there may be trade restrictions during economic or news events. No dealing desk means a bank handles your orders, but you do not have the same trade restrictions.

Questions to Ask

If you want to ensure orders are executed correctly, ask how long your broker has been in business. The more experience the better. Some brokers have trading restrictions. Ask about any restrictions and how they may affect you personally. Find out who exactly quotes rates. It could be the broker, a single bank or multiple banks. Also, ask about spreads. Find out how tight spreads are and if they are fixed or variable.

The more questions you ask before choosing a broker, the less surprises you have later on. Trading forex is much easier when you do not have to worry about mistakes from your broker. An excellent broker also provides customer service to answer all your questions, even before you choose them.

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18th October 2011

Trade Forex Safely with Limits

Trading forex is not just about buying and selling currency pairs in the hope of making a profit. There are rules and tools for traders to use to help make trading not only easier, but also safer. Many investors have busy schedules, which may prevent them from having 24/7 access to their accounts. Should the market suddenly change, a particularly volatile currency pair could result in major losses if left unmanaged for even a few hours. To prevent this from happening, you should always set limits on your positions.

When you set up a trade, minimise any potential losses by using a stop/loss order, also referred to as a stop order. You choose the level at which you will exit the position automatically if the currency drops or rises above a certain value, depending on your position. By doing this you will only be liable to lose within the limits you set. The closer you set the stop/loss order to the original currency value, the quicker the position will be exited when the value changes, which can also minimise gains. Therefore you should set a moderate level, which allows for normal currency fluctuations.

You can also protect against sudden or unexpected losses, caused by major fluctuations, by setting a limit order. You automatically exit a position once your profits or currency value reaches a predetermined level. This should be set much further away from the original currency value. Setting a limit provides a safe way to exit while guaranteeing a profit.

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6th October 2011

Can You Really Trade Forex Automatically?

You have probably seen advertisements for automatic forex systems. They claim that you can simply “set and forget” your forex trading; in other words, you simply press a button, so to speak, sit back and let the system make money for you.

It is not quite that simple though. While you might have a forex trading platform and software system that will allow you to trade in forex ‘automatically,’ it does not mean you do not have any input. Instead, what such systems allow you to do is set the parameters of for your trades, so that you can get out of or into a particular trade once a predetermined level of losses or gains have been reached.

The forex trading software you use lets you set trades automatically, which is to say you do not have to actually monitor progress and enter or exit them manually. However, you are the brains behind what that software does; you tell it what to do and it does it. It is not a turnkey system that does everything for you. Forex requires your interaction and participation for success and no ‘automatic’ system is a substitute for that. The software and systems you choose do serve to support you in this fast-paced market and you could not operate without them. These tools are available through your broker and should cost you nothing, beyond the commissions you already pay to trade.

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2nd October 2011

Avoid Emotion When You Are Trading in Forex

To be a successful forex trader, you need to adopt a reliable system. That system gives you a blueprint to follow, a series of steps to take that you know will result in successful trades in most cases. With this blueprint in place, you can focus on the trades as they happen, make decisions objectively and keep emotions out of play as you evaluate whether or not a particular trade is succeeding.

Even before you enter into a trade, decide when you are going to get out. Stop/loss orders let you set when that happens, so that you do not have to think about it. If you are succeeding, by all means stay in a trade; however, once you begin to see a plateau, decide when you are going to get out and then set your stop/loss order so that it executes when performance drops below a predetermined point.

Though all forex traders hope to succeed, the best know that no fx trading will succeed if they let their emotions rule. If you are winning with a particular trade you should still try to remain cool and objective. If you are losing, stay objective and simply deal with whatever is happening; it may be time to cut your losses and get out for now.

A good forex trading system is going to help you plan your trades objectively and achieve the best results. Remember, as well, that you are not going to win on every trade. The successful forex trader knows that wins have to outweigh losses, but he or she does not take any single loss personally; neither should you.

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28th September 2011

What Does Moody’s Threat to Downgrade US Credit Mean Globally?

As the world’s largest economy, the US has had significantly rocky times recently, with Moody’s decision to review the US’ credit rating; a possible decision to downgrade may be the result unless the debt ceiling resolution can be reached by 2nd August. This has caused the US dollar to struggle against other currencies, most notably the Japanese yen and the Swiss franc, although it has also had significant fluctuations against the euro and the pound.

The US’ possible downgrade from its current AAA credit rating, would greatly affect not just its domestic economy and therefore negatively impact the US dollar’s trading value in Forex; it would also affect economies around the world as well. A possible downgrade also adds to the shaky situation that has come about as a result of the ongoing debt crisis in the eurozone. Therefore, the US economy would be affected by a downgrade in US credit rating or a US default on credit, but so would many others.

Other news

Greece’s credit rating was also downgraded from a B+ to a CCC rating on Thursday 14 July. At the same time, Italy sold €4.96 billion of its multiyear Treasury bonds. Italy’s government also called for a confidence vote in the Senate on a budget bill that has €40 billion in austerity measures, mostly to take effect in 2013 and 2014.

Specifically related to Forex trading, the euro gained some ground against the US dollar in spite of the debt problems ongoing in Europe. It was up to $1.4191 against the US dollar, from $1.4158 late on Wednesday.

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