Emerging Markets

Certain markets, particularly in Latin America, Eastern Europe and Asia, still have developing economies compared with Western countries which often means that they will have restrictions in the form of legal and regulatory frameworks designed to protect their currencies and economies from speculators. This makes trading in these currencies much more difficult than with the major world currencies and you may need to consider dealing in those countries in a ‘hard currency’ such as the U.S. dollar instead.

Managing Your Foreign Exchange Risk
Risk Control
Controlling risk is one of the most important ingredients of successful trading. While it is emotionally more appealing to focus on the upside of trading, every trader should know precisely how much he is willing to lose on each trade before cutting losses, and how much he is willing to lose in his account before ceasing trading and re-evaluating.

Risk will essentially be controlled in two ways:
1) by exiting losing trades before losses exceed your pre-determined maximum tolerance (or “cutting losses”), and
2) by limiting the “leverage” or position size you trade for a given account size.

Cutting Losses

Too often, the beginning trader will be overly concerned about incurring losing trades. He therefore lets losses mount, with the “hope” that the market will turn around and the loss will turn into a gain.

Almost all successful trading strategies include a disciplined procedure for cutting losses. When a trader is down on a positions, many emotions often come into play, making it difficult to cut losses at the right level. The best practice is to decide where losses will be cut before a trade is even initiated. This will assure the trader of the maximum amount he can expect to lose on the trade.

The other key element of risk control is overall account risk. In other words, a trader should know before he begins his trading endeavor how much of his account he is willing to lose before ceasing trading and re-evaluating his strategy. If you open an account with $2,000, are you willing to lose all $2,000? $1,000? As with risk control on individual trades, the most important discipline is to decide on a level and stick with it.

Once you have a clear idea of what your foreign exchange exposure will be and the currencies involved, you will be in a position to consider how best to manage the risk. The options available to you also fall into three categories:

Do Nothing: You might choose not to actively manage your risk, which means dealing in the spot market whenever the cash flow requirement arises. This is a very high-risk and speculative strategy, as you will never know the rate at which you will deal until the day and time the transaction takes place. Foreign exchange rates are notoriously volatile and movements make the difference between making a profit or a loss. It is impossible to properly budget and plan your business if you are relying on buying or selling your currency in the spot market.

Take out a Forward Foreign Exchange Contract: As soon as you know that a foreign exchange risk will occur, you could decide to book a forward foreign exchange contract with your bank. This will enable you to fix the exchange rate immediately to give you the certainty of knowing exactly how much that foreign currency will cost or how much you will receive at the time of settlement whenever this is due to occur. As a result, you can budget with complete confidence. However, you will not be able to benefit if the exchange rate then moves in your favour as you will have entered into a binding contract which you are obliged to fulfill. You will also need to agree a credit facility with your bank for you to enter into this kind of transaction.

Use Currency Options: A currency option will protect you against adverse exchange rate movements in the same way as a forward contract does, but it will also allow the potential for gains should the market move in your favor. For this reason, a currency option is often described as a forward contract that you can rip up and walk away from if you don’t need it. Many banks offer currency options which will give you protection and flexibility, but this type of product will always involve a premium of some sort. The premium involved might be a cash amount or it could be factored into the pricing of the transaction.

Finally, you may consider opening a Foreign Currency Account if you regularly trade in a particular currency and have both revenues and expenses in that currency as this will negate to need to exchange the currency in the first place. The method you decide to use to protect your business from foreign exchange risk will depend on what is right for you but you will probably decide to use a combination of all three methods to give you maximum protection and flexibility.

Trading Strategy

Making trading decisions and developing a sound and effective trading strategy is an important foundation of trading. Before developing a trading strategy, a trader should have a working knowledge of technical analysis as well as knowledge of some of the more popular technical studies.

Sample Strategy 1 – Simple Moving Average
Successful trading is often described as optimizing your risk with respect to your reward, or upside. Any trading strategy should have a disciplined method of limiting risk while making the most out of favorable market moves. We will illustrate one decision making model which uses a Simple Moving Average (”SMA”) technical study, based on a 12-period SMA, where each period is 15 minutes. This is one example of a trading decision making strategy, and we encourage any trader to research other strategies as thoroughly as possible.

We will use a simple algorithm: when the price of the currency crosses above the 12-period SMA, it will be taken as a signal to buy at the market. When the currency price crosses below the 12-period SMA, it will be a signal to “Stop and Reverse” (”SAR”). In other words, a long position will be liquidated and a short position will be established, both with market orders. Thus this system will keep the traders “always in” the market – he will always have either a long or short position after the first signal

This is a simple example of technical analysis applied to trading. Many strategies used by professional traders make use of moving averages along with other indicators or “filters”. Note that the moving average method has an element of risk control built in: a long position will be stopped out fairly quickly in a falling market because the price will drop below the SMA, generating a stop-and-reverse signal. The same holds true for a sell signal in a rising market.

Sample Strategy 2 – Support and Resistance Levels
One use of technical analysis, apart from technical studies, is in deriving “support” and “resistance” levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.

Determining Position Size
Before beginning any trading program, an assessment should be made of the maximum account loss that is likely to occur over time, per lot . For example, assume you have determined that your worse case loss on any trade is 30 pips. That translates into approximately $300 per $100,000 position size. Further assume that the $100,000 position size is equal to one lot. Five consecutive losing trades would result in a loss of $1,500 (5 x $300); a difficult period but not to be unexpected over the long run. For a $10,000 account trading one lot, this translates into a 15% loss. Therefore, even though it may be possible to trade 5 lots or more with a $10,000 account, this analysis suggests that the resulting “drawdown” would be too great (75% or more of the account value would be wiped out).

Any trader should have a sense of this maximum loss per lot, and then determine the amount he wishes to trade for a given account size that will yield tolerable drawdown.

Entries and Exits FOREX Trading

1. Placing an order
Placing an order is like learning to drive a car – you will have to check a few things before clicking that mouse and pretty soon you will be able to place orders without any further assistance.

2. What is a stop loss
Stop loss or stop order is a feature that you can use to cut your losses when the market isn’t going your way. Do not place your orders without a stop order – stop orders save your capital and keep you in the game much longer.

3. What is a trailing stop
Trailing stop simply put is the number of pips the market should move your stop-order – if you trailing stop is set at 25 – then when you make 25 pips in profit, your stop-order is moved 25 pips too.

4. What is a bullish or bearish market
A Bullish/Bearish market is one that is controlled by the demand and supply of market – it’s a temporary period of the market. FOREX market is either bullish, bearish or sideways at any given point of time.

5. What is a sideways market
A Sideways market is one that is neither controlled by the bulls nor bears – infact, both bulls and bears are trying to get control of the market. Sideways market usually occurs when there is no positive or negative economical data from both the countries.

FOREX Leverage and Spreads

FOREX Leverage and FOREX Spreads are TWO distinct features of FOREX Market.

Let’s deal with FOREX Spread first.
A spread is the difference between BUY and SELL price of a currency pair.
The market will give you TWO different prices for the same currency pair –

example:
EUR/USD: 1.5586 (sell) and 1.5589 (buy)
so, if you want to SELL the EUR/USD currency (because you think USD dollar is going to go up) – then you will be able to sell it at 1.5586

Spread is basically for opening your trade.
IF you are going to BUY the EUR/USD currency(because you think EURO is going up) – then you wil be able to buy it at 1.5589
The difference between buy and sell (1.5589-1.5586) = 3 pips is called the SPREAD.

Yes! its important to have a reliable broker – who has enough NET assets that allows the brokerage to liquidate your account easily.

However, your charting package is the “DECISION MAKER” – you make your decisions based on what the charts are showing you and your ability to read them correctly.

It is VERY important to get a charting package – which has at least a few of the following:
1. Tools that you know you need (will use).
2. Tools that you MIGHT want to use in your back-testing
3. Tools that generate “alerts” when needed – for example, you might have drawn what you think is an IMPORTANT support or resistance on the chart – what good is it gonna do you – if it doesn’t “ring a bell” when the market hits that price? – maybe your in the other room – or maybe you on the same computer reading an interesting article about US vs North Korea – shouldn’t your charting package “alert” you of a moving market?
4. I personally would prefer a package that would alert me a few PIPS – BEFORE my support or resistance is hit – either it can make noise on my computer or send me a text message – so far, I am yet to realize this joy in my life.
5. You also need a charting package that doesn’t use much of your computer’s resource – who wants something that freezes up your computer every now & then?
6. Last but not the least – you will need something that you “enjoy” or at least “tolerate” looking at – that’s only achievable if the charting package allows you to change backgrounds, candlestick colors, trendline, channel colors etc..

Prepare a list of “what my charting package SHOULD be” – and then compare it with what’s available. Take them for a test drive – almost all of the package subscriptions can be taken for a test drive – just make sure to cancel them (if you don’t like it)

FOREX Brokers on the other hand – the only test drive you can do – is use their demo accounts – and “feel” their trading platform and execution.

All the best in your setup.

Meaning and value of a PIP

Meaning and value of a Price interest point – PIP. It is the lowest denominator in currency trading – the actual value of a pip is based on your type of account – usually for
– standard accounts – ONE pip=$10
– for mini accounts – ONE pip=$1

Before we get into this more – let’s cover some topics that will make it easier for you to understand and appreciate the value of a PIP.

Currency Exchange

The investor’s goal in FOREX trading is to profit from foreign currency movements. FOREX trading or currency trading is always done in currency pairs. For example, the exchange rate of EUR/USD on Aug 16th, 2009 was 1.5057. This number is also referred to as a “FOREX rate” or just “rate” for short. If the investor had bought 1000 euros on that date, he would have paid 1505.70 U.S. dollars. One day later, the FOREX rate was 1.6083, which means that the value of the euro (the numerator of the EUR/USD ratio) increased in relation to the U.S. dollar.

The investor could now sell the 1000 euros in order to receive 1608.30 dollars. Therefore, the investor would have USD 102.60 more than what he had started one day earlier. However, to know if the investor made a good investment, one needs to compare this investment option to alternative investments. At the very minimum, the return on investment (ROI) should be compared to the return on a “risk-free” investment. One example of a risk-free investment is long-term U.S. government bonds since there is practically no chance for a default, i.e. the U.S. government going bankrupt or being unable or unwilling to pay its debt obligation.

When trading currencies, trade only when you expect the currency you are buying to increase in value relative to the currency you are selling. If the currency you are buying does increase in value, you must sell back the other currency in order to lock in a profit. An open trade (also called an open position) is a trade in which a trader has bought or sold a particular currency pair and has not yet sold or bought back the equivalent amount to close the position.

However, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency.

In contrast to the world’s stock markets, foreign exchange is traded without the constraints of a central physical exchange. Transactions are instead conducted via telephone or online. With this transaction structure as its foundation, the Foreign Exchange Market has become by far the largest marketplace in the world. Average volume in foreign exchange exceeds $1.5 trillion per day versus only $25 billion per day traded on the New York Stock Exchange. This high volume is advantageous from a trading standpoint because transactions can be executed quickly and with low transaction costs (i.e., a small bid/ask spread).

As a result, foreign exchange trading has long been recognized as a superior investment opportunity by major banks, multinational corporations and other institutions. Today, this market is more widely available to the individual trader than ever before.

Getting Started

You don’t need much to get started with FOREX . The main things you need are: a computer with Internet access, a funded FOREX account with foreign currency exchange broker, and a FOREX online system trading.

It’s not a secret that to minimize the risks of losing money, some fundamental charting knowledge is as well recommended before you start trading FOREX.

No doubt, you have to pay serious attention to the fact that FOREX charts help the investor by providing a visual representation of exchange rate variations. So far as we know, many variables affect currency exchange rates, such as interest rates, bank policies, geopolitics, and even the time of day may affect exchange rates. In fact, charting is an required tool in FOREX trading.

Besides daily charts, hourly charts, and 15-minute charts are used while trading in FOREX. It is interesting to know that daily charts will help you specify the overall trend from a position trading point-of-view, and the hourly (one hour) chart will give you a feel for the intraday trend. We can safely presume that the 15-minute chart is used for entry and exit – with help from the five-minute chart, where the price is moving rapidly, and you need to be nearer the action.”

It is no great surprise that being one of the technical programs, FOREX charting is based on the principal ‘history repeats itself’. In a word, FOREX traders who study charts predict the market future by evaluating past market performance. By the way, the time frame used for charting might differs for different traders, some analyze the past one week, some prefer six months analysis, and there are also traders who analyze the market for the past five to ten years before getting involved in a FOREX trade. Actually, a huge variety of FOREX charts are available in the market.

About FOREX (Foreign Exchange)

Globalisation

Globalisation is a worldwide movement toward economic, financial, trade and communication integration. Globalisation implies “a process which involves growing economic competition, openness and interdependence of countries worldwide”. As a result, globalization presents Opportunities and Challenges in the world of financial markets especially foreign exchange market. The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another currency. In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign currency market started during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system. (The Bretton Woods Accord – Near the end of WWII, The Bretton Woods agreement was reached on the initiative of the USA in July 1944. The conference held in Bretton Woods, New Hampshire rejected John Maynard Keynes suggestion for a new world reserve currency in favor of a system built on the US Dollar.)

Let’s start with the fact that getting started in FOREX trading is simple and you can always test your abilities first in a mam forex account before you go ‘live’ with real money.

Why Forex ?

Remember: to get started in fx online trading, we have to get to know what FOREX is. For the novice, FOREX trading involves buying and selling the different currencies of the world. Actually, a FOREX deal is made when one purchases one currency and sells another at the same time. You should know that it is always traded in pairs, Euro/USD, CHF/USD, USD/JPY etc – you get ‘short’ in a currency every time to buy another and the income is made when you buy-low and sell-high.

• Accessibility
– All anyone needs to take part in the action is a PC/notebook with good internet connection. That’s all!

• 24 hour Market
– The FOREX market is open 24 hours a day. You can trade there anytime and anyplace you wish.

• Narrow focus
– There is no room for confusion even though the market is huge. It’s quite simple to get a clear view of what’s going on in the financial market.

• Liquidity
– The enormous volume of daily trades makes it the most liquid market in the world (just over $3 trillion only!)

• Cornered Market
– It’s sure one huge market where NOBODY can corner.