Risk determines the trading dynamics

iFC Markets market overview

The recent dynamics in the currency markets remains and is still determined by the risk. Understanding that the Dubai World problems will not affect the global economy allowed highly yielding currencies to recover but put the Dollar and Yen down. A supporting factor was also UAE authorities' willingness to open a credit line to the country's banking system which has immediately reduced the risks level over a possible Dubai World bankruptcy. EURUSD got back up above 1.50. Economic data is helping the European currency too. November's Consumer Prices showed the first since April increase by 0.6% in Euro zone outbeating the optimists with their +0.4%. US data came rather positive too. Chicago's ISM said that Business Sentiment went up to 56.1, being a maximum since August 2008. Dallas Fed's Manufacturing Activity has also bloomed. Business Activity grew from -3.3 a month earlier to 0.3 although the employment sector remained weak, it improved from October's -15.1 to this month's -11.9.

The Pound felt much worse as the Dubai fund's problems are a partly its own as long as about 40% of the fund's debts belong to British banks. Apart from that, the British consumers' confidence fell for the first time in more than a year. Another bad news came from the Bank of England saying that the net retail lending level fell by 579 million GBP in October. A disastrous figure comparing to the economists' forecasts of 300 million.

The USDJPY's decline has halted. A possible intervention from the Japanese authorities' side is having a preserving impact on Yen buyers. Although the commentaries are mixed, the fact that it's being talked around, points at a high probability of such an outcome. The Minister of Finance, Mr. Fuji said he would not exclude a declining Yen scenario. Bank of Japan's head, Mr. Sirakawa confirmed the central bank is ready to act.
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Getting Started Trading Forex

Terminology and Market Conventions

If you are going to trade forex you need to understand the terms and quoting conventions used, especially in regards to the spot market.

Notational Conventions

The forex market uses 3-letter codes for all currencies. These are commonly known as SWIFT or ISO codes. For example, USD is the code for the US Dollar. Here are the codes for the other primary currencies:

AUD: Australian Dollar
CAD: Canadian Dollar
CHF: Swiss Franc
EUR: European Euro
GBP: British Pound
JPY: Japanese Yen

( For a complete listing of all currency SWIFT codes, click here. )

Expressing a relational value between two currencies is done by combining two currency abbreviations in the fashion of XXX/YYY. This indicates the amount of YYY currency (the "quote" currency) equivalent to one unit of XXX ("base" currency). For example if the exchange rate for USD/JPY - the US Dollar to Japanese Yen rate - was 100 it would mean that each USD is worth 100 JPY.

Using this convention, changes up or down in the quoted exchange rate indicate changes up or down in the value of the base currency. Using the USD/JPY example again, if the rate went from 100 to 101 it would mean a 1% increase in the value of the USD against the JPY. Similarly, a decline from 100 to 99 would represent a 1% fall in the USD value vs. the JPY.

In theory, one could quote the exchange rates either way around - meaning if USD/JPY is 100 it is the same as saying JPY/USD is 0.01 (one JPY is worth $0.01). In practice, however, the forex market has specific conventions for the traded pairs. In most cases, USD is the base currency, with the other currency in question being the quote currency. USD/JPY is an example.

There are a few exceptions, though. When it was introduced in 1999, the market authorities decided the Euro would always be the base currency in all traded pairs. Before that, the Pound (GBP) held that distinction. Thus, when traded against either of those, the USD is the quote currency (EUR/USD, GBP/USD). The same also holds for former British Commonwealth currencies the Australian Dollar (AUD/USD) and the New Zealand Dollar (NZD/USD).

It is worth noting that forex futures contracts involving currencies as quoted against the US Dollar do not hold to the spot market convention. Instead they all use the USD as the quote currency.

Majors and Crosses

In the forex you will here the terms "majors" and "crosses" when traders refer to different categories of currency pairs. In general terms, the "majors" are the pairs which include the USD quoted against the other primary industrialized currencies. Those include the ones listed above. So the majors are as follows:

AUD/USD
EUR/USD
GBP/USD
USD/CAD
USD/CHF
USD/JPY

While technically every currency pairing is a cross-rate, the term "cross" is most commonly used to refer to currency pairings which do not include the USD. For example, EUR/JPY is the Euro-Yen exchange rate. That would be considered a cross.

Forex Price Quotes

With an understanding of what we are looking at, now we can turn out focus to the actual price quotes. The graphic shows a sample table of quotes for an array of currency pairs - majors and crosses.

One thing you will notice in the table is that some pairs are quoted to four decimal places, while others only go out two places. In general terms, those pairs with values of about 10 or less will go out to four places, while those with higher values will be quoted only at two places.

Regardless of how many decimal places a currency pair is quote to, though, the term "pip" is used to define a single price movement value. So, for a two decimal place pair, a pip would be .01, while for a four decimal place pair a pip would be .0001.

We can see this in the quotes on the chart, especially when looking at the bid/offer spreads. AUD/JPY is quoted at 79.60-79.64, which is a 4 pip spread, while AUD/USD is quoted 0.7648-0.7650 for a 2 pip spread.

In recent times there has been introduced the "pipette", which is a fraction of a pip. In essence, some of the more popular pairs like EUR/USD are trading at five decimal places now, which is why you can see a spread of 1.5 listed on the chart (column to the right of the price quote itself). That means the bid-offer spread is 1 and 5/10 pips.

One will sometimes here the term "figure" in spot forex trading. That is used to refer to a price level which is a round 100 pip figure. In USD/JPY that would be a multiple of 1 full JPY (such as 104), while in GBP/USD the figure would be a $0.01 multiple (like 1.8800).

The term "yard" sometimes comes up as well. That is used to refer to a one billion base currency transaction. So a yard of USD/JPY would be $1 billion.

Getting in to the Trading

Opening an Account

It is quite easy to start trading forex. There are a great many forex brokers available and opening an account is pretty straightforward. Some things you should consider as you look to identify the one best suited to you are:

• Account minimum deposit (if any)

• Transaction size flexibility

• Spreads

• Execution

• Commissions (if any)

• Security of deposited funds

• Allowable leverage

• Currency pairs available for trading

• Usability of the trading platform

The great thing is that nowadays the vast majority of brokers have available demo trading platforms you can use to evaluate their system. Be sure, though, to make note of any differences there are between the real platform and the demo one. Some brokers' platforms are both the same across the board, but some have noticeable differences in things like execution speeds. It wouldn't hurt to check around the discussion boards to see what others are saying.

Actually, if you are new to forex trading it is well worth it to spend a while trading via a demo platform first. It will help you develop and understanding of how it all works. That way, when you do go live, you will be more confident and ready for action.

Making Trades

Forex market trading is really little different from an execution perspective than most other markets. You can buy or sell. In most cases, the same types of orders (stops, limits, etc.) are available. The trading platforms are very modern and trades can be done very quickly. Anyone who has ever used an online trading platform for any other market will have no trouble making the move to forex and executing trades with ease. For that matter, even those new to trading will find entering and exiting forex positions a breeze.

Japanese Yen Sinks with US Dollar, but at Slower Pace

Speaking of seven-month lows, did anyone notice that while the US Dollar was busy declining against pretty much every other tradable currency that the Japanese Yen was doing the same? The Yen has remained rangebound against the Dollar for the last three months - the period during which the market rally and Dollar decline have taken place - which just by simple mathematics explains why it has also fallen to a seven-month low around the same time.

The same set of factors that caused the Yen and Dollar to move in lockstep prior to the credit crisis seems to have coalesced again in March. Specifically, investor comfort with risk-taking have combined with low rates to make both very attractive candidates for carry trade funding currencies. Both countries’ Central Banks are holding rates close to 0% (for several years now, in the case of Japan) and appear unlikely to hike them anytime soon. Simply put, ” ‘Risk appetite is improving in the market, which has been attracting cash away from safe-haven currencies like the dollar’ and the yen. Investors are ‘searching for higher yields.’ ”

At the same time, both countries have been aggressive in using fiscal and monetary policy to tackle the economic downturn, both of which could be highly inflationary and lead to currency debasement. Then, again, nearly every economy has responded with the same policy measures, which suggests that low interest rates represent the most plausible factor. It could, however, explain why the Yen is rising against the Dollar, and is closing in on the 13-year high recorded earlier this year. In other words, while both currencies are being sold in the short-term to fund carry trades, investors may have determined that the Dollar will remain weaker in the long-term, due to inflation problems.

On a certain level, this is somewhat baffling. Japanese economic indicators make the US economic recession look like an economic boom by comparison. “Preliminary figures showed the world’s second-largest economy shrank at a record 15.2 percent annual pace last quarter,” which would be the worst on record. Meanwhile, Japanese corporations saw so-called recurring profits fall by “69.0 percent from a year earlier to 4.27 trillion yen (44.35 billion dollars) in the three months to March…the sharpest drop since comparable figures became available in 1955 and the seventh straight quarter of declines…Combined sales reported by corporate Japan both at home and abroad caved by a record 20.4 percent.”

In addition, the US has recorded a net capital account surplus with Japan of late, which implies that Japanese are net investors in the US- not the other way around. The government of Japan is equally confused, and is “in the middle of analyzing what is driving the yen higher.” Still, it insists that forex intervention is not currently on the table. If Japan’s economy contracts by another 15% next quarter, however, I wouldn’t be surprised if it did an about-face.

A Tax on Forex Trading?

On June 1, the Forex Blog reported that Brazil is considering a forex tax on capital inflows as a way of discourage the inflow of speculative capital that is causing the Real to appreciate. It turns out that Brazil is not alone; England and France, among others, are also mulling taxes on forex transactions. Their goal is not necessarily to discourage capital inflows, but rather to raise money to fund projects that would otherwise not be viable under current budgetary conditions. The UK “levy would raise $30bn-$50bn a year - enough to double spending on health in low-income countries.” The French plan, meanwhile, would “involve taking 0.005% of the proceeds of currency transactions, perhaps on a voluntary basis, to benefit global aid projects.”

While Brazil and England/France appear to be pursuing different ends, together their plans capture the idea behind the “Tobin Tax.” Originally proposed by Nobel Laureate James Tobin after President Nixon declared the end of the gold standard, the tax would be levied on all forex transactions with the proceeds deposited in forex stability funds. One of the most popular versions would only impose the tax during periods of volatility (i.e. speculation) so as not to punish those exchanging currency for “mundane” reasons.

While still a fringe idea, the tax initially gained momentum following the 1997 Southeast Asian economic crisis, and has found new followers in the wake of the ongoing credit crisis. Consider the unprecedented volatility in currency markets of late, manifested in wild daily fluctuations.

Even the US Dollar, the world’s reserve currency, has been on a veritable roller coaster of late, rising and falling by 10% in a matter of months. Prior to the rise of forex speculation (already a $1 Quadrillion/year market!), it was rare for a currency to move that much in a year. Given that such speculation probably accounts for 90% of daily turnover, it seems obvious as to who is causing this volatility.

Don’t get me wrong; there’s a role for speculation in the forex markets, just like there’s a role for speculation in all securities markets. When markets function efficiently and players act rationally, currences should and will reflect economic fundamentals and act to minimize global imbalances. Due to the rise of the carry trade and the herd mentality, however, the oppose often obtains in practice. This can cause currency runs and or artificially inflated currencies that compel Central Banks to act counter to the way they otherwise would (i.e. by raising interest rates rapidly to deter capital flight, crimping economic growth.)

A Tobin tax would work both to minimize speculation in the short-term (by taxing trades) and promote stability in the long-term (by providing Central Banks with funds that they can use to fight speculative “attacks.” Besides, given that forex traders already enjoy favorable tax treatment - i.e. taxed below the short-term speculative rate - it wouldn’t be the end of forex trading as we know it.

Automated Trading

Using automated trading on your Forex account may turn your trading career into a money making venture. Traders from around the world use trading robots to manage their accounts, and some are very profitable!

The Future is Here Now

Technology has now made it possible for the smaller retail Forex trader to use the same type of trading program that institutions have used for years.

Trading robots, or Expert Advisors (EA's) are actually small software programs which enter and exit trades based upon certain rules. Many different styles are available and prices range from free to hundreds of dollars or more.

The Trading Platform

The most common platform used for automated trading is the MetaTrader solution. There are hundreds of brokers offering trading with this platform, but as usual, do your homework before sending your hard-earned cash to anybody!

The trading programs are copied into a special folder within the software and once activated, execute trades based upon how their parameters are set. Most of these robots allow a small amount of adjustment to suit your risk level.

There are a few things you should consider before you jump onto the robot trader bandwagon. There are pros and cons to automated trading and you need to be sure they suit your circumstances.

Why Use Auto Trading?

If you have done any trading at all, you know the emotional roller coaster ride you take while trading... profits appear, then they're gone, maybe some losses, then profits again, back into loss and on it goes.

Our emotions are usually what gets us into trouble while we are trading. We have a plan, but once we see profits or losses, our fear, greed and confusion take over and we abandon the plan we spent all that time preparing.

Trading robots on the other hand, are programmed to execute specific actions based upon certain events. Their complete lack of emotion makes them the (almost) perfect trader. They don't get caught up in the excitement, but simply do what they were designed to do... time after time.

The Flip Side

This type of trading does have limitations. Probably the largest one is the robot's inability to know what is coming in the way of news and data.

The trading action is based upon indicators, which are based upon historic prices. As soon as a new tick is made, the previous one is history. By this measure, the robot is unable to predict the future of prices.

Add to this the robot also doesn't know the NFP or interest rate numbers are about to be released, which could easily result in a major blindside to it's trading plan. This is usually overcome by switching off the automatic system during news times.

Since these programs are running on your computer, your system needs to be left running and connected to the internet for the entire time the market is open. Usually a broadband connection is also required or desired to ensure the data stream remains constant. The FAP Turbo robot mentioned above offers a hosting option so they will actually run it on their server, which will free your computer from this requirement.

Something you should consider is that some robots don't put out a hard stop-loss order when the trades are taken, but rather monitor losses internally and act when necessary. Should your system happen to go down for any reason, you would be left without any stop-loss protection on your trades with this type of robot. Of course you can manually enter a stop order for safety sake when a new trade is opened, but what if it's 3:00 am and it just happens to be a night when you can sleep! Just beware.

The Bottom Line

I think the automated trading robots are the future for us. We all know that to be successful, we have to put our emotions aside. It's much easier for your computer to do that and it also doesn't mind working 24 hours a day!

We do need to hold their hands during news times, but that issue will be cured by smart programmers. Some trading programs boast earnings of 1000% per year and more. Timing and dealer intervention play a large roll in your results, so they may vary.

Always use conservative settings with any new EA's until you are completely familiar with how they perform under all market conditions.

Wishing you trading success,
David Stevenson.

Make Money Trading Forex

The reality is you need to do a little homework to be successful at this. You can learn how to claim some cash from the $3.2 trillion (according to BIS in Sept/07) that trade through the Forex market every trading day, but to make money trading Forex, you need to treat it like a business and invest some of your time to achieve profitable results.

In the end, the results you get will be the product of the time and effort you put in. Do this the right way and it can change your life. If you are looking to get rich quick, Forex can do it, but it can break you just as quickly, so beware.

Typically, 95% of traders who open accounts to trade the currency market will lose all of their "investment". However, with a proper strategy, you can become a member of the successful 5%. Once you learn to make money trading Forex, the world will be a much different place for you.

Got a question you can't find the answer to? Send me a quick email from the "About the Author" page and I'll try to point you in the right direction.

Start Trading Forex
To start trading Forex you can choose the hard way, or the easy way. If you are like most, here's the the easy way...