Forex Trading is a High risk Investment

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. 

The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Speculation

Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, many economists (e.g. Milton Friedman) argue that speculators perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do. Other economists (e.g. Joseph Stiglitz) however, may consider this argument to be based more on politics and a free market philosophy than on economics.

Large hedge funds and other well capitalized "position traders" are the main professional speculators.

Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not, according to this view. It is simply gambling, that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 150% per annum, and later to devalue the krona. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view . He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.

Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.

In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and forex speculators only made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from them for having caused the unsustainable economic conditions.

Forex Market Information Easily Accessible

Information about stocks is abundant, but so are the stocks. Finding a trade opportunity in the equities markets may mean sifting through data on thousands of stocks, while the forex trader has only six major currencies to research. Additionally, the vital information that moves equity markets, such as revenues and profits, is proprietary and private, and sometimes subject to fraud, deception and insider trading. In contrast, virtually all of the news that bears on the forex market is in publicly disseminated reports from governments or research institutions, and released to everybody at the same time.

We feel that the knowledge you've gained in analyzing stocks can easily be transferred to the forex market. Many of the economic indicators familiar to equity traders, such as payroll data and interest rates, affect the currency markets. And many technical traders have found the forex market to be particularly attractive, since currencies respond well too many of the common technical indicators, such as MACD, RSI, and Candlestick charting.

How can we limit the Risk on Forex Trades?

FXCM offers two order types, stop orders and limit orders, that allow you to control the risk on your trades, and we recommend that you use these orders whenever possible. A limit is placed on the winning side of your trade and a stop is placed on the losing side of your trade. If the market price reaches either the stop price or the limit price that you define, your live will attempt to be closed.

What is Lot?

A lot is the smallest trade size available and is determined by the account type. FXCM offers standardized trade sizes and the lot determines the trade sizes available as well.

For example, with an FXCM Standard account, the lot size is 10,000 units of currency. Therefore, the smallest trade size is 10,000 units of currency. Additionally, Standard account holders can place trades of any size, so long as they are in increments of 10,000 units like, 20,000, 30,000, 100,000, 310,000, etc.

What is a Pip?

A pip is a common term that is used in the forex market. It refers to the smallest movement (not considering fractional pips) that a currency exchange rate can make. For example, if the GBP/USD exchange rate changed from 2.0010 to 2.0012, you could say that it increased by 2 pips.

Most currency pair exchange rates are priced to the fourth decimal place, frequently making the fourth decimal place represent the pip value. However, for currency pairs like the USD/JPY, which are only priced to the second decimal place, the pip value is not the fourth decimal place but instead the second. So a two pip increase could be represented by a change of 85.35 to 85.37.

Calculating price changes in pips helps you determine transaction costs, profit and loss on trades, among other things.

What does it mean to "Buy a Currency Pair?"

Each forex transaction involves the buying of one currency and the selling of another. For example, you might buy euros (EUR) while selling US dollars (USD). This transaction is often referred to as buying the EUR/USD currency pair.

Currency pairs are needed to create exchange rates, which tell you the value of one currency relative to another. For example, if the EUR/USD currency pair had an exchange rate of 1.3500 it would take $1.35 to exchange for 1 euro. If the EUR/USD currency pair had an exchange rate of 0.9500 it would take $0.95 to exchange for 1 euro. Forex traders essentially speculate on exchange rates by buying or selling currency pairs. The decision to buy or sell is determined by whether they think the exchange rate will go up or down.

How do you trade Forex

Today, forex trading is primarily done online through software or web-based trading platforms. If you have access to a personal computer or a cell phone, you most likely have everything that is required to trade forex with FXCM.

One of the best ways to learn how to trade forex is by learning from FXCM's DailyFX course instructors. The course instructors have nearly 100 years of combined experience between them. You can learn more about this great opportunity at the Forex Mentor page. FXCM also offers free forex trading demo accounts, with $50,000 of virtual money, to help new traders learn to use FXCM's Trading Station II platform, risk-free.

Forex is an Art

Forex is an art. In that sense, we must take Forex as an art and not a science. I know, some people may not agree with me and all the post that is in this blog. I don't blame them as I was actually in the same place as they were when I started trading. Trying to find the answer to forex using every logical explanation. This is the answer that you have been looking for. I am going to give it to you straight away. Let see if your mind can accept it.

 

Forex is not a science. There is not a single mathematical equation that can explain it. Do not forecast, do not predict, and do not anticipate. All you need to do to make profit is to follow the market. If the price is going up, you buy. If the price is going down, you sell. You may not win all the time but if you follow the market, in the end you will be in profit. Make profit and build up your capital up to a point where a few winning trades per month will bring huge profit. Can you accept it? Can you mind admit it? Is your logical mind challenged? Do you feel helpless? Welcome to the real world.

Forex Market Participants

This article (Forex Market participants) is based to the BIS study Triennial Central Bank Survey 2004

• 53% of transactions were strictly interdealer (ie interbank);
• 33% involved a dealer (ie a bank) and a fund manager or some other non-bank financial institution;
• and only 14% were between a dealer and a non-financial company.

Banks

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers but much is conducted by proprietary desk, trading for the bank's own account

Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems, such as EBS, Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Bloomberg and TradeBook(R). The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

Commercial Companies

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

Central Banks

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves, to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high - that is, to trade for a profit. Nevertheless, central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in South East Asia.

Investment Management Firms

Investment Management firms (who typically manage large accounts on behalf of customers such as pension funds, endowments etc.) use the Foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximization.

Some investment management firms also have more speculative specialist currency overlay units, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. The number of this type of specialist is quite small, their large assets under management (AUM) can lead to large trades.

Hedge Funds

Hedge funds, such as George Soros's Quantum fund have gained a reputation for aggressive currency speculation since 1990. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Retail Forex Brokers

Retail Forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $25-50 billion daily, which is about 2% of the whole market. CNN also quotes an official of the National Futures Association "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically."

All firms offering foreign exchange trading online are either market makers or facilitate the placing of trades with market makers.

In the retail forex industry market makers often have two separate trading desks- one that actually trades foreign exchange (which determines the firm's own net position in the market, serving as both a proprietary trading desk and a means of offsetting client trades on the interbank market) and one used for off-exchange trading with retail customers (called the "dealing desk" or "trading desk").

Many retail FX market makers claim to "offset" clients' trades on the interbank market (that is, with other larger market makers), e.g. after buying from the client, they sell to a bank. Nevertheless, the large majority of retail currency speculators are novices and who lose money , so that the market makers would be giving up large profits by offsetting. Offsetting does occur, but only when the market maker judges its clients' net position as being very risky.

The dealing desk operates much like the currency exchange counter at a bank. Inter bank exchange rates, which are displayed at the dealing desk, are adjusted to incorporate spreads (so that the market maker will make a profit) before they are displayed to retail customers. Prices shown by the market maker do not neccesarily reflect interbank market rates. Arbitrage opportunities may exist, but retail market makers are efficient at removing arbitrageurs from their systems or limiting their trades.

A limited number of retail forex brokers offer consumers direct access to the interbank forex market. But most do not because of the limited number of clearing banks willing to process small orders. More importantly, the dealing desk model can be far more profitable, as a large portion of retail traders' losses are directly turned into market maker profits. While the income of a market maker that offsets trades or a broker that facilitates transactions is limited to transaction fees (commissions), dealing desk brokers can generate income in a variety of ways because they not only control the trading process, they also control pricing which they can skew at any time to maximize profits.

The rules of the game in trading FX are highly disadvantageous for retail speculators. Most retail speculators in FX lack trading experience and and capital (account minimums at some firms are as low as 250-500 USD). Large minimum position sizes, which on most retail platforms ranges from $10,000 to $100,000, force small traders to take imprudently large positions using extremely high leverage. Professional forex traders rarely use more than 10:1 leverage, yet many retail Forex firms default client accounts to 100:1 or even 200:1, without disclosing that this is highly unusual for currency traders. This drastically increases the risk of a margin call (which, if the speculator's trade is not offset, is pure profit for the market maker).

According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005) "Even people running the trading shops warn clients against trying to time the market. 'If 15% of day traders are profitable,' says Drew Niv, chief executive of FXCM, 'I'd be surprised.' "

In the US, "it is unlawful to offer foreign currency futures and option contracts to retail customers unless the offer or is a regulated financial entity" according to the Commodity Futures Trading Commission. Legitimate retail brokers serving traders in the U.S. are most often registered with the CFTC as "futures commission merchants" (FCMs) and are members of the National Futures Association (NFA). Potential clients can check the broker's FCM status at the NFA. Retail forex brokers are much less regulated than stock brokers and there is no protection similar to that from the Securities Investor Protection Corporation. The CFTC has noted an increase in forex scams 

Trading Characteristics

There is no single unified foreign exchange market. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is no such thing as a single dollar rate-but rather a number of different rates (prices) , depending on what bank or market marker is trading. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs. 

Top 6 Most Traded Currencies
Rank	Currency	ISO 4217 Code	Symbol
1	United States dollar	USD	$
2	Eurozone euro	EUR	€
3	Japanese yen	JPY	¥
4	British pound sterling	GBP	£
5-6	Swiss franc	CHF	-
5-6	Australian dollar	AUD	$

The main trading centers are in London, New York, and Tokyo, but banks throughout the world participate. As the Asian trading session ends, the European session begins, then the US session, and then the Asian begin in their turns. Traders can react to news when it breaks, rather than waiting for the market to open.

There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers order flow. Trading legend Richard Dennis has accused central bankers of leaking information to hedge funds. 

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.

On the spot market, according to the BIS study, the most heavily traded products were:

• EUR/USD - 28 %
• USD/JPY - 17 %
• GBP/USD (also called cable) - 14 %

and the US currency was involved in 89% of transactions, followed by the euro (37%), the yen (20%) and sterling (17%). (Note that volume percentages should add up to 200% - 100% for all the sellers, and 100% for all the buyers). Although trading in the euro has grown considerably since the currency's creation in January 1999, the foreign exchange market is thus still largely dollar-centered. For instance, trading the euro versus a non-European currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The only exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market.

Market Size and Liquidity

The foreign exchange (Fx) market is unique because of ;

* its trading volume,

* the extreme liquidity of the market, 

* the large number of, and variety of traders in the market,

* its geographical dispersion,

* its long trading hours- 24 hours a day (except n weekends),

* the variety of factors that affect exchange rates, 

Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study Triennial Central Bank Survey 2004

• $600 billion spot
• $1,300 billion in derivatives, ie
• $200 billion in outright forwards
• $1,000 billion in forex swaps
• $100 billion in FX options.

Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).

Top 10 Currency Traders
Rank	Name	% of volume
1	Deutsche Bank	17.0
2	UBS	12.5
3	Citigroup	7.5
4	HSBC	6.4
5	Barclays	5.9
6	Merrill Lynch	5.7
7	J.P. Morgan Chase	5.3
8	Goldman Sachs	4.4
9	ABN AMRO	4.2
10	Morgan Stanley	3.9

The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 1-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $1,000,000.

These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' cheques. Spot prices at market makers vary, but on EUR/USD are usually no more than 5 pips wide (i.e. 0.0005). Competition has greatly increased with pip spreads shrinking on the majors to as little as 1 to 1.5 pips.

Forex with Peace of Mind

Met a friend while on vacation. It seems he is making 15k average per month without even knowing how to trade. Talk about Forex with peace of mind. You guys wanna know how he did it? Let me tell you his story.

He wanted to learn from me how to trade but I am reluctant to teach him since this is not something I can teach. I can tell you how I did it but I can't guarantee you can do it the same way I did. Its not pure technical or skill. There are some form of mind control involve. I can't change your mind. You have to do it yourself. Free your mind.

He kept asking me how to make money in Forex. I gave him a way that is a bit risky but with care everyone can do it. I told him to find a trader that is looking for investors. Lots of new traders around with good skills but low capital. These traders are looking for a way to maximize their income, so they take in few accounts to manage. They trade their own account and at the same time execute the exact same trade on their managed accounts. They take profit from their own account and take commission on manage accounts. 

Turns out after 1 year my friend manage to get 15k average monthly income and he knows nothing about trading. There are few rules to follow if you want to do the exact same way.

1. Study the trader records. At least 3 months maintain profit.
2. Open a trading account with your name tied to your banking account. (Don't ever hand him your money)

3. Get the trader details just in case he decides to make a run for it.

4. Ready to accept trading losses. If it's a trading loss, accept it and release him from his burden. Trading is already hard enough. Now you know why I don't manage accounts.

5. Give him your trading account details and leave him alone. 

6. Take him out for dinner at the end of the months. Don't ask; let him tell you about the trading.

Hope that is clear enough. Those steps are minimal. Extra precaution is always welcome but don't put pressure on the trader. We don't want to send him to a mental hospital or something.

Good luck everyone and happy trading

Trade systems on Forex

Trading with brokers:  Brokers only service banks and their roles are to bring together buyers and sellers in the market, to optimize the price they show to their customers and quickly, accurately, and faithfully executing the traders' orders. The majority of the foreign exchange brokers execute business via phone using a phone lines to the speaker boxes in the banks. This way, all banks can hear all the deals being executed.

Because of the open box system used by brokers, a trader is able to hear all prices quoted; whether the bid was hit or the offer taken; and the following price. What the trader will not be able to hear is the amounts of particular bids and offers and the names of the banks showing the prices. Prices are anonymous. The anonymity of the banks that are trading in the market ensures the market's efficiency, as all banks have a fair chance to trade. Sometimes brokers charge a commission that is paid equally by the buyer and the seller. The fees are negotiated on an individual basis by the bank and the brokerage firm. Brokers show their customers the prices made by other customers either two-way prices or one way "read" the market differently; they have different expectations and different interests.

A broker who has more than one price on one or both sides will automatically optimize the price. In other words, the broker will always show the highest bid and the lowest offer. Therefore, the market has access to an optimal Foreign exchange brokers, unlike equity brokers, do not take positions for open box system microphone in front of the broker that continuously transmits everything he or she says on the direct bid and offer)bid or offer) prices from his or her customers. Traders show different prices because they spread  currency. A trader might test the market by hitting a bid for a small amount to see if there is any reaction. Another advantage of the brokers' market is that brokers might provide a broader selection of banks to their customers. 

Some European and Asian banks have overnight desks so their orders are usually placed with brokers who can deal with the American banks, adding to the liquidity of the market. Fundamental and technical analyses are used for forecasting the future direction of the direct dealing making or quoting a price — expects the bank that is calling to reciprocate with respect to making a price when called upon. Direct dealing provides more trading discretion, as compared to dealing in the brokers' market. Sometimes traders take advantage of this characteristic. Direct dealing used to be conducted mostly on the phone. Phone dealing was error-prone and slow. Dealing errors were difficult to prove and even more difficult to settle. Direct dealing was forever changed in the mid-1980s, by the introduction of dealing systems. Dealing systems are on-line computers that link the contributing banks around the world on a one-on-one basis. The performance of dealing systems is characterized by speed, reliability, and safety. Dealing systems are continuously being improved in order to offer maximum support to the dealer's main function: trading. The software is rather reliable in picking up the big figure of the exchange rates and the standard value dates. In addition, it is extremely precise and fast in contacting other parties, switching among conversations, and accessing the database. The trader is in continuous visual contact with the information exchanged on the monitor. It is easier to see than hear this information, especially when switching among conversations. 

Most banks use a combination of brokers and direct dealing systems. Both approaches reach the same banks, but not the same parties, because corporations, for instance, cannot deal in the brokers' market. Traders develop personal relationships with both brokers and traders in the markets, but select their trading medium based on price quality, not on personal feelings. The market share between dealing systems and brokers fluctuates based on market conditions. Fast market conditions are beneficial to dealing systems, whereas regular market conditions are more beneficial to brokers.. Direct dealing is based on trading reciprocity. A market maker—the bank Matching systems.  on a one-on-one basis, matching systems are anonymous and individual traders deal against the rest of the market, similar to dealing in the brokers' market. However, unlike the brokers' market, there are no individuals to bring the prices to the market, and liquidity may be limited at times. Matching systems are well-suited for trading smaller amounts as well.

The dealing systems' characteristics of speed, reliability, and safety are replicated in the matching systems. In addition, credit lines are automatically managed by the systems. Traders input the total credit line for each counterparty. When the credit line has been reached, the system automatically disallows dealing with the particular party by displaying credit restrictions, or shows the trader only the price made by banks that have open lines of credit. As soon as the credit line is restored, the system allows the bank to deal again. In the inter-bank market, traders deal directly with dealing systems, matching systems, and brokers in a complementary fashion. Unlike dealing systems, on which trading is not anonymous and is conducted. 

Why Trade Forex?

It's equally easy to trade in both rising and falling markets, so profits can be made whichever the market directions.

 

They are leveraged instruments, also known as they trade on margin, meaning you can open trades in sizes multiple times larger than the funds you have in your account.

Open all hours. The Forex market is open all day from Monday morning Sydney time to Friday night New York time. In this time period you can trade whenever you want. 

Lots of traders are starting to trade Forex due to the Forex market advantages. Here are the most important Forex market advantages:

1. 24 hours a day market: The Forex market is open 24 hours a day except on weekends. So, no matter where you are based, you can trade Forex at your favorite time.

2. High liquidity: Forex market is the biggest financial market in the world averaging over 3 trillion USD daily.

3. Leverage: The leverage on Forex can be as high as 200, which means that you can trade up to $ 100 k with just $ 500. 

4. Easy short selling: On Forex it's as easy to buy a currency pair as to short sells it. there's no uptick rule like on Nasdaq.

5. Free Commission Fees: Commission fees are 0 on Forex. The only cost in buying a currency pair is the spread. 

6. Free trading platforms: On Forex most brokers offer good trading platforms for free.

7. Free Demo accounts: Most Forex brokers offer free demo accounts which allow you to start practicing with virtual money, the way you can learn. This way you can learn Forex without risking your money.

8. Opportunity: Easily trade when markets are trending up or trending down.

9. Simplicity: Use technical analysis (indicators on charts) methods from other markets like equities.

10. Strength: Access the most liquid market in the world ($4 Trillion average daily volume).