Forex Stock Market: February 2010

Wednesday, February 10, 2010

Forex Trading:

Most of you must have often heard the term Forex or Fx. Forex is nothing but foreign exchange or international currency exchange. Simply speaking, if you are an American, then British Sterling Pound or European Euro or any other currency is a foreign exchange for you.

Huge amounts of Forex change hands in the global trade and commerce. Besides the international business transactions, forex has also established a firm foothold in the investment portfolio of large number of people. You may wonder how you can invest in forex. Is it like investment in stocks and bonds? Is it suitable to a layman like me? Well, according to me it is neither easy nor difficult. You must give it a try, provided you are willing to learn forex trading.

Let me tell you one astounding feature of forex markets. Rates of international currencies fluctuate tremendously depending upon the country specific factors. To realize the true potential of how the vast scale fluctuation or volatility in the forex rates can help you in reaping huge benefits, you must partake in online forex trading.

Let me first brief you on the Advantages of Forex Trading:

Liquidity: Global forex trading witnesses a daily turn over of few trillion US dollars.
Market Availability: Forex trading is a round the clock market place. Forex market wakes up with Sidney, moving around globally as each market comes to life. Tokyo wakes up next, then London and finally US.
Low Trading Costs: Like all the other markets, forex trading requires an intermediary called as a forex broker. However unlike other markets, the forex trading brokers do not charge any commissions for executing your trade. On the contrary the forex trading brokers make a small profit from bid/ask spread on the currency pair.
Small Capital and High Leverage: You do not need to deploy huge capital amounts as the exposure or leverage ratios are high of the order of 200:1. Most of the forex brokers allow you to start with a capital as low as 100 USD.

Proper Forex

Let me make an attempt to guide you through avoiding failures in the forex markets.

1. Don’t Misuse Low margin and high leverage facility

Never try to over leverage than your capacity. First of all determine the spare cash that you can afford to loose. You may call it as risk capital. You should never risk your life long savings that you can not afford to loose. Even though the high leverage facility is an important advantage but there are dark sides that need not be explained. Forex trading on borrowed money is the worst mistake that small time forex traders and investors make.

2. Never Jump on the Bandwagon without Proper Forex Trading Training

If you are entering the forex markets without any forex trading training then please don’t do it. Even if you have gathered sufficient knowledge on how the forex currency trading markets work, make it a point that forex trading education is a continuing process.

3. Do Your Own Fundamental Research and Technical Analysis

You should be aware about day to day fundamental factors that contribute to the ups and downs in the forex currency rates. Remain updated on economic calendars and various data releases on inflation, GDP, CPI, trade balances, other monetary policy matters and geopolitical events. Technical analysis of the price and volume charts is the best tool to spot identifiable forex trading patterns. Most of the forex traders rely on exact entry and exit points based on the break outs, supports and resistances levels for a potential profitable trade. Don’t stick to only technical analysis. Be flexible and use a right blend of fundamental and technical analysis.

National Stock Exchange

NSE (National Stock Exchange of India) has witnessed healthy growth in the turnover and open interest positions during its first completed month of currency futures trading in India. NSE commenced currency futures trading in India on 29th August.

CDX (Currency Derivative Exchange), currency derivative segment of BSE (Bombay Stock Exchange) commenced currency futures trading from 1st October. BSE on its very first day of trading in currency futures clocked a turn over of about 65,000 contracts, which is approximately Rs. 300 Crores.

With ever-growing global financial crisis, exchange rates are fluctuating widely. INR exchange rate has touched 47 against USD. Currency futures trading in India has generated huge interest among Indian retail investors and traders. There is a strong demand for information gathering about the intricacies of currency futures from small investors and enterprises.

Who carries out the process of clearing and settlement?

NSCCL (National Securities Clearing Corporation Limited), a wholly owned subsidiary of NSE acts as the body responsible for carrying out the entire clearing and settlement process. NSCCL, established in August 1995, is the first clearing corporation in India.

Forex or FX

With fast track globalization and deep rooted penetration of Internet services at every nook and corner all across the world, trading in International currency is becoming more and more popular. International currency or foreign exchange or Forex or FX is no more a word restricted to the world of select few large participants.

People all around the globe have started realizing that forex currency is a great investment avenue and trading in forex currency can provide a good source of income from home based business. Nowadays, online forex currency trading is easily accessible and affordable even to a common Joe.

Few moot questions that are obviously likely to arise in your mind – Is it suitable for me? Is it like jumping on a bandwagon? Is it like trading in stocks and commodities? Is it a piece of cake? The list could be long with couple of more questions.

In the very recent past, getting information and right answers to all your questions was hard. It is not so in the high speed and inexpensive Internet arena. On this website, we have endeavored to provide you a Step-by-Step Beginner’s Guide to Make Money with Forex Trading.

We will provide you useful articles, direct you to valuable source of information on other sites and suggest forex products and systems that we have found to be useful to you. You are welcome to stay put as long as you wish. You can also access good information on this site How To Make Money with Forex Trading.

Forex brokers

Forex brokers or forex brokerage firms act as an intermediary that facilitates order routing between the buyers and sellers. With rapid development of forex markets, brokers have transformed into full service agencies. Forex brokers offer vast number of innovative features and services instead of just acting as the dealers. Forex brokers fall under two categories – small and medium brokers and large and heavyweights like financial institutions or banks.

If you are a potential investor in the forex currency trading then your first step in the right direction is to choose a reliable forex broker. There are many important factors that need proper due-diligence in order to select professional forex broker. It is indeed a daunting task for the beginners. This article intends to provide a comparison between forex brokers operating in and around UK. Comparison is centered on UK because UK plays a very vital role in the entire global forex markets and due to its dominance in the global forex markets, majority of the forex brokers provide their services in UK.

Table given below shows a comparison of forex brokers based on the most important parameters viz. leverage ratio, pip spread, and minimum deposit. We have selected about a dozen plus leading names from small/medium/large forex brokers who are registered under NFA (National Futures Association, USA) or CFTC (Commodities Futures Trading Commission, USA) or FSA (Financial Services Authority, UK) or any other global regulatory authority.

Demo account?

Beginners should always start with a demo account or practice account. Most of the leading currency brokers dealing in fx online trading offer demo account. Account opening is simple – Register on the website of the broker and download currency trading software. It hardly takes few minutes to start trading currencies.

1. What is a Demo account?

Demo account is essentially a practice account where you can do everything that fx trader does in a live fx market.

2. How does a Demo account work?

When you open a demo account, you are allotted a notional sum of 50,000$. Sum varies from broker to broker. Validity of demo account varies from 30 days to 60 days. With this virtual money of 50,000$ you can buy/sell foreign currency in a real fx market without any fear of loss of money.

3. What are the major benefits of a Demo Account?

Demo account is a great way to get a real handle on the features and functionality of fx trading platform of the broker. Demo account is the best option to learn A to Z of foreign exchange trading right from the types of orders up to the technical analysis and currency trading strategies.

Demo account is an ideal solution to get rid of the phobia of getting started with foreign exchange trading.

futures trading

Efficient order management, live charts, real time market quotes, commodity forex news and analysis – these are few of the necessary elements required by a trader for commodity forex trading.

Majority of the commodity forex brokers provide fully integrated and customizable futures trading platforms without levying any additional charges or license fees. Some of the brokers may grant free access only for web based or browser based trading software but for java application based software they impose one time license fees or insist on minimum commitment on brokerage business.

What should you expect from futures trading platforms?

Look out for a state of the art futures trading platform that works on application based software and that offers:

Multi segment platform that can allow trading across various exchanges and markets such as E-Minis, Globex commodities and forex, pit traded commodities and many other global futures markets.
Live streaming quotes, market depth, multiple market windows, fast, reliable and efficient order management.
Facilities to trade directly from the charts.
Surfeit of technical analysis, charting and other analytical tools like options calculator and currency converter to develop trading strategies.
Real time access to global news, fundamental research and technical analysis.
Demo version with a demo user id and password. It helps you get a complete idea about various features and functionalities of the futures trading platform.

Forex Symbols:

Forex Symbols: There are seven most active currencies on the forex trading markets, besides number of other currencies that are traded sporadically.

US Dollar – USD
European currency – EURO
Japanese Yen – JPY
British Sterling Pound – GBP
Swiss Franc – CHF
Australian Dollar – AUD
Canadian Dollar – CAD

Forex Pairs: The term Forex pair may sound intriguing to those of you who are used to stock trading. Why forex in pairs? Well, even in stock trading, indirectly you are trading a pair. When you buy a stock, you are selling your money and vice versa. Similarly when you are trading forex you are buying once currency and selling the other currency. EURO/USD, USD/JPY, GBP/USD and USD/CHF are the most traded forex pairs that churn out the bulk of the daily trillion dollars turn over in global forex trading.

On any forex trading platform, you will find that almost half of the screen is occupied by flashing figures of forex quotes. Dealing rates is the alternate term often prescribed for forex quotes. Prima-Facie you may feel that it is very easy to read forex quotes. However if you are a novice, you may land up with a buy trade instead of a desired sell trade. I would suggest that you must thoroughly understand how the forex rates are quoted on the forex trading platforms.

Let us study an example of USD/JPY. There are essentially two aspects. The first aspect relates to the exchange rate and the second aspect relates to the forex quote as appearing on the screen of forex trading broker.

Profit and Loss

Calculation of Profit and Loss for EURO/USD Trade:

Buy trade executed at 1.5555 and sell trade executed at 1.5560.
Profit/Loss = 1.5560 – 1.5555 = 0.0005 OR 5 Pips.
Since the quote currency (second currency) is USD, profit and loss in USD terms = 0.0005 x 100,000 = 50 USD ALTERNATIVELY profit and loss = 5 Pips x 10 USD =50 USD
If you are a trader from EURO zone and you wish to calculate your profit and loss in EURO terms then you need to apply basic math. Divide your USD profit and loss by the exchange rate i.e. 1.5560. It works out to 50/1.5560 = 32.13 EURO. This point has been explained just for the academic interest as all the forex trading brokers display your profit and loss in USD terms.

Calculation of Profit and Loss for USD/CHF Trade:

Buy trade executed at 1.0473 and sell trade executed at 1.0488.
Profit/Loss = 1.0473 – 1.0488 = 0.0015 OR 15 Pips.
Since the quote currency (second currency) is CHF (other than USD), profit and loss in USD terms = 0.0015/1.0488 x 100,000 = 143.02 USD.

Calculation of Profit and Loss for USD/JPY Trade:

Buy trade executed at 108.09 and sell trade executed at 108.30.
Profit/Loss = 108.30 – 108.09 = 0.21 OR 21 Pips.
Since the quote currency (second currency) is JPY (other than USD), profit and loss in USD terms = 0.21/108.3 x 100,000 = 193.91 USD.

Online forex trading

Online forex trading offers number of distinct advantages. Besides real time rates, your profit and loss is calculated on real time basis by the forex trading software and is displayed live online. Even though this is an important advantage in forex trading account but I strongly recommend that you must be aware about the methodology to calculate your profit and loss from forex trading.

Basically there are two straightforward rules for calculating your profit and loss from forex trading:

Rule No.1: Whenever the quote currency (second currency) is USD, you can calculate the profit and loss in USD terms by multiplying the number of Pips with 10 USD if the lot size is a standard lot of 100,000. Similarly in case of mini lot of 10,000, the profit and loss from forex trading can be calculated by multiplying the number of Pips with 1 USD.
Rule No.2: In case of quote currency other than USD, the profit and loss will be calculated by dividing the number of pips with the exchange rate and then multiplying the result with lot size.

Let us discuss few factual examples on how to calculate profit and loss from forex trading. I have illustrated three examples – one example with USD as the quote currency and two examples with JPY as the quote currency. For simplicity only Long trades (Trades where you buy first and then sell) are considered. The lot size is assumed as standard lot of 100,000 and lot quantity is taken as 1 Lot.

Forex Trading Software

Forex Trading Software: This is the backbone for online forex currency trading. Ensure that the forex trading platform is state of the art. Look out for the following important feature.

IT infrastructure and user friendly features.
Real time quotes, multiple windows, types of orders, number of currency pairs and speed of execution of orders.
Charting, technical analysis and other analytical tools.
Research and Analysis: There are ample value add on services like tips on entry and exit points, forex indicators, real time access to fundamental and technical research reports and global news broadcasts. Find out are there any extras for these services?

Demo Account: Most of the forex trading brokers offer you a free practice account or a demo account for at least 30 days. However if it is not offered then insist upon it. Demo account enables you to get an in-depth idea about forex trading platform.

Account Related: Read and understand all the paper work before signing any documents. Find out (1) What is the minimum balance requirement (2) What is the margin and leverage and (3) Whether the back office is fully online. Nowadays you can start with as low as 250$ account and leverage ratio as high as 200:1.

Trading costs: There is only once cost – Bid/Ask spread. Pips charged by the forex brokers vary from 2 to 5 Pips, lower the better. Ensure that there are no other hidden costs and charges.

Customer Support and Reputation: I will not deliberate much on this factor as it can be ascertained only after the experience. However you can take the reviews from friends or internet bloggers community.

forex trading brokers

Your analysis and conviction dictates you that EURO will appreciate to a level of 1.5600. In anticipation you buy 1000 EURO/USD at 1.5550. As a matter of fact you have bought 1000 EURO by paying 1555 USD. Your trade turns in your favor and the exchange rate goes up to 1.5600. Immediately you sell 1000 EURO/USD at 1.5600. You have sold your 1000 EURO in exchange for 1560 USD. Let us work out the profit under two different scenarios.

Without leverage: Profit = 1000 x (1.5600 – 1.5550) = 5 USD. Your return on investment (ROI) is 0.5%.
With leverage: Let us presume that your forex trading broker has given you a leverage of 100:1 Now with the same investment of 1000$, you are in a position to buy 100,000 EURO/USD. Profit = 100,000 x (1.5600 – 1.5550) = 500 USD. Your ROI is 50%.

Don’t you think that magic of leverage creates wonders? Well, it does, but let me caution you that there are dark sides as well. Suppose if the trade went against you and EURO/USD fell to 1.5500. You will land up with a loss of 5$ without leverage but the loss would be 500$ with leverage. Do you realize the actual implications? You have ended up with a loss of 50% of your capital in just one trade.

Summing Up

Risk management is an extremely important function in forex trading.
Risk management and surveillance systems followed by forex trading brokers and forex trading company are different. In case your forex trading position is making huge losses, you may be called upon to jack up your margins. It may happen that in the event of acute volatile market conditions your loss making position would be squared off automatically

Global forex

Global forex trading business has emerged as the most rewarding venture for skilled, experienced and professional forex traders. It is true that people like me and you would also like to grab a small pie from the enormous profit potential of forex trading. Well, there is nothing wrong in it but it is not a piece of cake for everybody to become a successful forex trading professional.

It is said that success follows automatically if you can avoid failures. It is only partly true in forex markets as the success also depends upon few other special qualities of a forex trader. So, what are the traits of a successful forex trader? Read further in the article to get a hand on whether you can also become a successful forex trader.

1. Confidence and Conviction

Confidence and conviction in your own knowledge, research and analysis is the first prerequisite to a path of success in forex currency trading. Successful traders know that they should take the profit of the table as fast as possible without letting the luck come into picture. They are confident about when to enter the market and when to exit the markets. They follow their convictions rigidly.

2. Discipline, Calmness and Focus

Forex trading demands a strict discipline and self-control over your emotions, limitations, actions and decisions. You should develop and maintain your own trading style suitable to your limitations, personality and financial goal. Successful traders stick to their normal trading style. Your ability to remain calm and focused ensures that you won’t be perturbed in panic situations like extreme volatility during market crash.

3. Accept Losses and Failure in Your Stride

I don’t know of any forex traders who have not tested failures and loss of money during their forex trading careers. It is simply not possible to go on a winning spree. Your ability to cut losses is most vital. Successful traders know how to keep the losses as small as possible and when to jump the sinking ship. Don’t pray when your trade starts going against you, instead book the losses. You should never commit a mistake of averaging a losing trade. In forex markets, delay in cutting the losses may result into complete erosion of your wealth. Your skills and experience in risk control and management can save you from a big disaster.

forex trading accounts

Orders with Price Variable:

Market Orders: This is the most basic and simplest type of order. The order is executed at the current market price. In this order you buy or sell immediately at the best available price. If you are trading through online forex trading software with your high speed broadband internet connection then the order is executed almost instantly.
Limit Orders: In limit order you can specify the limit price – upper limit for buy order and lower limit for sell order. Limit order is used by the forex traders for entering a new position or exiting the open position.
Stop or Stop-Loss Orders: Stop order is akin to limit order but stop order is used for entry or exit at a price that is pre-determined as per support and resistance levels on the technical chart. Stop orders are essentially used as an effective tool to curtail the losses or for protecting the profit (trailing stop loss). Stop orders are favorites for forex traders who trade aggressively based on the break out on the chart.
OCO – Order Cancels Other: In OCO order you place two orders simultaneously. One order is placed above the current price and the other order is placed below the current market price. As soon one order gets executed the other order is cancelled.

Orders with Duration Variable:

GTC – Good Till Cancelled: GTC orders can be placed with limit orders or stop orders. The order remains in the forex trading system till it is cancelled by the trader. It is the responsibility of the trader to cancel this order as per his judgment.
GTD – Good Till the Day/Date OR GFD – Good for the Day: Unlike GTC orders, GTD orders would remain in the system only till the end of the day.

Calculate Pip Values

If you are steadfast on taking up online forex trading business, I would recommend that you must get your hands on very sound fundamentals about Pips. For an ardent trader involved in global forex trading, the day starts with setting out the target for the Pips and the day ends with ascertaining his Pips balance sheet. I will try to guide you in learning the basics of Pips. It is essential that you must do sufficient math work to understand Pips to get a clear insight on Pips.

What is meant by Pips?

Well, I would say that Pip is nothing but a fancy name for ‘Point’. Technically speaking, Pip is the smallest increment or decline in the value of the exchange rate. In a much simpler way, you can understand Pip as the last decimal point of any exchange rate. Pip is the acronym for Percentage in Point.
An illustration of EURO/USD exchange rate of 1.5582 will make the things much better. In this exchange rate the next incremental value would be 1.5583 and the next decline value would be 1.5581. Mathematically the difference is 0.0001 and in forex jargon it is said that the exchange rate has increased or decreased by 1 Pip.
You must be aware that rates of most of the currency pairs are expressed up to four decimal points except USD/JPY where it is expressed in two decimal points.
Let us delve further into Pips by considering a fictitious buy/sell trade of EURO/USD. You are expecting that the value of EURO would appreciate in relation to USD. You have decided to buy EURO/USD. Your buy trade is executed at 1.5582. Your speculation turns in your favor and after some time EURO/USD appreciates to 1.5600. You make up your mind to lock the profit and sell EURO/USD. Your sell trade is executed at 1.5599. The difference between buy and sell values is equal to 0.0017. You have gained a profit of 17 Pips. What exactly is 17 Pips in USD terms? Well, we will see it in the next topic.

Forex Pairs:

Before I deliberate on Forex Quotes, let me first update you on forex pairs and forex symbols. Let us not delve further into the history of how the currency pairs have evolved and standardized in the forex trading system.

Forex Symbols: There are seven most active currencies on the forex trading markets, besides number of other currencies that are traded sporadically.

US Dollar – USD
European currency – EURO
Japanese Yen – JPY
British Sterling Pound – GBP
Swiss Franc – CHF
Australian Dollar – AUD
Canadian Dollar – CAD

The forex quote USD/JPY = 108.09 is in reality the exchange rate. Here in this quote, the first currency USD is termed as the base currency and the second currency JPY is termed as the quote currency. Thus for buying one unit of the base currency you have to pay 108.09 units of quote currency.
If you see the forex quote for USD/JPY on the online forex trading software, you will find two separate quotes. USD/JPY Sell =108.07 and USD/JPY Buy=108.10. Offline forex trading brokers will quote USD/JPY = 108.10/108.07. The first price is the bid price and the second price is the ask price. Does it not sound confusing? Well, it is, but till the time you get used to the system. Here is where the concept of bid/ask spread comes into picture.

Advantages of Forex

Let me first brief you on the Advantages of Forex Trading:

Liquidity: Global forex trading witnesses a daily turn over of few trillion US dollars.
Market Availability: Forex trading is a round the clock market place. Forex market wakes up with Sidney, moving around globally as each market comes to life. Tokyo wakes up next, then London and finally US.
Low Trading Costs: Like all the other markets, forex trading requires an intermediary called as a forex broker. However unlike other markets, the forex trading brokers do not charge any commissions for executing your trade. On the contrary the forex trading brokers make a small profit from bid/ask spread on the currency pair.
Small Capital and High Leverage: You do not need to deploy huge capital amounts as the exposure or leverage ratios are high of the order of 200:1. Most of the forex brokers allow you to start with a capital as low as 100 USD.

Fx Trading Tournament

Forex or Fx as is fondly known in the global foreign exchange trading community, could probably rank as the most fancied investment avenue. I am sure that a popular search engine would yield millions of results for forex or fx. What does it imply? It simply means that a lot has been written on the subject of Fx trading and I don’t intend to bore you any more with stuff like basics of forex, introduction to forex and fundamentals of forex.

I am going to write something about Fx trading tournaments. Have you ever heard of it? Well, unlikely, as it is probably a new idea. I am inclined to say that it is indeed an innovative approach to forex training. Carry on further with a short FAQ on Fx Trading Tournaments.

What does it mean?

Fx trading tournament has nothing to do with any of your favorite sports. Fx trading tournament or alternatively Fx championship is an innovative opportunity offered by few forex brokers to forex investors to test their trading skills. Essenially, it is an event where large numbers of forex traders participate in online foreign currency trading at one common forex platform.

Construction of Candlestick

Chart is the most essential element for any technical analyst. There are various methods of plotting the charts. Candlestick charting is one of the most favored techniques for visual analysis. Candlestick charting was first developed by Japanese and hence the name Japanese Candlestick chart has become very famous.

As a matter of fact, this method of charting captured the attention of Wall Street traders much later. Japanese were using this technique for tracking the price movement of agricultural commodities. For all the practical purposes when a technical analyst refers to Candlestick charts, it essentially implies Japanese Candlestick chart.

Construction of Candlestick charts (refer drawing):

Like bar chart, construction of candlestick charts is also very easy. Let us try to understand how it is done.

Each candlestick line represents the activity for a fixed period that could be an hour or a day or a week or a month. It shows the prices at opening, high price, low price and closing price. OHLC is a frequently used acronym for open high low close.
Main body or real body is either filled in (black or red) or hollow (white or green) and
It represents the price range between the opening and closing prices. Black and white colors were used as per the traditional methods when the charts were drawn manually. However, in most of the latest computer aided charting red and green colors are used.
If the opening price is higher than the closing price then the main body is filled.
If the closing price is higher than the opening price then the main body is hollow.
The thin lines above and below the main body are called as shadows or wick. Shadows represent the high and low prices for the particular period.

Patterns of Japanese

Comparison between a standard bar chart and a Japanese Candlestick chart:

Scaling is same.
Overall shape is same.
Both the charts can be used in conjunction to study other technical analysis tools such as moving averages, oscillators and other methods.
Range of high and low is same for each period.
Different types of patterns develop in both the charts that can help to identify the market trend.
There is only one difference. How the opening and closing prices are displayed.

Advantages of Japanese Candlestick chart over the standard bar chart:

Visual analysis is much easier and hence the traders can read the price action much faster.
Comprehension of market sentiments can be done in a better way.
Many traders believe that the Japanese Candlestick charts provide a better depth of information over the traditional bar charts.
Traders find it easy and quick to analyze the trend reversal, trend continuation and other patterns. Identifying the pattern is usually considered as one of the most difficult part of technical analysis.

Patterns of Japanese Candlestick chart:

Candlesticks can take variety of shapes depending upon the relationship of OHLC. Shape of each Candlestick represents different interpretations such as extremely bullish, extremely bearish, bullish, bearish, neutral, turning period and end of the trend. Besides the shapes of individual Candlestick, various patterns develop on the Candlestick chart. Major patterns are Bullish Reversal, Bearish reversal and Continuation.