Pip
Price Interest point (Pip) is the term used in currency market to represent the smallest price increment in a currency. It is often referred to as ticks or points in the market. In EUR/USD, a movement from .9018 to .9019 is one pip. In USD/JPY, a movement from 128.50 to 128.51 is one pip.
Pip Values – according to your trading platform from $7.00 to $10.00 USD.
Pip Spreads – according to your trading platform from 3 to 20 pips.
Volume
The trading volume measures how much “money” is being traded. During some types of news breaks and when the New York’s exchange is open, the volume is obviously higher. The volume indicates us that more things can change. There no real strong correlation for volume, good trades is being developed even when the Forex volume is relatively low.
Buying and Selling short
Buying = term to use when buying a currency pair to open a trade.
Selling short = term to use when selling a currency pair to open a trade.
Both terms, refer to things we do to open a trade.
On the other hand, to exit a trade, you will have to use the terms “selling” and “buying-back”. The term “selling” refers to what we do to exit a trade that initially started by “buying”. The term “buying-back” refers to what we do to exit a trade that initially started by “selling-short”.
Basically the term, “selling-short” can be referred to the futures and commodities market. For instance the mentality of buying a field to plant vegetables that will grow in the future is the same thing than buying a currency and to predict that it will eventually go short.
Bid/Ask Spread
A spread is the difference between the bid and the ask price. The bid price is the price at which you may sell your currency pair for. The ask price is the price at which you must buy the currency pair. The ask price is always higher then the bid price. Profits in the market are made from charging the ask price for a currency pair and buying it from someone else at the bid price.
The bid/ask spread increases when there is uncertainty about what is going to happen in the market.
Major currencies
US Dollar –The United States dollar is the world’s main currency – a universal measure to evaluate any other currency traded on Forex. All currencies are generally q
uoted in US dollar terms. Under conditions of international economic and political unrest, the US dollar is the main safe-haven currency, which was proven particularly well during the Southeast Asian crisis of 1997-1998.
Symbol Currency
GBP British Pound
USD US Dollar
EUR Euro
JPY Japanese Yen
CAD Canadian Dollar
CHF Swiss Franc
AUD Australian Dollar
uoted in US dollar terms. Under conditions of international economic and political unrest, the US dollar is the main safe-haven currency, which was proven particularly well during the Southeast Asian crisis of 1997-1998.As it was indicated, the US dollar became the leading currency toward the end of the Second World War along the Bretton Woods Accord, as the other currencies were virtually pegged against it. The introduction of the Euro in 1999 reduced the dollar’s importance only marginally.
The other major currencies traded against the US dollar are the Euro, Japanese Yen, British Pound and the Swiss Franc.
Euro – The Euro was designed to become the premier currency in tra
ding by simply being quoted in American terms. Like the US dollar, the Euro has a strong international presence stemming from members of the European Monetary Union. The currency remains plagued by unequal growth, high unemployment, and government resistance to structural changes. The pair was also weighed in 1999 and 2000 by outflows from foreign investors, particularly Japanese, who were forced to liquidate their losing investments in euro-denominated assets. Moreover, European money managers rebalanced their portfolios and reduced their Euro exposure as their needs for hedging currency risk in Europe declined.
Japanese Yen – The Japanese Yen is the third most traded currenc
y in the world; it has a much smaller international presence than the US dollar or the Euro. The Yen is very liquid around the world, practically around the clock. The natural demand to trade the Yen concentrated mostly among the Japanese keiretsu, the economic and financial conglomerates. The Yen is much more sensitive to the fortunes of the Nikkei index, the Japanese stock market, and the real estate market.
British Pound – Until the end of the World War II, the Pound was t
he currency of reference. The currency is heavily traded against the Euro and the US dollar, but has a spotty presence against the other currencies. Prior to the introduction of the Euro, both the Pound benefited from any doubts about the currency convergence. After the introduction of the Euro, Bank of England is attempting to bring the high U.K. rates closer to the lower rates in the Euro zone. The Pound could join the Euro in the early 2000’s, provided that the U.K. referendum is positive.
Swiss Franc – The Swiss Franc is the only currency of a major European country that belongs neither to the European Monetary Union nor the G
-7 countries. Although the Swiss economy is relatively small, the Swiss Franc is one of the four major currencies, closely resembling the strength and quality of the Swiss economy and finance. Switzerland had a very close economic relationship with Germany, and thus to the Euro zone. Therefore, in terms of political uncertainty in the East, the Swiss Franc is favored generally over the Euro.
Typically, it is believed that the Swiss Franc is a stable currency. Actually, from a foreign exchange point of view, the Swiss Franc closely resembles the patterns of the Euro, but lacks its liquidity. As the demand for it exceeds supply, the Swiss Franc can be more volatile than the Euro.
The Canadian Dollar and the Australian Dollar are also part of the currencies traded on the Forex market but do not count as being part of the major currencies due to their insufficient volume and circulation. They can only be traded against the US Dollar.
Canadian Dollar - Canada decided to use the dollar instead of a Pou
nd Sterling system because of the ubiquity of Spanish dollars in North America in the 18th century and early 19th century and because of the standardization of the American dollar. The Province of Canada declared that all accounts would be kept in dollars as of January 1, 1858, and ordered the issue of the first official Canadian dollars in the same year. The colonies that would come together in Canadian Confederation progressively adopted a decimal system over the next few years.
Australian Dollar - The Australian Dollar was introduced in February 14, 1966, not only replacing the Australian Pound but also introducing a d
ecimal system. Following the introduction of the Australian Dollar in 1966, the value of the national currency continued to be managed in accord with the Bretton Woods gold standard as it had been since 1954. Essentially the value of the Australian Dollar was managed with reference to gold, although in practice the US dollar was used. In 1983, the Australian government «floated» the Australian dollar, meaning that it no longer managed its value by reference to the US dollar or any other foreign currency. Today the value of the Australian Dollar is managed with almost exclusive reference to domestic measures of value such as the CPI (Consumer Price Index).
The other major currencies traded against the US dollar are the Euro, Japanese Yen, British Pound and the Swiss Franc.
Euro – The Euro was designed to become the premier currency in tra
ding by simply being quoted in American terms. Like the US dollar, the Euro has a strong international presence stemming from members of the European Monetary Union. The currency remains plagued by unequal growth, high unemployment, and government resistance to structural changes. The pair was also weighed in 1999 and 2000 by outflows from foreign investors, particularly Japanese, who were forced to liquidate their losing investments in euro-denominated assets. Moreover, European money managers rebalanced their portfolios and reduced their Euro exposure as their needs for hedging currency risk in Europe declined.Japanese Yen – The Japanese Yen is the third most traded currenc
y in the world; it has a much smaller international presence than the US dollar or the Euro. The Yen is very liquid around the world, practically around the clock. The natural demand to trade the Yen concentrated mostly among the Japanese keiretsu, the economic and financial conglomerates. The Yen is much more sensitive to the fortunes of the Nikkei index, the Japanese stock market, and the real estate market.British Pound – Until the end of the World War II, the Pound was t
he currency of reference. The currency is heavily traded against the Euro and the US dollar, but has a spotty presence against the other currencies. Prior to the introduction of the Euro, both the Pound benefited from any doubts about the currency convergence. After the introduction of the Euro, Bank of England is attempting to bring the high U.K. rates closer to the lower rates in the Euro zone. The Pound could join the Euro in the early 2000’s, provided that the U.K. referendum is positive.Swiss Franc – The Swiss Franc is the only currency of a major European country that belongs neither to the European Monetary Union nor the G
-7 countries. Although the Swiss economy is relatively small, the Swiss Franc is one of the four major currencies, closely resembling the strength and quality of the Swiss economy and finance. Switzerland had a very close economic relationship with Germany, and thus to the Euro zone. Therefore, in terms of political uncertainty in the East, the Swiss Franc is favored generally over the Euro.Typically, it is believed that the Swiss Franc is a stable currency. Actually, from a foreign exchange point of view, the Swiss Franc closely resembles the patterns of the Euro, but lacks its liquidity. As the demand for it exceeds supply, the Swiss Franc can be more volatile than the Euro.
The Canadian Dollar and the Australian Dollar are also part of the currencies traded on the Forex market but do not count as being part of the major currencies due to their insufficient volume and circulation. They can only be traded against the US Dollar.
Canadian Dollar - Canada decided to use the dollar instead of a Pou
nd Sterling system because of the ubiquity of Spanish dollars in North America in the 18th century and early 19th century and because of the standardization of the American dollar. The Province of Canada declared that all accounts would be kept in dollars as of January 1, 1858, and ordered the issue of the first official Canadian dollars in the same year. The colonies that would come together in Canadian Confederation progressively adopted a decimal system over the next few years. Australian Dollar - The Australian Dollar was introduced in February 14, 1966, not only replacing the Australian Pound but also introducing a d
ecimal system. Following the introduction of the Australian Dollar in 1966, the value of the national currency continued to be managed in accord with the Bretton Woods gold standard as it had been since 1954. Essentially the value of the Australian Dollar was managed with reference to gold, although in practice the US dollar was used. In 1983, the Australian government «floated» the Australian dollar, meaning that it no longer managed its value by reference to the US dollar or any other foreign currency. Today the value of the Australian Dollar is managed with almost exclusive reference to domestic measures of value such as the CPI (Consumer Price Index).Symbol Currency
GBP British Pound
USD US Dollar
EUR Euro
JPY Japanese Yen
CAD Canadian Dollar
CHF Swiss Franc
AUD Australian Dollar
Currency pairs
The currencies are always traded in pairs. For example, EUR/USD, which means Euro over US dollars, would be a typical pair. In this case, the Euro, being the first currency can be called the base currency. The second currency, by default USD, is called the counter or quote currency.
As mentioned, the first currency is the base, therefore in a pair you can refer the amount of that currency as being the amount required to purchase one unit of the second currency.
So, if you want to buy the currency pair, you have to buy the EURO and sell the USD simultaneously. On the other hand, if you are looking forward to sell the currency pair, you have to sell the EURO and buy the USD.
The most important thing to understand in a currency pair, or more precisely in a Forex transaction, is that you will be selling or buying the same currency.
As mentioned, the first currency is the base, therefore in a pair you can refer the amount of that currency as being the amount required to purchase one unit of the second currency.
So, if you want to buy the currency pair, you have to buy the EURO and sell the USD simultaneously. On the other hand, if you are looking forward to sell the currency pair, you have to sell the EURO and buy the USD.
The most important thing to understand in a currency pair, or more precisely in a Forex transaction, is that you will be selling or buying the same currency.
Benefits of Forex Trading vs. Equity Trading
Benefits of Forex Trading vs. Equity Trading
• 24 hour trading
• Liquidity
• 50:1 Leverage to 400:1 Leverage
• Lower transaction costs
• Equal access to market information
• Profit potential in both rising and falling markets
24-hour trading
The main advantage of the Forex market over the stock market and other exchange-traded instruments is that the Forex market is a true 24-hour market. Whether it’s 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading Forex so that investors can respond to breaking news immediately. In the currency markets, your portfolio won’t be affected by after hours earning reports or analyst conference calls.
Recently, after hours trading has become available for US stocks - with several limitations. These ECNs (Electronic Communication Networks) exist to bring together buyers and sellers when possible. However, there is no guarantee that every trade will be executed, nor at a fair market price. Quite frequently, stock traders must wait until the market opens the following day in order to receive a tighter spread.
Liquidity
With a daily trading volume that is 50 times larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Investors can always open or close a position, and more importantly, receive a fair market price.
Because of the lower trading volume, investors in the stock market and other exchange-traded markets are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.
50:1 Leverage to 400:1 Leverage
Leveraged trading, also called margin trading, allows investors in the Forex market to execute trades up to $250,000 with an initial margin of only $5000. However, it is important to remember that while this type of leverage allows investors to maximize their profit potential, the potential for loss is equally great. A more pragmatic margin trade for someone new to the FX markets would be 5:1 or even 10:1, but ultimately depends on the investor’s appetite for risk. On the other hand, a 100:1 leverage would be the foremost suggested margin trading to use for the best risk and reward return.
Lower transaction costs
It is much more cost efficient to invest in the Forex market, in terms of both commissions and transaction fees.
Commissions for stock trades range from a low of $7.95-$29.95 per trade with on-line brokers to over $100 per trade with traditional brokers. Typically, stock commissions are directly related to the level of service offered by the broker. For instance, for $7.95, customers receive no access to market information, research or other relevant data. At the high end, traditional brokers offer full access to research, analyst stock recommendations, etc.
In contrast, on-line Forex brokers charge significantly lower commission and transaction fees. Some, like FCStone FX, charge LOW fees, while still offering traders access to all relevant market information.
In general, the width of the spread in a FX transaction is less than 1/10 as wide as a stock transaction, which typically includes a 1/8 wide bid/ask spread. For example, if a broker will buy a stock at $22 and sell at $22.125, the spread equals .006. For a FX trade with a 5 pip wide spread, where the dealer is willing to buy EUR/USD at .9030 and sell at .9035, the spread equals .0005.
Equal access to market information
Professional traders and analysts in the equity market have a definitive competitive advantage by virtue of that fact that they have first access to important corporate information, such as earning estimates and press releases, before it is released to the general public. In contrast, in the Forex market, pertinent information is equally accessible, ensuring that all market participants can take advantage of market-moving news as soon as it becomes available.
Profit potential in both rising and falling markets
In every open FX position, an investor is long in one currency and short the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means that potential exists in a rising as well as a falling FX market. The ability to sell currencies without any limitations is one distinct advantage over equity trading. It is much more difficult to establish a short position in the US equity markets, where the Uptick rule prevents investors from shorting stock unless the immediately preceding trade was equal to or lower than the price of the short sale.
• 24 hour trading
• Liquidity
• 50:1 Leverage to 400:1 Leverage
• Lower transaction costs
• Equal access to market information
• Profit potential in both rising and falling markets
24-hour trading
The main advantage of the Forex market over the stock market and other exchange-traded instruments is that the Forex market is a true 24-hour market. Whether it’s 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading Forex so that investors can respond to breaking news immediately. In the currency markets, your portfolio won’t be affected by after hours earning reports or analyst conference calls.
Recently, after hours trading has become available for US stocks - with several limitations. These ECNs (Electronic Communication Networks) exist to bring together buyers and sellers when possible. However, there is no guarantee that every trade will be executed, nor at a fair market price. Quite frequently, stock traders must wait until the market opens the following day in order to receive a tighter spread.
Liquidity
With a daily trading volume that is 50 times larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Investors can always open or close a position, and more importantly, receive a fair market price.
Because of the lower trading volume, investors in the stock market and other exchange-traded markets are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.
50:1 Leverage to 400:1 Leverage
Leveraged trading, also called margin trading, allows investors in the Forex market to execute trades up to $250,000 with an initial margin of only $5000. However, it is important to remember that while this type of leverage allows investors to maximize their profit potential, the potential for loss is equally great. A more pragmatic margin trade for someone new to the FX markets would be 5:1 or even 10:1, but ultimately depends on the investor’s appetite for risk. On the other hand, a 100:1 leverage would be the foremost suggested margin trading to use for the best risk and reward return.
Lower transaction costs
It is much more cost efficient to invest in the Forex market, in terms of both commissions and transaction fees.
Commissions for stock trades range from a low of $7.95-$29.95 per trade with on-line brokers to over $100 per trade with traditional brokers. Typically, stock commissions are directly related to the level of service offered by the broker. For instance, for $7.95, customers receive no access to market information, research or other relevant data. At the high end, traditional brokers offer full access to research, analyst stock recommendations, etc.
In contrast, on-line Forex brokers charge significantly lower commission and transaction fees. Some, like FCStone FX, charge LOW fees, while still offering traders access to all relevant market information.
In general, the width of the spread in a FX transaction is less than 1/10 as wide as a stock transaction, which typically includes a 1/8 wide bid/ask spread. For example, if a broker will buy a stock at $22 and sell at $22.125, the spread equals .006. For a FX trade with a 5 pip wide spread, where the dealer is willing to buy EUR/USD at .9030 and sell at .9035, the spread equals .0005.
Equal access to market information
Professional traders and analysts in the equity market have a definitive competitive advantage by virtue of that fact that they have first access to important corporate information, such as earning estimates and press releases, before it is released to the general public. In contrast, in the Forex market, pertinent information is equally accessible, ensuring that all market participants can take advantage of market-moving news as soon as it becomes available.
Profit potential in both rising and falling markets
In every open FX position, an investor is long in one currency and short the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means that potential exists in a rising as well as a falling FX market. The ability to sell currencies without any limitations is one distinct advantage over equity trading. It is much more difficult to establish a short position in the US equity markets, where the Uptick rule prevents investors from shorting stock unless the immediately preceding trade was equal to or lower than the price of the short sale.
Benefits of Online Investing & Trading FX on the Internet
Benefits of Online Investing
Online trading has caused a major paradigm shift in investing. At the turn of the millennium, there are over 6 million online investment accounts, up from 1.5 million in 1997. As a result, start-up firms now compete directly with financial institutions to serve investors in the new Economy, and the clear winner is the customer. The competition between the brick and mortar institutions and the Internet-based companies has dramatically lowered the costs of investing, and empowered the individual investor to take control of their own investment strategy.
On-line trading will revolutionize the currency markets by making it accessible to the small and medium sized investor. For the first time, these investors have the ability to execute transactions of between $100,000 and $10,000,000 at the same prices the Interbank market offers for deals well over $10,000,000. This benefits both those who wish to speculate on the direction of the currency markets for profit, as well as the money manager or corporate treasurer looking to hedge against unwanted exposure to future price fluctuations in the currency markets.
Benefits of Trading FX on the Internet
• Deal directly from live price quotes
• Instantaneous trade execution and confirmation
• Fast and efficient execution of deals
• Lower transaction costs
• Real-time profit and loss analysis
• Full access to market information
Deal directly from live price quotes
Very few on-line brokers are able to offer their clients real-time bid/ask quotes, which facilitates instantaneous deal execution - no missed market opportunities. Real-time prices also allow investors to compare an on-line broker’s dealing spread with that of other pricing services, to ensure they are receiving the best possible price on all their Forex transactions.
Many on-line Forex brokers require their clients to request a price before dealing. This is disadvantageous for a number of reasons, primarily because it significantly lengthens the execution process from just a few seconds to possibly as long as a minute. In a fast paced market, this could make a significant difference in an investor’s profit potential. Also, some of the more unscrupulous brokers may use the opportunity to look at an investor’s current position. Once they have determined whether the investor is a buyer or a seller, they ‘shade’ the price to increase their own profit on the transaction.
Instantaneous trade execution and confirmation
Timing is everything in the fast-paced Forex market. On-line trades are executed and confirmed within seconds, which ensures that traders do not miss market opportunities. Even the incremental extra time it takes to complete a transaction over the phone can mean a big difference in profit potential.
Lower transaction costs
Simply, executing trades electronically reduces manual effort, thereby lowering the costs of doing business. On-line brokers are then able to pass along the savings to their client base.
Real-time profit and loss analysis
The fast-paced nature of the Forex market compels traders to execute multiple trades each day. It is vital for each client to have real-time information about their current position in order to make well-informed trading decisions.
Full access to market information
Access to timely and relevant information is critical. Professional traders pay thousands of dollars each month for access to major information providers. However, the very nature of the Internet affords users free access to reliable market information from a variety of sources, including real-time price quotes, international news, government-issued economic indicators and reports, as well as subjective information such as expert commentary and analysis, trader chat forums etc.
Online trading has caused a major paradigm shift in investing. At the turn of the millennium, there are over 6 million online investment accounts, up from 1.5 million in 1997. As a result, start-up firms now compete directly with financial institutions to serve investors in the new Economy, and the clear winner is the customer. The competition between the brick and mortar institutions and the Internet-based companies has dramatically lowered the costs of investing, and empowered the individual investor to take control of their own investment strategy.
On-line trading will revolutionize the currency markets by making it accessible to the small and medium sized investor. For the first time, these investors have the ability to execute transactions of between $100,000 and $10,000,000 at the same prices the Interbank market offers for deals well over $10,000,000. This benefits both those who wish to speculate on the direction of the currency markets for profit, as well as the money manager or corporate treasurer looking to hedge against unwanted exposure to future price fluctuations in the currency markets.
Benefits of Trading FX on the Internet
• Deal directly from live price quotes
• Instantaneous trade execution and confirmation
• Fast and efficient execution of deals
• Lower transaction costs
• Real-time profit and loss analysis
• Full access to market information
Deal directly from live price quotes
Very few on-line brokers are able to offer their clients real-time bid/ask quotes, which facilitates instantaneous deal execution - no missed market opportunities. Real-time prices also allow investors to compare an on-line broker’s dealing spread with that of other pricing services, to ensure they are receiving the best possible price on all their Forex transactions.
Many on-line Forex brokers require their clients to request a price before dealing. This is disadvantageous for a number of reasons, primarily because it significantly lengthens the execution process from just a few seconds to possibly as long as a minute. In a fast paced market, this could make a significant difference in an investor’s profit potential. Also, some of the more unscrupulous brokers may use the opportunity to look at an investor’s current position. Once they have determined whether the investor is a buyer or a seller, they ‘shade’ the price to increase their own profit on the transaction.
Instantaneous trade execution and confirmation
Timing is everything in the fast-paced Forex market. On-line trades are executed and confirmed within seconds, which ensures that traders do not miss market opportunities. Even the incremental extra time it takes to complete a transaction over the phone can mean a big difference in profit potential.
Lower transaction costs
Simply, executing trades electronically reduces manual effort, thereby lowering the costs of doing business. On-line brokers are then able to pass along the savings to their client base.
Real-time profit and loss analysis
The fast-paced nature of the Forex market compels traders to execute multiple trades each day. It is vital for each client to have real-time information about their current position in order to make well-informed trading decisions.
Full access to market information
Access to timely and relevant information is critical. Professional traders pay thousands of dollars each month for access to major information providers. However, the very nature of the Internet affords users free access to reliable market information from a variety of sources, including real-time price quotes, international news, government-issued economic indicators and reports, as well as subjective information such as expert commentary and analysis, trader chat forums etc.
The Market Hours
The trading begins once the markets are officially open in Tokyo, Japan at 7:00 PM Sunday, New York time.
Afterwards, at 9:00 PM EST, Singapore and Hong Kong opens followed by the European markets in Frankfurt at 2:00 AM and in London at 3:00 AM.
When the clock reaches 4:00 AM, the European markets are in the hot spot and Asia just concluded its trading day.
Around 8:00 AM on Monday, the US markets opens in New York while Europe is slowly going down. Australia will take the lead around 5:00 PM and when it is 7:00PM again, Tokyo is ready to reopen.
Afterwards, at 9:00 PM EST, Singapore and Hong Kong opens followed by the European markets in Frankfurt at 2:00 AM and in London at 3:00 AM.
When the clock reaches 4:00 AM, the European markets are in the hot spot and Asia just concluded its trading day.
Around 8:00 AM on Monday, the US markets opens in New York while Europe is slowly going down. Australia will take the lead around 5:00 PM and when it is 7:00PM again, Tokyo is ready to reopen.
Factors Affecting the Market
Currency prices are affected by a variety of economic and political conditions, most importantly interest rates, inflation and political stability. Moreover, governments sometimes participate in the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price. This is known as Central Bank intervention. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and volume of the Forex market makes it impossible for any one entity to «drive» the market for any length of time.
Another factor affecting the market, with an effect as important as the other factors mentioned above, is the news. Once released, the news have a direct outcome on the currency price as per news are always directly related to the economic stability of the market. Here’s a list of channels that will provide you useful information on currency news:
CNBC – USD News
Rob TV – CAD News
Bloomberg TV – EUR News
Another factor affecting the market, with an effect as important as the other factors mentioned above, is the news. Once released, the news have a direct outcome on the currency price as per news are always directly related to the economic stability of the market. Here’s a list of channels that will provide you useful information on currency news:
CNBC – USD News
Rob TV – CAD News
Bloomberg TV – EUR News
Daily or Position Trader, their strengths and weaknesses
Day-trading overview
Day-trading, which was once the exclusive domain of the floor trader, is now fair game for all speculators. Inspired in part by large intraday price swings, instant availability of quotes, affordable high-powered computers and competitive commissions, the new wave of day-trading methods and systems has attracted thousands of traders in recent years. The undeniable thrill of trading within the time span of one day is, however, a double-edged sword: one that can hurt as well as heal. To be successful, a day-trader must have the discipline of a machine, the instincts of a fox, the emotions of a rock, the skills of a surgeon and the patience of a saint. (And a little luck wouldn’t hurt either.) The day trader works more with the emotions along with the fundamental analysis.
Definition
Very active currency trader who holds positions for a very short time and makes several trades each day. Day traders are individuals who are trying to make a career out of buying and selling stocks very quickly, often making dozens of trades in a single day and generally closing all positions at the end of each day. Day trading can be costly, since the commissions and the bid/ask spread add up when there are so many transactions.
Position Trading Overview
Position Trader looks for occasional significant moves that may unfold quickly or over time. It patiently waits for ideal trade setups to occur during minor and major trend reversals in certain sectors, indexes or entire broad markets. Determination of these potential setups is derived from technical indicators, chart patterns, point and figure charts and fundamental news events. Once a move shows sign of development, hourly and intraday charts are monitored for optimum entry.
Definition
Currency trader who, unlike most traders, takes a long-term, buy and hold approach. In currency trading, «long-term» refers to holding until the delivery date is close, usually 5-7 months. Basically, a position trade approach is to enter the markets only during times of key reversal probability in order to capture large moves as they gradually or quickly unfold. It is designed for traders who favor a gradual, buy and hold approach when ideal trade conditions exist for high-odds success.
Day-trading, which was once the exclusive domain of the floor trader, is now fair game for all speculators. Inspired in part by large intraday price swings, instant availability of quotes, affordable high-powered computers and competitive commissions, the new wave of day-trading methods and systems has attracted thousands of traders in recent years. The undeniable thrill of trading within the time span of one day is, however, a double-edged sword: one that can hurt as well as heal. To be successful, a day-trader must have the discipline of a machine, the instincts of a fox, the emotions of a rock, the skills of a surgeon and the patience of a saint. (And a little luck wouldn’t hurt either.) The day trader works more with the emotions along with the fundamental analysis.Definition
Very active currency trader who holds positions for a very short time and makes several trades each day. Day traders are individuals who are trying to make a career out of buying and selling stocks very quickly, often making dozens of trades in a single day and generally closing all positions at the end of each day. Day trading can be costly, since the commissions and the bid/ask spread add up when there are so many transactions.
Position Trading Overview
Position Trader looks for occasional significant moves that may unfold quickly or over time. It patiently waits for ideal trade setups to occur during minor and major trend reversals in certain sectors, indexes or entire broad markets. Determination of these potential setups is derived from technical indicators, chart patterns, point and figure charts and fundamental news events. Once a move shows sign of development, hourly and intraday charts are monitored for optimum entry.Definition
Currency trader who, unlike most traders, takes a long-term, buy and hold approach. In currency trading, «long-term» refers to holding until the delivery date is close, usually 5-7 months. Basically, a position trade approach is to enter the markets only during times of key reversal probability in order to capture large moves as they gradually or quickly unfold. It is designed for traders who favor a gradual, buy and hold approach when ideal trade conditions exist for high-odds success.
Players in the Forex Market
Central Banks - The national central banks play an important role in the (FOREX) markets. Ultimately, central banks seek to control the money supply and often have official or unofficial target rates for their currencies. As many central banks have very substantial foreign exchange reserves, their intervention power is significant. Among the most important responsibilities of a central bank is the restoration of an orderly market in times of excessive exchange rate volatility and the control of the inflationary impact of a weakening currency.
Frequently, the mere expectation of central bank intervention is sufficient to stabilize a currency, but in case of aggressive intervention the actual impact on the short-term supply/demand balance can lead to the desired moves in exchange rates.
If a central bank does not achieve its objectives, the market participants can take on a central bank. The combined resources of the market participants could easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 with the European Exchange Rate Mechanism (ERM) collapse and 1997 throughout South East Asia.
Banks - The Interbank market caters to both the majority of commercial turnover as well as enormous amounts of speculative trading. It is not uncommon for a large bank to trade billions of dollars daily. Some of this trading activity is undertaken on behalf of corporate customers, but a banks treasury room also conducts a large amount of trading, where bank dealers are taking their own positions to make the bank profits.
The Interbank market has become increasingly competitive in the last couple of years and the god-like status of top foreign exchange traders has suffered as equity traders are again back in charge. A large part of the banks’ trading with each other is taking place on electronic booking systems that have negatively affected traditional foreign exchange brokers.
Interbank Brokers - Until recently, foreign exchange brokers were doing large amounts of business, facilitating Interbank trading and matching anonymous counterparts for comparatively small fees. With the increased use of the Internet, a lot of this business is moving onto more efficient electronic systems that are functioning as a closed circuit for banks only.
The traditional broker box, which lets bank traders and brokers hear market prices, is still seen in most trading rooms, but turnover is noticeably smaller than just a few years ago due to increased use of electronic booking systems.
Commercial Companies - The commercial companies’ international trade exposure is the backbone of the foreign exchange markets. A multinational company has exposure in accounts receivables and payables denominated in foreign currencies. They can be protected against unfavorable moves with foreign exchange. That is why these markets are in existence. Commercial companies often trade in sizes that are insignificant to short term market moves, however, as the main currency markets can quite easily absorb hundreds of millions of dollars without any big impact. It is also clear that one of the decisive factors determining the long-term direction of a currency’s exchange rate is the overall trade flow.
Some multinational companies, whose exposures are not commonly known to the majority of market, can have an unpredictable impact when very large positions are covered.
Retail Brokers - The arrival of the Internet has brought us a host of retail brokers. There is a numbered amount of these non-bank brokers offering foreign exchange dealing platforms, analysis, and strategic advice to retail customers. The fact is many banks do not undertake foreign exchange trading for retail customers at all, and do not have the necessary resources or inclination to support retail clients adequately. The services of such retail foreign exchange brokers are more similar in nature to stock and mutual fund brokers and typically provide a service-orientated approach to their clients.
Hedge Funds - Hedge funds have gained a reputation for aggressive currency speculation in recent years. There is no doubt that with the increasing amount of money some of these investment vehicles have under management, the size and liquidity of foreign exchange markets is very appealing. The leverage available in these markets also allows such a fund to speculate with tens of billions at a time. The herd instinct that is very apparent in hedge fund circles was seen in the early 1990’s with George Soros and others squeezing the GBP out of the European Monetary System.
It is unlikely, however, that such investments would be successful if the underlying investment strategy was not sound. It is also argued that hedge funds actually perform a beneficial service to foreign exchange markets. They are able to exploit economical weakness and to expose a countries unsustainable financial plight, thus forcing realignment to more realistic levels.
Investors and Speculators - In all efficient markets, the speculator has an important role taking over the risks that a commercial participant hedges. The boundaries of speculation in the foreign exchange market are unclear, because many of the above mentioned players also have speculative interests, even central banks. The foreign exchange market is popular with investors due to the large amount of leverage that can be obtained and the liquidity with which positions can be entered and exited. Taking advantage of two currencies interest rate differentials is another popular strategy that can be efficiently undertaken in a market with high leverage. We have all seen prices of 30 day forwards, 60 day forwards etc, that is the interest rate difference of the two currencies in exchange rate terms.
Frequently, the mere expectation of central bank intervention is sufficient to stabilize a currency, but in case of aggressive intervention the actual impact on the short-term supply/demand balance can lead to the desired moves in exchange rates.
If a central bank does not achieve its objectives, the market participants can take on a central bank. The combined resources of the market participants could easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 with the European Exchange Rate Mechanism (ERM) collapse and 1997 throughout South East Asia.
Banks - The Interbank market caters to both the majority of commercial turnover as well as enormous amounts of speculative trading. It is not uncommon for a large bank to trade billions of dollars daily. Some of this trading activity is undertaken on behalf of corporate customers, but a banks treasury room also conducts a large amount of trading, where bank dealers are taking their own positions to make the bank profits.
The Interbank market has become increasingly competitive in the last couple of years and the god-like status of top foreign exchange traders has suffered as equity traders are again back in charge. A large part of the banks’ trading with each other is taking place on electronic booking systems that have negatively affected traditional foreign exchange brokers.
Interbank Brokers - Until recently, foreign exchange brokers were doing large amounts of business, facilitating Interbank trading and matching anonymous counterparts for comparatively small fees. With the increased use of the Internet, a lot of this business is moving onto more efficient electronic systems that are functioning as a closed circuit for banks only.
The traditional broker box, which lets bank traders and brokers hear market prices, is still seen in most trading rooms, but turnover is noticeably smaller than just a few years ago due to increased use of electronic booking systems.
Commercial Companies - The commercial companies’ international trade exposure is the backbone of the foreign exchange markets. A multinational company has exposure in accounts receivables and payables denominated in foreign currencies. They can be protected against unfavorable moves with foreign exchange. That is why these markets are in existence. Commercial companies often trade in sizes that are insignificant to short term market moves, however, as the main currency markets can quite easily absorb hundreds of millions of dollars without any big impact. It is also clear that one of the decisive factors determining the long-term direction of a currency’s exchange rate is the overall trade flow.
Some multinational companies, whose exposures are not commonly known to the majority of market, can have an unpredictable impact when very large positions are covered.
Retail Brokers - The arrival of the Internet has brought us a host of retail brokers. There is a numbered amount of these non-bank brokers offering foreign exchange dealing platforms, analysis, and strategic advice to retail customers. The fact is many banks do not undertake foreign exchange trading for retail customers at all, and do not have the necessary resources or inclination to support retail clients adequately. The services of such retail foreign exchange brokers are more similar in nature to stock and mutual fund brokers and typically provide a service-orientated approach to their clients.
Hedge Funds - Hedge funds have gained a reputation for aggressive currency speculation in recent years. There is no doubt that with the increasing amount of money some of these investment vehicles have under management, the size and liquidity of foreign exchange markets is very appealing. The leverage available in these markets also allows such a fund to speculate with tens of billions at a time. The herd instinct that is very apparent in hedge fund circles was seen in the early 1990’s with George Soros and others squeezing the GBP out of the European Monetary System.
It is unlikely, however, that such investments would be successful if the underlying investment strategy was not sound. It is also argued that hedge funds actually perform a beneficial service to foreign exchange markets. They are able to exploit economical weakness and to expose a countries unsustainable financial plight, thus forcing realignment to more realistic levels.
Investors and Speculators - In all efficient markets, the speculator has an important role taking over the risks that a commercial participant hedges. The boundaries of speculation in the foreign exchange market are unclear, because many of the above mentioned players also have speculative interests, even central banks. The foreign exchange market is popular with investors due to the large amount of leverage that can be obtained and the liquidity with which positions can be entered and exited. Taking advantage of two currencies interest rate differentials is another popular strategy that can be efficiently undertaken in a market with high leverage. We have all seen prices of 30 day forwards, 60 day forwards etc, that is the interest rate difference of the two currencies in exchange rate terms.
History of the Forex
Money, in one form or another, has been used by man for centuries. At first it was mainly Gold or Silver coins. Goods were traded against other goods or against gold. So, the price of gold became a reference point. But as the trading of goods grew between nations, moving quantities of gold around places to settle payments of trade became cumbersome, risky and time consuming. Therefore, a system was sought by which the payment of trades could be settled in the seller’s local currency. But how much of buyer’s local currency should be equal to the seller’s local currency?The answer was simple. The strength of a country’s currency depended on the amount of gold reserves the country maintained. So, if country A’s gold reserves are double the gold reserves of country B, country A’s currency will be twice in value when exchanged with the currency of country B. This became to be known as The Gold Standard. Around 1880, The Gold Standard was accepted and used worldwide.During the first WORLD WAR, in order to fulfill the enormous financing needs, paper money was created in quantities that far exceeded the gold reserves. The currencies lost their standard parities and caused a gross distortion in the country’s standing in terms of its foreign liabilities and assets.
After the end of the second WORLD WAR the western allied powers attempted to solve the problem at the Bretton Woods Conference in New Hampshire in 1944. In the first three weeks of July 1944, delegates from 45 nations gathered at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. The delegates met to discuss the postwar recovery of Europe as well as a number of monetary issues, such as unstable exchange rates and protectionist trade policies.
During the 1930s, many of the world’s major economies had unstable currency exchange rates. As well, many nations used restrictive trade policies. In the early 1940s, the United States and Great Britain developed proposals for the creation of new international financial institutions that would stabilize exchange rates and boost international trade. There was also a recognized need to organize a recovery of Europe in the hopes of avoiding the problems that arose after the First World War.
The delegates at Bretton Woods reached an agreement known as the Bretton Woods Agreement to establish a postwar international monetary system of convertible currencies, fixed exchange rates and free trade. To facilitate these objectives, the agreement created two international institutions: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). The intention was to provide economic aid for reconstruction of postwar Europe. An initial loan of $250 million to France in 1947 was the World Bank’s first act.
Under the Bretton Woods Exchange System, the currencies of participating nations could be converted into the US dollar at a fixed rate, and foreign central banks could convert the US dollar into gold at a fixed rate. In other words, the US dollar replaced the then dominant British Pound and the parities of the world’s leading currencies were pegged against the US Dollar.
The Bretton Woods Agreement was also aimed at preventing currency competition and promoting monetary co-operation among nations. Under the Bretton Woods system, the IMF member countries agreed to a system of exchange rates that could be adjusted within defined parities with the US dollar or, with the agreement of the IMF, changed to correct a fundamental disequilibrium in the balance of payments. The per value system remained in use from 1946 until the early 1970s.
The United States, under President Nixon, retaliated in 1971 by devaluing the dollar and forcing realignment of currencies with the dollar. The leading European economies tried to counter the US move by aligning their currencies in narrow band and then float collectively against the US dollar.
After the end of the second WORLD WAR the western allied powers attempted to solve the problem at the Bretton Woods Conference in New Hampshire in 1944. In the first three weeks of July 1944, delegates from 45 nations gathered at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. The delegates met to discuss the postwar recovery of Europe as well as a number of monetary issues, such as unstable exchange rates and protectionist trade policies.
During the 1930s, many of the world’s major economies had unstable currency exchange rates. As well, many nations used restrictive trade policies. In the early 1940s, the United States and Great Britain developed proposals for the creation of new international financial institutions that would stabilize exchange rates and boost international trade. There was also a recognized need to organize a recovery of Europe in the hopes of avoiding the problems that arose after the First World War.
The delegates at Bretton Woods reached an agreement known as the Bretton Woods Agreement to establish a postwar international monetary system of convertible currencies, fixed exchange rates and free trade. To facilitate these objectives, the agreement created two international institutions: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). The intention was to provide economic aid for reconstruction of postwar Europe. An initial loan of $250 million to France in 1947 was the World Bank’s first act.
Under the Bretton Woods Exchange System, the currencies of participating nations could be converted into the US dollar at a fixed rate, and foreign central banks could convert the US dollar into gold at a fixed rate. In other words, the US dollar replaced the then dominant British Pound and the parities of the world’s leading currencies were pegged against the US Dollar.
The Bretton Woods Agreement was also aimed at preventing currency competition and promoting monetary co-operation among nations. Under the Bretton Woods system, the IMF member countries agreed to a system of exchange rates that could be adjusted within defined parities with the US dollar or, with the agreement of the IMF, changed to correct a fundamental disequilibrium in the balance of payments. The per value system remained in use from 1946 until the early 1970s.
The United States, under President Nixon, retaliated in 1971 by devaluing the dollar and forcing realignment of currencies with the dollar. The leading European economies tried to counter the US move by aligning their currencies in narrow band and then float collectively against the US dollar.
Attention All Forex Beginners!!!
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Let us start by introduction about FOREX.
Description of the Forex
The Forex market, established in 1971, was created when floating exchange rates began to materialize. The Forex market is not centralized, like in currency futures or stock markets. Trading occurs over computers and telephones at thousands of locations worldwide.
The Foreign Exchange market, commonly referred as FOREX, is where banks, investors and speculators exchange one currency to another. The largest foreign exchange activity retains the spot exchange (i.e.., immediate) between five major currencies: US Dollar, British Pound, Japanese Yen, Eurodollar and the Swiss Franc. It is also the largest financial market in the world. In comparison, the US stock market may trade $10 billion in one day, whereas the Forex market will trade up to $2 trillion in one single day. The Forex market is an opened 24 hours a day market where the primary market for currencies is the 24-hour Interbank market. This market follows the sun around the world, moving from the major banking centres of the United States to Australia and New Zealand to the Far East, to Europe and finally back to the Unites States.
Until now, professional traders from major international commercial and investment banks have dominated the FX market. Other market participants range from large multinational corporations, global money managers, registered dealers, international money brokers, and futures and options traders, to private speculators.
There are three main reasons to participate in the FX market. One is to facilitate an actual transaction, whereby international corporations convert profits made in foreign currencies into their domestic currency. Corporate treasurers and money managers also enter the FX market in order to hedge against unwanted exposure to future price movements in the currency market. The third and more popular reason is speculation for profit. In fact, today it is estimated that less than 5% of all trading on the FX market is actually facilitating a true commercial transaction.
The FX market is considered an Over The Counter (OTC) or ‘Interbank’ market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets. A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.
Let us start by introduction about FOREX.
Description of the Forex
The Forex market, established in 1971, was created when floating exchange rates began to materialize. The Forex market is not centralized, like in currency futures or stock markets. Trading occurs over computers and telephones at thousands of locations worldwide.The Foreign Exchange market, commonly referred as FOREX, is where banks, investors and speculators exchange one currency to another. The largest foreign exchange activity retains the spot exchange (i.e.., immediate) between five major currencies: US Dollar, British Pound, Japanese Yen, Eurodollar and the Swiss Franc. It is also the largest financial market in the world. In comparison, the US stock market may trade $10 billion in one day, whereas the Forex market will trade up to $2 trillion in one single day. The Forex market is an opened 24 hours a day market where the primary market for currencies is the 24-hour Interbank market. This market follows the sun around the world, moving from the major banking centres of the United States to Australia and New Zealand to the Far East, to Europe and finally back to the Unites States.
Until now, professional traders from major international commercial and investment banks have dominated the FX market. Other market participants range from large multinational corporations, global money managers, registered dealers, international money brokers, and futures and options traders, to private speculators.
There are three main reasons to participate in the FX market. One is to facilitate an actual transaction, whereby international corporations convert profits made in foreign currencies into their domestic currency. Corporate treasurers and money managers also enter the FX market in order to hedge against unwanted exposure to future price movements in the currency market. The third and more popular reason is speculation for profit. In fact, today it is estimated that less than 5% of all trading on the FX market is actually facilitating a true commercial transaction.
The FX market is considered an Over The Counter (OTC) or ‘Interbank’ market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets. A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.
What is real importance of trading?
Almost every successful investor that I have encountered has realized the lesson of the Holy Grail metaphor-that success in the markets comes from internal control. This is a radical change for most investors. Internal control is not that difficult to achieve, but it is difficult for most people to realize how important it is. For example, most investors believe that markets are living entities that create victims. If you believe that statement, then it is true for you. But markets do not create victims; investors turn themselves into victims. Each trader controls his or her own destiny. No trader will find success without understanding this important principle atleast subconsciously Let’s look at some facts:Most successful market professionals achieve success by controlling risk. Controlling risk goes against our natural tendencies. Risk control requires tremendous internal control. Most successful speculators have success rates of 35 to 50 percent. They are not successful because they predict prices well. They are successful because the size of their profitable trades far exceeds the size of their losses. This requires tremendous internal control. Most successful conservative investors are contrarians. They do what everyone else is afraid to do. They have patience and are willing to wait for the right opportunity.
This also requires internal control. Investment success requires internal control more than any other factor. This is the first step toward trading success. People who dedicate themselves to developing that control are the ones who will ultimately succeed.
What is money management?
Money management is changing the number of contracts you trade as youraccount size increases or decreases. There are several ways to mathematically
define money management strategies. Here are a few of the more commonly
accepted approaches.
Percent risked
Adjust the lot size so the total amount risked (stop loss) on each trade is a fixed
fraction of your trading equity.
LotSize = RiskFraction * Equity / TradeRisk
This model can skip trades or stop trading if the risk fraction of equity shrinks
smaller than the risk or initial stop loss one must endure to enter a trade. If your
risk input contains a constant value for risk (as you would input if you didn’t have
risk data on a per-trade basis), then this model becomes what’s called the fixed
fractional model. Its power derives from having the risk, or initial stop loss size, of
each individual trade.
Percent volatility
Adjust the lot size so that the market volatility in dollars per lot, often measured
as the average true range of the last 10 to 20 bars, is no more than a fixed fraction
of your equity.
LotSize = VolatilityFraction * Equity / Volatility
This model can skip trades or stop trading if the volatility fraction of equity
shrinks smaller than the market’s volatility. This model also converts to a fixedfractional
model if you have a constant value in the volatility input.
Optimal f — An overview
Optimal f is a fixed factional money management method. In 1956, J.L. Kelly Jr.
published a paper called “A New Interpretation of Information Rate.”
Professional blackjack players realized the application of this work and began
using it in their gaming efforts. The basic concept was to use the probability of
winning and the ratio of wins to losses to calculate the optimal bet size.
Larry Williams popularized this concept for traders in 1987 during the Robbins’
World Cup trading competition. Money management is a powerful tool when an
individual has an edge. Roulette will not work with money management because
you cannot get a theoretical edge in that game. However, in backgammon or
blackjack an expert player can get a small edge on the casino and use Kelly’s formulas
to supercharge their returns. The Kelly formula is:
F = ((B + 1) * P - 1) / B
Where:
P is the probability of a winning bet
B is the ratio of the amount won vs. the amount loss
If there is a 60% chance of winning $1.50 or a 40% chance of losing $1.00, the
optimal bet size can be calculated as:
f = (1.5 + 1) * 0.60 - 1) / 1.5 F = 0.33
We would conclude that betting 33% of our stake on each bet would produce
the best or optimal results.
Another researcher, Ralph Vince, discovered the problem with the Kelly formula
in 1987 while working with Larry Williams. He found that the formula was
not valid if the amount won or lost on each event was different. Vince developed
his own set of equations to solve this problem based on the concept of a Holding
Period Return (HPR). The Holding Period Return is the rate of return on any given
trade plus 1.00. So, a 10% return equals 1.10 and a 25% loss equals 0.75. Because percentage returns are being calculated based on a fixed fraction of the account
size, we can define HPR as:
HPR = 1 + f * (-T / BL)
Where:
f is the fixed fraction of the account to trade
T is the profit/loss of an individual trade
BL is the largest losing trade of an entire sequence of trades
The HPR formula is applied to each trade. By multiplying HPR for each trade, we
can obtain a multiple of our original stake, the Terminal Wealth Relative (TWR):
TWR = Product (1 + f * (-T / BL))
We maximize the TWR function by changing the values of “f” to find the value
that produces the highest TWR, which is called optimal f. After calculating optimal
f and TWR, we need to calculate how much equity is required to trade one unit:
U = (ML / - f)
Where:
U is the trading units in dollar
ML is the maximum loss in dollars
f is the optimal value for f
Using the trading units in dollars, starting account size and trade history, we can
run a simulation of the equity curve for any trading system using optimal f. These
simulations often yield astronomical results after 50 or 100 trades. The problem is
optimal f quickly can require trading more contracts than is realistic for a given market.
Another problem is that optimal f returns are also based on trading fractional
contracts. For example, if U is $4,000 and our account equity is $10,000, optimal f
would call for 2.5 contracts to be traded. In real life, we would round the number of
contracts down to the nearest whole number, which would be two contracts.
Because the largest losing trade is used to calculate TWR, it has a major effect
on optimal f. This is not a problem when working with historical simulations, but
when we are using optimal f on a real system where protective stops are based on
volatility or channel size, we cannot define optimal f.
The distribution of trades greatly affects the value of optimal f.
We can have two trading systems that make $100,000 on 1,000 trades for an
average profit of $1,000 per trade. The optimal f values for these two systems can
vary widely based on the distribution of the returns on the trades. It is dangerous
to trade anywhere near optimal f because the distribution of trades in real time
can change. For illustration’s sake, say, in testing you had 500 straight winners and
500 straight losers, while real life may deliver any mix of winners and losers to
achieve the same results.
The problem is that when an account is in a run up, the number of contracts
being traded can increase rapidly and when the system goes into a drawdown, the
account takes a hit that takes it below the level before the run up. This happens
because lot numbers can double within a few trades.
Professional money managers also trade a fixed percentage of an account on a
given trade. The standard for professional money managers is to risk 1% to 3% of
trading capital on a given trade. We will call this term RiskFraction, so it is between
0.01 and 0.03. The number of units to be traded can depend on market conditions
as well as the system.
define money management strategies. Here are a few of the more commonly
accepted approaches.
Percent risked
Adjust the lot size so the total amount risked (stop loss) on each trade is a fixed
fraction of your trading equity.
LotSize = RiskFraction * Equity / TradeRisk
This model can skip trades or stop trading if the risk fraction of equity shrinks
smaller than the risk or initial stop loss one must endure to enter a trade. If your
risk input contains a constant value for risk (as you would input if you didn’t have
risk data on a per-trade basis), then this model becomes what’s called the fixed
fractional model. Its power derives from having the risk, or initial stop loss size, of
each individual trade.
Percent volatility
Adjust the lot size so that the market volatility in dollars per lot, often measured
as the average true range of the last 10 to 20 bars, is no more than a fixed fraction
of your equity.
LotSize = VolatilityFraction * Equity / Volatility
This model can skip trades or stop trading if the volatility fraction of equity
shrinks smaller than the market’s volatility. This model also converts to a fixedfractional
model if you have a constant value in the volatility input.
Optimal f — An overview
Optimal f is a fixed factional money management method. In 1956, J.L. Kelly Jr.
published a paper called “A New Interpretation of Information Rate.”
Professional blackjack players realized the application of this work and began
using it in their gaming efforts. The basic concept was to use the probability of
winning and the ratio of wins to losses to calculate the optimal bet size.
Larry Williams popularized this concept for traders in 1987 during the Robbins’
World Cup trading competition. Money management is a powerful tool when an
individual has an edge. Roulette will not work with money management because
you cannot get a theoretical edge in that game. However, in backgammon or
blackjack an expert player can get a small edge on the casino and use Kelly’s formulas
to supercharge their returns. The Kelly formula is:
F = ((B + 1) * P - 1) / B
Where:
P is the probability of a winning bet
B is the ratio of the amount won vs. the amount loss
If there is a 60% chance of winning $1.50 or a 40% chance of losing $1.00, the
optimal bet size can be calculated as:
f = (1.5 + 1) * 0.60 - 1) / 1.5 F = 0.33
We would conclude that betting 33% of our stake on each bet would produce
the best or optimal results.
Another researcher, Ralph Vince, discovered the problem with the Kelly formula
in 1987 while working with Larry Williams. He found that the formula was
not valid if the amount won or lost on each event was different. Vince developed
his own set of equations to solve this problem based on the concept of a Holding
Period Return (HPR). The Holding Period Return is the rate of return on any given
trade plus 1.00. So, a 10% return equals 1.10 and a 25% loss equals 0.75. Because percentage returns are being calculated based on a fixed fraction of the account
size, we can define HPR as:
HPR = 1 + f * (-T / BL)
Where:
f is the fixed fraction of the account to trade
T is the profit/loss of an individual trade
BL is the largest losing trade of an entire sequence of trades
The HPR formula is applied to each trade. By multiplying HPR for each trade, we
can obtain a multiple of our original stake, the Terminal Wealth Relative (TWR):
TWR = Product (1 + f * (-T / BL))
We maximize the TWR function by changing the values of “f” to find the value
that produces the highest TWR, which is called optimal f. After calculating optimal
f and TWR, we need to calculate how much equity is required to trade one unit:
U = (ML / - f)
Where:
U is the trading units in dollar
ML is the maximum loss in dollars
f is the optimal value for f
Using the trading units in dollars, starting account size and trade history, we can
run a simulation of the equity curve for any trading system using optimal f. These
simulations often yield astronomical results after 50 or 100 trades. The problem is
optimal f quickly can require trading more contracts than is realistic for a given market.
Another problem is that optimal f returns are also based on trading fractional
contracts. For example, if U is $4,000 and our account equity is $10,000, optimal f
would call for 2.5 contracts to be traded. In real life, we would round the number of
contracts down to the nearest whole number, which would be two contracts.
Because the largest losing trade is used to calculate TWR, it has a major effect
on optimal f. This is not a problem when working with historical simulations, but
when we are using optimal f on a real system where protective stops are based on
volatility or channel size, we cannot define optimal f.
The distribution of trades greatly affects the value of optimal f.
We can have two trading systems that make $100,000 on 1,000 trades for an
average profit of $1,000 per trade. The optimal f values for these two systems can
vary widely based on the distribution of the returns on the trades. It is dangerous
to trade anywhere near optimal f because the distribution of trades in real time
can change. For illustration’s sake, say, in testing you had 500 straight winners and
500 straight losers, while real life may deliver any mix of winners and losers to
achieve the same results.
The problem is that when an account is in a run up, the number of contracts
being traded can increase rapidly and when the system goes into a drawdown, the
account takes a hit that takes it below the level before the run up. This happens
because lot numbers can double within a few trades.
Professional money managers also trade a fixed percentage of an account on a
given trade. The standard for professional money managers is to risk 1% to 3% of
trading capital on a given trade. We will call this term RiskFraction, so it is between
0.01 and 0.03. The number of units to be traded can depend on market conditions
as well as the system.
Money Management in Forex
Money management is likesex: Everyone does it,
one way or another, but
not many like to talk
about it and some do it better than others.
But there’s a big difference: Sex sites
on the Web proliferate, while sites devoted
to the art and science of money management
are somewhat difficult to find.
There are many, many financial sites
on the Web that let you track a portfolio
of stocks on a glorified watch list. You
enter in your open positions and you get
a snapshot, or better yet a live, real-time
update, of the status of your stocks
based on the site’s most recently available
prices. Some sites, like Fidelity’s,
provide tools that tell you how your
portfolio is allocated among various asset classes such as stocks, mutual funds, bonds and cash.
While such sites get at the idea of money or portfolio management, the overwhelming majority fail to provide the tools required to answer the central question of money management: “When I make a trade, how much do I trade?” (Try and find the topic of money management on the Motley Fool site.) We’ll discuss how to measure and manage trade risk and where to find the tools to help do it in a responsible and profitable manner. The key underlying concept is to limit how much money you are willing to let the market extract from your wallet when you make losing.When any trader makes a decision to buy or sel (short), they must also decide at that time how many shares or contracts to buy or sell — the order form on every brokerage page has a blank spot where the size of the order is specified. The essence of risk management is mak - ing a logical decision about how much to buy or sell when you fill in this blank. This decision determines the risk of the trade. Accept too much risk and you increase the odds that you will go bust; take too little risk and you will not be rewarded in sufficient quantity to beat the transaction costs and the overhead of your efforts. Good money management practice is about finding the sweet spot between these undesirable extremes.
one way or another, but
not many like to talk
about it and some do it better than others.
But there’s a big difference: Sex sites
on the Web proliferate, while sites devoted
to the art and science of money management
are somewhat difficult to find.
There are many, many financial sites
on the Web that let you track a portfolio
of stocks on a glorified watch list. You
enter in your open positions and you get
a snapshot, or better yet a live, real-time
update, of the status of your stocks
based on the site’s most recently available
prices. Some sites, like Fidelity’s,
provide tools that tell you how your
portfolio is allocated among various asset classes such as stocks, mutual funds, bonds and cash.
While such sites get at the idea of money or portfolio management, the overwhelming majority fail to provide the tools required to answer the central question of money management: “When I make a trade, how much do I trade?” (Try and find the topic of money management on the Motley Fool site.) We’ll discuss how to measure and manage trade risk and where to find the tools to help do it in a responsible and profitable manner. The key underlying concept is to limit how much money you are willing to let the market extract from your wallet when you make losing.When any trader makes a decision to buy or sel (short), they must also decide at that time how many shares or contracts to buy or sell — the order form on every brokerage page has a blank spot where the size of the order is specified. The essence of risk management is mak - ing a logical decision about how much to buy or sell when you fill in this blank. This decision determines the risk of the trade. Accept too much risk and you increase the odds that you will go bust; take too little risk and you will not be rewarded in sufficient quantity to beat the transaction costs and the overhead of your efforts. Good money management practice is about finding the sweet spot between these undesirable extremes.
Yen Reaches Eight-Month High on View Japan May Permit Gains
Sept. 28 (Bloomberg) -- The yen rose against all of its 16 most-traded counterparts tracked by Bloomberg and touched the highest level in eight months against the dollar on speculation Japan’s new government will allow its currency to appreciate.
The dollar fell below 89 yen for the first time since February after Finance Minister Hirohisa Fujii said the Japanese currency’s moves aren’t excessive. The greenback pared losses after Fujii said people misinterpreted his comments as an endorsement for a strong currency.
“The Japanese finance minister talked down the risk of currency intervention, and that is a red flag to the bulls,” said Paul Robson, a currency strategist at Royal Bank of Scotland Group Plc in London. “I expect the yen to move stronger against the dollar.”
The yen advanced 0.4 percent to 89.27 per dollar at 10:21 a.m. in New York, from 89.64 on Sept. 25. It earlier touched 88.24, the strongest level since Jan. 23. The yen appreciated 0.3 percent to 131.31 per euro, from 131.70, after reaching 129.83, the strongest since July 14. The dollar climbed 0.3 percent to $1.4650 per euro, from $1.4689.
The pound dropped for a fourth day against the dollar, falling as much as 1.1 percent to $1.5771, the lowest level since May 22. Sterling dropped 5.5 percent since Aug. 6, when the Bank of England expanded its program of asset purchases designed to keep borrowing costs low by 50 billion pounds ($79 billion) to 175 billion pounds.
The yen strengthened 1.9 versus the dollar last week after Fujii said at the Group of 20 meeting in Pittsburgh on Sept. 24 that he has been questioning the idea of “easy intervention.”
Fujii’s Stance
Fujii said on Sept. 16 he doesn’t support a “weak yen,” fueling speculation the government won’t act to curb the currency’s 19 percent appreciation versus the dollar in the past year. Central banks intervene in foreign-exchange markets by selling and buying currencies.
Speaking today at a forum co-hosted by Bloomberg, Fujii said he “never said I will leave the yen to strengthen” and that he didn’t necessarily accept gains in the currency. Fujii’s Democratic Party of Japan swept to power in elections on a platform of boosting public consumption.
The yen will be among the best-performing currencies in the fourth quarter as the dollar replaces it as the funding asset of choice and strengthens as stock markets rise, according to JPMorgan Chase & Co.
Japan’s currency may appreciate to 85 per dollar by year- end, John Normand, global head of foreign-exchange strategy in London at JPMorgan, said in an interview.
JPMorgan on Yen
“The yen is no longer the best funding currency globally,” Normand said. “The yen no longer weakens reflexively when growth accelerates and equities rally.”
The London interbank offered rate, or Libor, for three- month yen loans stayed at almost a 16-year high relative to comparable-maturity dollar Libor, with the spread at 0.06 percentage point.
The Japanese currency’s level of about 90 per dollar is “painful,” Toyota Motor Corp. Executive Vice President Yukitoshi Funo said on Sept. 25.
The Bank of Japan’s Tankan survey will probably show this week that the economic recovery is too weak to persuade companies to invest. Large firms plan to cut capital spending by 9 percent this year, little changed from estimates made three months ago as the nation was emerging from a recession, economists predict the Oct. 1 report will show.
“I don’t think a strong yen is the trend,” said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. “The Japanese economy is not in a good shape. The yen strength will be short-lived.”
Profit Repatriation
Japan’s currency also gained versus the dollar today on expectation exporters are taking advantage of an April 1 rule change that waives taxes on repatriated profits. Under previous laws, companies had to pay a combined 40 percent tax on overseas earnings. The first half of Japan’s fiscal year ends Sept. 30.
“Japanese firms are continuing to bring home profits,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo.
The yen climbed to 87.13 per dollar on Jan. 21, the strongest since July 1995. The median forecast among securities companies is for the currency to trade at 96 per dollar at year- end and 98 at the end of the first quarter of 2010.
The Norwegian krone, Swedish krona and New Zealand dollar gained about 10 percent against the U.S. dollar since June 30, making them the best performers among the 16 major currencies. Rising oil prices helped Norway. New Zealand benefited from accelerating growth in Australia, its biggest market. The international bailout of Latvia staved off defaults on Swedish bank loans.
The krone dropped 0.3 percent to 5.8205 per dollar today, while the krona slid 0.3 percent to 6.9713. The New Zealand dollar fell 0.6 percent to 71.51 U.S. cents.
The dollar fell below 89 yen for the first time since February after Finance Minister Hirohisa Fujii said the Japanese currency’s moves aren’t excessive. The greenback pared losses after Fujii said people misinterpreted his comments as an endorsement for a strong currency.
“The Japanese finance minister talked down the risk of currency intervention, and that is a red flag to the bulls,” said Paul Robson, a currency strategist at Royal Bank of Scotland Group Plc in London. “I expect the yen to move stronger against the dollar.”
The yen advanced 0.4 percent to 89.27 per dollar at 10:21 a.m. in New York, from 89.64 on Sept. 25. It earlier touched 88.24, the strongest level since Jan. 23. The yen appreciated 0.3 percent to 131.31 per euro, from 131.70, after reaching 129.83, the strongest since July 14. The dollar climbed 0.3 percent to $1.4650 per euro, from $1.4689.
The pound dropped for a fourth day against the dollar, falling as much as 1.1 percent to $1.5771, the lowest level since May 22. Sterling dropped 5.5 percent since Aug. 6, when the Bank of England expanded its program of asset purchases designed to keep borrowing costs low by 50 billion pounds ($79 billion) to 175 billion pounds.
The yen strengthened 1.9 versus the dollar last week after Fujii said at the Group of 20 meeting in Pittsburgh on Sept. 24 that he has been questioning the idea of “easy intervention.”
Fujii’s Stance
Fujii said on Sept. 16 he doesn’t support a “weak yen,” fueling speculation the government won’t act to curb the currency’s 19 percent appreciation versus the dollar in the past year. Central banks intervene in foreign-exchange markets by selling and buying currencies.
Speaking today at a forum co-hosted by Bloomberg, Fujii said he “never said I will leave the yen to strengthen” and that he didn’t necessarily accept gains in the currency. Fujii’s Democratic Party of Japan swept to power in elections on a platform of boosting public consumption.
The yen will be among the best-performing currencies in the fourth quarter as the dollar replaces it as the funding asset of choice and strengthens as stock markets rise, according to JPMorgan Chase & Co.
Japan’s currency may appreciate to 85 per dollar by year- end, John Normand, global head of foreign-exchange strategy in London at JPMorgan, said in an interview.
JPMorgan on Yen
“The yen is no longer the best funding currency globally,” Normand said. “The yen no longer weakens reflexively when growth accelerates and equities rally.”
The London interbank offered rate, or Libor, for three- month yen loans stayed at almost a 16-year high relative to comparable-maturity dollar Libor, with the spread at 0.06 percentage point.
The Japanese currency’s level of about 90 per dollar is “painful,” Toyota Motor Corp. Executive Vice President Yukitoshi Funo said on Sept. 25.
The Bank of Japan’s Tankan survey will probably show this week that the economic recovery is too weak to persuade companies to invest. Large firms plan to cut capital spending by 9 percent this year, little changed from estimates made three months ago as the nation was emerging from a recession, economists predict the Oct. 1 report will show.
“I don’t think a strong yen is the trend,” said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. “The Japanese economy is not in a good shape. The yen strength will be short-lived.”
Profit Repatriation
Japan’s currency also gained versus the dollar today on expectation exporters are taking advantage of an April 1 rule change that waives taxes on repatriated profits. Under previous laws, companies had to pay a combined 40 percent tax on overseas earnings. The first half of Japan’s fiscal year ends Sept. 30.
“Japanese firms are continuing to bring home profits,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo.
The yen climbed to 87.13 per dollar on Jan. 21, the strongest since July 1995. The median forecast among securities companies is for the currency to trade at 96 per dollar at year- end and 98 at the end of the first quarter of 2010.
The Norwegian krone, Swedish krona and New Zealand dollar gained about 10 percent against the U.S. dollar since June 30, making them the best performers among the 16 major currencies. Rising oil prices helped Norway. New Zealand benefited from accelerating growth in Australia, its biggest market. The international bailout of Latvia staved off defaults on Swedish bank loans.
The krone dropped 0.3 percent to 5.8205 per dollar today, while the krona slid 0.3 percent to 6.9713. The New Zealand dollar fell 0.6 percent to 71.51 U.S. cents.
Forex Business Starting with Usefull Strategies
If you’re a potential investment player who’d like to make it big in the business and financial world, then you go for forex trading. The FOREX, also known as the foreign exchange market is one of the largest financial markets in the world with and estimate of $1.5 trillion turn-overs every day. Here are a few strategies on how to make it big in the forex market.
Know your market
The best way to get advantage, earn profit and minimize losses is to familiarize yourself with the market and how the whole system works. In the forex market, the players are usually commercial banks, central banks and firms involved in foreign trade, investment funds, broker companies and other private individuals with large capital. With the speed and high liquidity of asset, most companies engage in this business than in any other trading venture. Transactions are done in a jiffy; there are no membership fees and there is always the allure and promise of big, big profit.Trading is done in pairs
The most commonly traded currencies are usually the US Dollar, Japanese Yen, Euro, British Pound, Canadian Dollar, Australian Dollar and the Swiss Franc. The more commonly traded currency pairs are the US Dollar and the Japanese Yen, the Euro and the US Dollar, the Swiss Franc and the US Dollar. In Forex trading, everything is speculative and virtual. There is no actual product being sold or bought. The activity mostly consists of computed entries made on the value of one currency against another. Say for example, you can buy Euros with US Dollar, hoping that the Euro will increase it value. Once its value rises, you can sell the Euro again, thus earning you profit.Learn the language
There are three concepts you need to know in the currency market. Pips refer to the increase of one hundredth of a percent of the value of the currency pair you are trading. Usually each pip has a value of $10 or $1. Volume is the quantity or amount of money being traded at one particular time in the market. Buying is the acquisition of a particular currency. A trader buys with the hopes that the price of the currency will increase. Selling is putting a currency up for grabs in the market because of a potential or possibility of a decrease in its value. There are also two techniques of analysis usually used in this business – the fundamental and the technical analysis. Technical analysis is usually used by small and medium players. Here, the primary point of analysis revolves on the price. Fundamental analysis, on the other hand, is used by bigger companies and players with higher capital as it involves looking at the other factors affecting the value of a particular currency. In this type of analysis, the player also looks at the situation of the country, particularly issues like political stability, inflation rate, unemployment rate, and tax policies as these are seen to have an effect on the currency’s value.Develop a sound trading strategy
Your trading strategy would depend on what kind of trader you are. The basic thing with developing a trading strategy is to identify what kind of forex trader you are. A good trading strategy should lessen, if not, eliminate losses. Plan also the size of your transactions. It is better to conduct many different trades than one huge transaction. Not only does it develop discipline, but it also lessens any possible loss as only a fraction of the capital is affected. Part of a trading strategy is developing the values of discipline and proper money management.Practice
Try paper trading, a great way to practice your skills, see how the market works and get acquainted with the software and tools being used. There are online brokers who allow free paper trades, which allows practice and experience before doing it with real money.Choose the right forex dealer
Make sure that they are regulated by the law. Take not of dealers with investment schemes that give out too-good-to-be-true-just-false-hopes promises. Look at investment offers before getting started.
Forex trading may seem easy and manageable. But the emotional stress, the demands and challenges of being a forex trader requires more than just the knowledge of the market. It requires more than just a keen and sensible head for business. It’s all about a gameplan, a strategy.
Forex Tools
The presented Forex tools can assist you both in technical analysis and money management which will greatly enhance your trading results. All these online Forex tools are totally free and can be used at no cost:
MT4 Expert Advisors — Download free expert advisors for a Metatrader 4 trading platform. Test and use these EAs to empower your automated Forex trading and also to help the developing of your own Metatrader expert advisor or Forex strategy.
MT4 Forex Indicators — Free downloads of the MetaTrader indicators for a Metatrader 4 trading platform. You can use these indicators to improve your Forex trading strategy or develop your own MetaTrader 4 expert advisors.
Pivot Points Calculator — Four online web based pivot points calculators will help you to generate pivot points for any given time period. Pivot points are used to as the most important market trend points, where trend can meet support or resistance and actually change its course. Floor, Tom Demark's, Woodie's and Camarilla pivot points building rules are available with this free calculator. You don't need to download any software, just fill the form and get instant pivot point, resistance and support levels.
Pip Value Calculator — How much is one pip? How about EUR/CHF or CAD/JPY? With this free and fast online tool you can find out the value of 1 pip in USD for any lot size and any major or cross currency pair. Fill the form and get the pip value in one moment. No need to download any software!
Fibonacci Calculator — The web based Fibonacci retracement calculator will help you to generate basic Fibonacci retracement values for any given trend. These retracement values can be used as the most natural points of support and resistance for a given trend for any currency pair. On the currency trading market, the use of Fibonacci retracement levels to set orders and targets is one of the best ways to organize trader's portfolio.
Risk and Reward Forex Calculator — online calculator that will help you to find out the risks and rewards associated with your possible position's targets and stop-losses based on the Fibonacci retracement levels of the current market wave.
MetaTrader VPS hosting — special dedicated hosting for your MetaTrader (and usually any other) Forex platform and expert advisors. A good way to keep your strategy always active independently on your home or work PC.
MT4 Expert Advisors — Download free expert advisors for a Metatrader 4 trading platform. Test and use these EAs to empower your automated Forex trading and also to help the developing of your own Metatrader expert advisor or Forex strategy.
MT4 Forex Indicators — Free downloads of the MetaTrader indicators for a Metatrader 4 trading platform. You can use these indicators to improve your Forex trading strategy or develop your own MetaTrader 4 expert advisors.
Pivot Points Calculator — Four online web based pivot points calculators will help you to generate pivot points for any given time period. Pivot points are used to as the most important market trend points, where trend can meet support or resistance and actually change its course. Floor, Tom Demark's, Woodie's and Camarilla pivot points building rules are available with this free calculator. You don't need to download any software, just fill the form and get instant pivot point, resistance and support levels.
Pip Value Calculator — How much is one pip? How about EUR/CHF or CAD/JPY? With this free and fast online tool you can find out the value of 1 pip in USD for any lot size and any major or cross currency pair. Fill the form and get the pip value in one moment. No need to download any software!
Fibonacci Calculator — The web based Fibonacci retracement calculator will help you to generate basic Fibonacci retracement values for any given trend. These retracement values can be used as the most natural points of support and resistance for a given trend for any currency pair. On the currency trading market, the use of Fibonacci retracement levels to set orders and targets is one of the best ways to organize trader's portfolio.
Risk and Reward Forex Calculator — online calculator that will help you to find out the risks and rewards associated with your possible position's targets and stop-losses based on the Fibonacci retracement levels of the current market wave.
MetaTrader VPS hosting — special dedicated hosting for your MetaTrader (and usually any other) Forex platform and expert advisors. A good way to keep your strategy always active independently on your home or work PC.
Forex Market Snapshot
Introduction
The following facts and figures relate to the foreign exchange market. Much of the information is drawn from the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS) in April 2007. 54 central banks and monetary authorities participated in the survey, collecting information from approximately 1280 market participants.
Excerpt from the BIS:
"The 2007 survey shows an unprecedented rise in activity in traditional foreign exchange markets compared to 2004. Average daily turnover rose to $3.2 trillion in April 2007, an increase of 71% at current exchange rates and 65% at constant exchange rates...Against the background of low levels of financial market volatility and risk aversion, market participants point to a significant expansion in the activity of investor groups including hedge funds, which was partly facilitated by substantial growth in the use of prime brokerage, and retail investors...A marked increase in the levels of technical trading – most notably algorithmic trading – is also likely to have boosted turnover in the spot market...Transactions between reporting dealers and non-reporting financial institutions, such as hedge funds, mutual funds, pension funds and insurance companies, more than doubled between April 2004 and April 2007 and contributed more than half of the increase in aggregate turnover." - BIS
Structure
* Decentralised 'interbank' market
* Main participants: Central Banks, commercial and investment banks, hedge funds, corporations & private speculators
* The free-floating currency system arose from the collapse of the Bretton Woods agreement in 1971
* Online trading began in the mid to late 1990's
The following facts and figures relate to the foreign exchange market. Much of the information is drawn from the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS) in April 2007. 54 central banks and monetary authorities participated in the survey, collecting information from approximately 1280 market participants.
Excerpt from the BIS:
"The 2007 survey shows an unprecedented rise in activity in traditional foreign exchange markets compared to 2004. Average daily turnover rose to $3.2 trillion in April 2007, an increase of 71% at current exchange rates and 65% at constant exchange rates...Against the background of low levels of financial market volatility and risk aversion, market participants point to a significant expansion in the activity of investor groups including hedge funds, which was partly facilitated by substantial growth in the use of prime brokerage, and retail investors...A marked increase in the levels of technical trading – most notably algorithmic trading – is also likely to have boosted turnover in the spot market...Transactions between reporting dealers and non-reporting financial institutions, such as hedge funds, mutual funds, pension funds and insurance companies, more than doubled between April 2004 and April 2007 and contributed more than half of the increase in aggregate turnover." - BIS
Structure
* Decentralised 'interbank' market
* Main participants: Central Banks, commercial and investment banks, hedge funds, corporations & private speculators
* The free-floating currency system arose from the collapse of the Bretton Woods agreement in 1971
* Online trading began in the mid to late 1990's
Forex Market participants
Unlike a stock market, where all participants have access to the same prices, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. The difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX-metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the foreign exchange market to align currencies to their economic needs.
The Perfect Forex Trading System
Trading the Forex market has became very popular in the last few years. But how difficult is it to achieve success in the Forex trading arena? Or let me rephrase this question, how many traders achieve consistent profitable results trading the Forex market? Unfortunately very few, only 5% of traders achieve this goal. One of the main reasons of this is because Forex traders focus in the wrong information to make their trading decisions and totally forget about the most important factor: Price behavior. 
Most Forex trading systems are made off technical indicators (a moving average (MA) crossover, overbought/oversold conditions in an oscillator, etc.) But what are technical indicators? They are just a series of data points plotted in a chart; these points are derived from a mathematical formula applied to the price of any given currency pair. In other words, it is a chart of price plotted in a different way that helps us see other aspects of price.
There is an important implication on this definition of technical indicators. The fact that the readings obtained from them are based on price action. Take for instance a long MA crossover signal, the price has gone up enough to make the short period MA crossover the long period MA generating a long signal. Most traders see it as “the MA crossover made the price go up,” but it happened the other way around, the MA crossover signal occurred because the price went up. Where I’m trying to get here is that at the end, price behavior dictates how an indicator will act, and this should be taken into consideration on any trading decision made.
Trading decisions based on technical indicators without taking price action into consideration will give us less accurate results. For example, again a long signal generated by a MA crossover as the market approaches an important resistance level. If the price suddenly starts to bounce back off that important level there is no point on taking this signal, price action is telling us the market doesn’t want to go up. Most of the time, under this circumstances, the market will continue to fall down, disregarding the MA crossover.
Don’t get me wrong here, technical indicators are a very important aspect of trading. They help us see certain conditions that are otherwise difficult to see by watching pure price action. But when it comes to pull the trigger, price action incorporation into our Forex trading system will definitely put the odds in our favor, it will generate higher probability trades.
So, how to create a perfect Forex trading system?
First of all, you need to make sure your trading system fits your trading personality; otherwise you will find it hard to follow it. Every trader has different needs and goals, thus there is no system that perfectly fits all traders. You need to make your own research on various trading styles and technical indicators until you find a concept that perfectly works for you. Make sure you know the nature of whatever technical indicator used.
Secondly, incorporate price action into your system. So you only take long signals if the price behavior tells you the market wants to go up, and short signals if the market gives you indication that it will go down. 
Third, and most importantly, you need to have the discipline to follow your Forex trading system rigorously. Try it first on a demo account, then move on to a small account and finally when feeling comfortably and being consistent profitable apply your system in a regular account.
Benefits of Forex Trading
The benefits of forex trading are:
- 1. It is conducted in an extremely liquid market. Thus, you are unlikely to get stuck in a trade. You can open and close any position at your desired level.
- 2. Traders can benefit in both rising and falling markets. You can take a short position (selling the currency pair and buying it back at a lower price) or long position (buying the currency pair and selling it later at a higher price).
- 3. Provides traders the option of trading in small lots. If you are a novice trader, you can opt to open small accounts and start trading with small lots. This allows you to begin with little capital and limit your risks.
- 4. Traders do not have to pay commissions to brokers. The cost of the transactions is built into the currency price and is known as the spread, which is the difference between the buying and selling price at any given time.
Drawbacks of Forex Trading
Forex trading can lead to huge losses if the trader is a novice. The lack of prompt action can also lead to substantial losses.
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