Sunday, November 1, 2009

A Brief Explanation

Forex Market History

This brief Forex market history will give you some insight into how this market has evolved.

The Forex market, as we know it, was established in 1971 when floating exchange rates for currencies began to appear. Prior to that, international agreements, including the gold exchange standard of 1876 and the Bretton Woods Agreement of 1945 prevented speculation in the currency markets.

With international trade expanding rapidly after the second world war and the massive movements of capital across international borders, the foreign exchange rates established by the Bretton Woods Agreement became unstable and the agreement was finally abandoned in 1971.

By 1973, international currencies began to float in value, driven mainly by the forces of supply and demand. The ensuing deregulation resulted in much more open trade and led to an increase in currency speculators.

With the growth of the computer age in the 1980's, currency movement across borders became a 24 hour-per-day business, trading through the various time zones. Major banks created dealing rooms where massive amounts of the world's various currencies could be traded in a matter of minutes.

Today, electronic brokers trade the Forex market. Single trades of tens of millions of dollars are carried out within seconds. Most of these transactions are conducted to speculate on the market, with the aim of making money from money. These brokers, or Market Makers, are allowed to divide the large inter-bank units into smaller lots and allow private investors, smaller banks, hedge funds, etc. to buy and sell into the market. These brokers negotiate buy/sell prices between each other, thereby having the ability to set market prices for the rest of us.

Generally, the market is divided into the Asian, European and American sessions. The trading week begins in Asia on their Monday morning, and continues until the close of the American market on it's Friday afternoon. 24 hours a day, 5-1/2 days per week.

Because there is no central exchange for Forex, exact figures on any aspect of it are hard to come by, but it is estimated by the Bank for International Settlements (or BIS) that the average daily turnover of the Forex market in April 2006 was $2.7 trillion USD. This figure includes the spot market (the one we trade), swap market, futures and options. In other words, the Forex market is more than 10 times the size of the daily turnover of all the world’s stock markets combined.

Forex is a group of interconnected marketplaces where currency instruments are traded. Each marketplace is at liberty to set it's own exchange rate, which means that your dealer may be showing you different prices than the guy up the street would. The reality is, the prices are usually very close from broker to broker.

Inside information in the foreign exchange markets is virtually non existent. Changes in exchange rates are usually caused by actual money flows. Expectations of changes in this flow, caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, etc. are major price drivers. This information is released publicly, usually on specific dates at specific times. Since so many people have access to the same news at the same time, any "insider advantage" is unlikely. The large banks do have an important advantage though, they can see their customer's order flow.

Currencies are traded against one another. Therefore, a trade will consist of two currencies, or a pair, such as EUR/USD, USD/JPY, GBP/USD, etc. The first currency of the pair is the base, and the second is known as the counter currency. Prices are expressed in terms of how much of the second, or counter, currency is needed to make up one unit of the base currency. For example, if the price quoted for EUR/USD is 1.3145, this is the price of one Euro expressed in US dollars, ie. 1 Euro=1.3145 US dollar.

We buy or sell the pair, at the market price, with an expectation the price will move higher or lower, towards our target.


Forex Players

Understanding The Forex Players

The largest Forex players all belong to an elite inner circle of trading institutions. These "big guns" work with razor thin price spreads and typically deal billions of dollars each day. These top level players are responsible for more than 50% of the daily market activity.

Here is a list of the top 10 players:

  • Deutsche Bank
  • UBS
  • Citigroup
  • HSBC
  • Barclays
  • Merrill Lynch
  • JP Morgan / Chase
  • Goldman Sachs
  • ABN AMRO
  • Morgan Stanley

These largest players handle the majority of both the commercial and speculative trading that occurs daily.

Outside of this group, you will find smaller investment banks, multi-national corporations, large hedge funds, and some of the retail Forex market makers. Many of these players conduct trading of their own accounts, rather than on behalf of customers. Their goal is to make money from money.

Central banks (country's national banks) are also major Forex players. They attempt to control inflation, usually through their interest rate policy, but sometimes they will use their huge financial reserves to try to stabilize the currency prices of their country.

Investment firms and hedge funds manage billions of dollars and usually have the ability to borrow billions more. They are aggressive currency speculators, and combined have the resources to overpower even large central banks. These are the large spec accounts the news feeds talk about.

Us little guys (and gals), the retail Forex players, are responsible for between $25 - $50 billion each day. While this may sound impressive, it represents about only 2% of the market.

The important information here, is you need to understand that as retail traders we are not market movers. To make money trading Forex, we need to watch for the movements of the major players and then join their parade and attempt to profit from it.

One thing that helps put us on the playing field, is the fact that we have access to the same market-moving information the big Forex players use. If we can anticipate how they are likely to respond, we have a much improved chance of profiting from price moves. These "big guns" place much of their importance on fundamental indicators and we need to clearly understand the impact of this on our trading.


Easy Way

Start Trading Forex

To start trading Forex, there is a quick way to get you going... Many peoples asking how they can get trading on a limited budget and it's very easy.

Essentially you need to open an account with a reliable broker such as Alpari, IBFX or Forex.com and get yourself a robot, such as the Forex MegaDroid and away you go.

The robot costs $100 and the rest goes into your trading account. Keep your risk settings at a sensible level and you will make money.

Some people currently run this robot on live accounts and the results show consistent growth of the trading account, even in the current choppy trading conditions.


History

A Little History

Years ago you had to spend hours analyzing charts, looking for patterns and setups and try to find or develop a system that would return a profit.

If you have tried this method, you know how hard it is to make money on a regular basis. Sure, there are systems you can buy that should help you win, but there are so many other variables that profits usually are very slow to materialize.

Add to that the "free" coaching the brokers give you, which actually encourages you to over-trade and places you at higher risk of losing your money.

The Solution? It's Automatic

Manually trading the Forex market is very tough. You can spend hours watching and waiting for setups that never come. It is also impossible for anyone to watch it 24 hours a day.

Just focused on automated trading systems and the robots (EA's) they use to trade your account. The beauty of this type of system is it allows you to have a life while your trading account is making money.

Trading is very emotional and you can assure you it is very tough to be trying new systems or strategies and losing money at the same time. Once the fear, worry and uncertainty start, it's very hard to turn them around.

If you are serious and want to start trading Forex the safest way, read on and make the process easier on yourself.

The Big Plan

Automated trading robots can produce profits by themselves, but they do even better if they get some help from you along the way. News releases and other activities greatly influence market prices and sometimes these robots are slow to react and would have better results if you were to intervene.

That said, a good plan is to get the EA started and while it is doing it's job, you are free to learn more of the trading game yourself and gradually move up so that you and your cyber friend work together to maximize your profit potential.

To really understand the Forex market will take months, if not years. Like anything else, your interest level and determination will play a big role, but an EA is a great way to start trading Forex and then you can be making money while you learn.


Trading Tips

Forex Trading Tips

This collection of Forex trading tips is intended to give you a brief reminder, or provide new insight into the multitude of things a successful Forex trader should be doing.

Each post is kept short and to the point, so you can quickly scan each one. Research has shown that our minds will tend to retain more information if we review information regularly.

Some of these tips will be a review for you, and some will present new information. In either case, all of them will benefit you, so take the time to review them and digest the information.

You're likely to find some of these trading tips contain information you are currently not considering or consciously thinking about, but to become a better and more profitable trader, these tips should have a place in your system.