Foreign Exchange [Forex] involves exchanging of different foreign currencies for a profit. The reason for buying the currency of another country may be the need to buy some commodity of the said country as well, besides making money through the difference in exchange rates.
In the latter case, people buy currency of a foreign country when the rate in the market is low, and sell it off when the rates go up. Currency trading is usually done between the central banks, the government, speculators and MNCs. Nations cannot trade with each other without the presence of a foreign market.
A huge amount of money is daily traded in the Forex market, though the amount invested by an individual trader may be very low. No one individually can have any influence on the Forex fluctuations, not even the government. So it can easily be concluded that the level of the currency reflects the strength or the weakness of the economy of a country. So this makes the Forex market a good place for competition.
The government and the central bank do try to stabilize the currency of their country by speculating, by buying and selling currencies at appropriate times. So they can influence the market if they conduct a trade in huge volumes, though. To buy its own currency, however, the government or the central bank must have huge reserves of foreign currency with them. So it is virtually impossible to inflate the currency value artificially. With Forex trading education you will understand the mechanism better.
Banks trade a lot in foreign currencies and this forms a chunk of the volume in the Forex market. They buy currencies not only as individual bodies, but also on behalf of their clients. They trade in lots of futures. Till a few years back, the brokers could influence the volumes of trading in the Forex market. But due to the electronic services available now, the services of brokers is not required. It’s easy to operate electronically.
With Forex trading education, forex trading with international countries is possible only with the existence of Forex markets. When there is no Forex market, there is no common currency between two countries, so one cannot evaluate the value of one currency with respect to the other.
The buyer pays the seller in the former’s currency. With the money so received, the seller buys goods in the buyer’s country and sells those goods in his [seller] country.
Only then he is able to know how much he has earned through the export. In the presence of a Forex market, though, it is very easy for a seller to know of his earnings at the very instant that he conducts an export trade. In the same manner, the buyer too will have a thorough knowledge of the cost he will have to incur to buy goods from an international country.
Showing posts with label Forex Basics. Show all posts
Showing posts with label Forex Basics. Show all posts
Friday, July 3, 2009
Friday, June 12, 2009
Forex Basics
An introduction to the foreign exchange market and trading currencies with FX Solutions.
Foreign Exchange
Foreign exchange trading is the simultaneous buying of one currency and selling of another. The foreign exchange market (Forex or FX) is the largest financial market in the world with a daily turnover of over $2.6 trillion. Examples of currency trading pairs are Euro/US Dollar (EUR/USD) and US Dollar/Japanese Yen (USD/JPY). Most currency transactions involve the "Majors" - US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.
Unlike most financial markets, the foreign exchange market has no physical location and no central exchange. The Forex market operates 24 hours a day through an electronic network of banks, corporations and individual traders. Forex trading begins every day in Sydney, then moves to Tokyo, followed by London and then New York. The major market makers, or dealers, consist of the commercial and investment banks, the exchange traded futures, and registered futures commission merchants (FCMs) such as FX Solutions. FX Solutions' dealing desk is open 24-hours a day from Sunday 16:00 to Friday 16:30 Eastern Time.
Foreign Exchange Prices
Foreign exchange markets and prices are mainly influenced by international trade flows and investment flows. The FX markets are also influenced, but to a lesser extent, by the same factors that influence the equity and bond markets: economic and political conditions especially interest rates, inflation, and political instability. Those factors usually have only a short-term impact, which makes Forex attractive as it offers some of the diversification necessary to protect against adverse movements in the equity and bond markets.
Foreign Exchange prices, or quotes, include a "Bid" and "Ask" similar to other financial products:
Bid: Price at which Dealer is willing to Buy and Traders can Sell Currency
Ask: Price at which Dealer will Sell and Traders can Buy Currency
The difference between the Bid and Ask is called the "Spread", which is the Trader's cost of the transaction.
Currencies are usually quoted to four decimal places, such as the Euro/US Dollar trading at 1.2400/1.2403, with the last decimal place referred to as a point or "pip". A pip for most currencies is 0.0001 of an exchange rate; the exception to this is all pairs that we offer with a JPY denominator have pips of .01.
Analysis of Foreign Exchange Markets
Foreign exchange traders generally fall into two groups and base their decisions on either technical analysis and fundamental analysis. Technical traders use charts, trend lines, support and resistance levels, mathematical models and other means to identify opportunities and drive trading decisions. Fundamental traders identify trading opportunities by analyzing economic information, such as interest rates, money supply and political/economical macroeconomic factors. Additionally, some traders take short-term positions and trade frequently while others are long-term, buy and hold traders.What is Forex Trading?
The Forex market is a non-stop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are constantly and simultaneously bought and sold across local and global markets and traders' investments increase or decrease in value based upon currency movements. Foreign exchange market conditions can change at any time in response to real-time events.
The main enticements of currency dealing to private investors and attractions for short-term Forex trading are:
* 24-hour trading, 5 days a week with non-stop access to global Forex dealers.
* An enormous liquid market making it easy to trade most currencies.
* Volatile markets offering profit opportunities.
* Standard instruments for controlling risk exposure.
* The ability to profit in rising or falling markets.
* Leveraged trading with low margin requirements.
* Many options for zero commission trading.
Forex trading
The investor's goal in Forex trading is to profit from foreign currency movements. Forex trading or currency trading is always done in currency pairs. For example, the exchange rate of EUR/USD on Aug 26th, 2003 was 1.0857. This number is also referred to as a "Forex rate" or just "rate" for short. If the investor had bought 1000 euros on that date, he would have paid 1085.70 U.S. dollars. One year later, the Forex rate was 1.2083, which means that the value of the euro (the numerator of the EUR/USD ratio) increased in relation to the U.S. dollar. The investor could now sell the 1000 euros in order to receive 1208.30 dollars. Therefore, the investor would have USD 122.60 more than what he had started one year earlier. However, to know if the investor made a good investment, one needs to compare this investment option to alternative investments. At the very minimum, the return on investment (ROI) should be compared to the return on a "risk-free" investment. One example of a risk-free investment is long-term U.S. government bonds since there is practically no chance for a default, i.e. the U.S. government going bankrupt or being unable or unwilling to pay its debt obligation.
When trading currencies, trade only when you expect the currency you are buying to increase in value relative to the currency you are selling. If the currency you are buying does increase in value, you must sell back the other currency in order to lock in a profit. An open trade (also called an open position) is a trade in which a trader has bought or sold a particular currency pair and has not yet sold or bought back the equivalent amount to close the position.
However, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency.
INVESTMENT STRATEGY: A checklist for investing in global funds
Global fund NFOs (new fund offers) are the latest trend in the mutual fund industry and are fast catching the investor’s fancy. Several fund houses have already launched their global fund offerings; we understand that there are many more in the pipeline. As the name suggests, global funds invest in global stocks and/or mutual funds (that in turn invest in global markets). So what do global funds offer to investors?
Investing in global funds can also prove advantageous if you have a future liability in that currency/country. For instance, if you plan to send your child to the US for higher studies, investing in an US fund can be an option for you. By doing so you would have done away with the currency risk (explained later in this note).
We present a checklist that will help you evaluate global funds and make an informed investment decision.
1. Factoring the expenses
Investors in mutual funds incur expenses at two levels.
The first is a one-time expense (in the form of an entry/exit load) and the other is the recurring expense related to fund management expenses, market and sales expenses, administration expenses to cite a few. The recurring expenses are incurred by the mutual fund, but passed on to the investor. If you never realised this fact, it is because the daily NAV (net asset value) that is declared factors in the expenses.
It is equally important to evaluate a global fund from the ‘expense’ perspective. This is more so since many of the global funds that are being launched have opted for the FoF (fund of funds) route as opposed to direct investments in global markets. While FoFs add the diversification edge to your portfolio, this comes at a cost. FoFs have a double-layered expense structure. So all expenses (one-time as well as recurring) are incurred twice in an FoF; first for the FoF itself and second for the underlying scheme. Although the underlying schemes often waive off the entry load, there is still the matter of the FoF’s recurring expense. While calculating the FoF’s expense ensure that you add both the recurring expenses (FoF’s plus that of the underlying funds) and both the loads (FoF’s plus that of the underlying funds, if any).
The reason why investors have to be very concerned about the expenses incurred by their mutual fund investments is because over a period of time, higher expenses can and will erode returns significantly.
2. Don’t ignore Currency risk one of the more vital factors associated with global investing. Let’s understand this risk with the help of an illustration. Suppose you invest Rs 4,000 in a US$ fund. The Rs 4,000 will be converted into US$ 100 (approximating, for convenience). This US$ 100 is then invested over a one year period; now assume you earned 10% return i.e. the value of your investment is now US$ 110. But what is the value in terms of Indian Rupees? Let’s again assume, that the India Rupee actually appreciates vis-à-vis the US Dollar and touches Rs 36 per US Dollar in a year. So, effectively, the US$ 110 translates to Rs 3,960! So, even though in US Dollar terms you earned 10%, in Indian Rupee terms you actually lost 1%! But this is just a hypothetical example to illustrate currency risk. The situation could reverse and your gains could actually be magnified. In our view, investors can take on this risk under certain circumstances; for instance if you plan to send your child abroad for higher studies, then you can consider investing in a global fund domiciled in the country where your child will be studying.
3. Then there is country/market segment risk Another type of risk related to the currency risk is the country/market segment risk. There is no doubt that by investing in global funds, investors get an opportunity to diversify their portfolio across countries, but the same also amounts to taking on country/market segment risk. For instance, if a global fund invests in a particular country (say the US) or a market segment (emerging markets), then its investors are exposed to the negatives and positives of that economy (over here the US) or that market segment (over here emerging markets). In our view, it is best to select a well-managed fund that can invest across global markets. That would be diversification at its best. Such a fund would give its fund management team the much-needed flexibility while deciding where to invest.
4. Check the track record of the underlying investments Through global funds Indian investors are venturing into an investment universe to which they have had little or no exposure. Investing in an avenue without adequate information enhances the risk level of that investment considerably. Hence, it is advisable for investors to check the track record of the underlying investments of global funds (particularly in a FoF global fund), before investing in them.
At Personalfn, we are presently not capacitated to give a view on the underlying investments; hence we recommend that investors evaluate the underlying investments based on a rating wherever available
5. Ensure that you have an adequate investment time frame We believe that investments in equities and related assets should be made with at least a 3-5 Yr investment time frame. In an open-ended global fund this should not be a problem because you stay invested for as long as required. But in a close-ended global fund you should consider funds that have an investment tenure of a minimum of 3-Yrs (preferably more than 3-Yrs) and if it is lower than that, then it is best to avoid such funds. For equity investments, longer the tenure, the better it is in our view.
6. Is it diversified adequately and appropriately? Investors are meant to get the benefit of diversification by investing in global funds; hence it is surprising when global funds deprive investors of this benefit. Many of the global funds that have been launched (and are going to be launched) are investing predominantly in emerging markets, which to an Indian investor is not particularly exciting because India by itself is an important emerging market. So by being invested in domestic markets, the Indian investor already has a flavour of emerging markets. Ideally, he wants to diversify by investing in other markets (like developed markets for instance) that behave differently vis-à-vis emerging markets. So go for global funds that invest across market segments.
7. Ensure that Your Portfolio is in place We welcome the move to launch global funds and believe that investors must make the most of this opportunity by investing in them to diversify their portfolios (and in this way de-risk them). However, first they must ensure they have an portfolio consisting of well-managed funds with established track records and investment processes. Only then must they invest in global funds. Put simply, global funds must not be considered as a stand-alone investment, rather they must form part of a portfolio.
8. How much to invest in global funds? Since global funds must be considered primarily for the purpose of diversification and asset allocation, they should not form a large chunk of your portfolio. Typically, such funds should account for a smaller portion of your portfolio (typically less than 10%); the precise allocation can be assessed only after discussing the same with your financial planner.
9. Don’t rush into investing in global funds Like with investments in domestic funds, investments in global funds need to be evaluated thoroughly after drawing comparisons with comparable offerings. So avoid the urge to rush into investing in a global fund for whatever reasons (media hype, distributor’s persuasion). Evaluate a global fund across parameters (the investment proposition it offers, the fund’s investment processes, long-term track record across market phases, especially the downturns) by comparing it with other global funds of a similar nature. And keep in mind that many open-ended global mutual funds are likely to be launched in the next several months. So don’t just invest thinking you will otherwise be missing an opportunity. Invest only for the right reasons
Investing in global funds can also prove advantageous if you have a future liability in that currency/country. For instance, if you plan to send your child to the US for higher studies, investing in an US fund can be an option for you. By doing so you would have done away with the currency risk (explained later in this note).
We present a checklist that will help you evaluate global funds and make an informed investment decision.
1. Factoring the expenses
Investors in mutual funds incur expenses at two levels.
The first is a one-time expense (in the form of an entry/exit load) and the other is the recurring expense related to fund management expenses, market and sales expenses, administration expenses to cite a few. The recurring expenses are incurred by the mutual fund, but passed on to the investor. If you never realised this fact, it is because the daily NAV (net asset value) that is declared factors in the expenses.
It is equally important to evaluate a global fund from the ‘expense’ perspective. This is more so since many of the global funds that are being launched have opted for the FoF (fund of funds) route as opposed to direct investments in global markets. While FoFs add the diversification edge to your portfolio, this comes at a cost. FoFs have a double-layered expense structure. So all expenses (one-time as well as recurring) are incurred twice in an FoF; first for the FoF itself and second for the underlying scheme. Although the underlying schemes often waive off the entry load, there is still the matter of the FoF’s recurring expense. While calculating the FoF’s expense ensure that you add both the recurring expenses (FoF’s plus that of the underlying funds) and both the loads (FoF’s plus that of the underlying funds, if any).
The reason why investors have to be very concerned about the expenses incurred by their mutual fund investments is because over a period of time, higher expenses can and will erode returns significantly.
2. Don’t ignore Currency risk one of the more vital factors associated with global investing. Let’s understand this risk with the help of an illustration. Suppose you invest Rs 4,000 in a US$ fund. The Rs 4,000 will be converted into US$ 100 (approximating, for convenience). This US$ 100 is then invested over a one year period; now assume you earned 10% return i.e. the value of your investment is now US$ 110. But what is the value in terms of Indian Rupees? Let’s again assume, that the India Rupee actually appreciates vis-à-vis the US Dollar and touches Rs 36 per US Dollar in a year. So, effectively, the US$ 110 translates to Rs 3,960! So, even though in US Dollar terms you earned 10%, in Indian Rupee terms you actually lost 1%! But this is just a hypothetical example to illustrate currency risk. The situation could reverse and your gains could actually be magnified. In our view, investors can take on this risk under certain circumstances; for instance if you plan to send your child abroad for higher studies, then you can consider investing in a global fund domiciled in the country where your child will be studying.
3. Then there is country/market segment risk Another type of risk related to the currency risk is the country/market segment risk. There is no doubt that by investing in global funds, investors get an opportunity to diversify their portfolio across countries, but the same also amounts to taking on country/market segment risk. For instance, if a global fund invests in a particular country (say the US) or a market segment (emerging markets), then its investors are exposed to the negatives and positives of that economy (over here the US) or that market segment (over here emerging markets). In our view, it is best to select a well-managed fund that can invest across global markets. That would be diversification at its best. Such a fund would give its fund management team the much-needed flexibility while deciding where to invest.
4. Check the track record of the underlying investments Through global funds Indian investors are venturing into an investment universe to which they have had little or no exposure. Investing in an avenue without adequate information enhances the risk level of that investment considerably. Hence, it is advisable for investors to check the track record of the underlying investments of global funds (particularly in a FoF global fund), before investing in them.
At Personalfn, we are presently not capacitated to give a view on the underlying investments; hence we recommend that investors evaluate the underlying investments based on a rating wherever available
5. Ensure that you have an adequate investment time frame We believe that investments in equities and related assets should be made with at least a 3-5 Yr investment time frame. In an open-ended global fund this should not be a problem because you stay invested for as long as required. But in a close-ended global fund you should consider funds that have an investment tenure of a minimum of 3-Yrs (preferably more than 3-Yrs) and if it is lower than that, then it is best to avoid such funds. For equity investments, longer the tenure, the better it is in our view.
6. Is it diversified adequately and appropriately? Investors are meant to get the benefit of diversification by investing in global funds; hence it is surprising when global funds deprive investors of this benefit. Many of the global funds that have been launched (and are going to be launched) are investing predominantly in emerging markets, which to an Indian investor is not particularly exciting because India by itself is an important emerging market. So by being invested in domestic markets, the Indian investor already has a flavour of emerging markets. Ideally, he wants to diversify by investing in other markets (like developed markets for instance) that behave differently vis-à-vis emerging markets. So go for global funds that invest across market segments.
7. Ensure that Your Portfolio is in place We welcome the move to launch global funds and believe that investors must make the most of this opportunity by investing in them to diversify their portfolios (and in this way de-risk them). However, first they must ensure they have an portfolio consisting of well-managed funds with established track records and investment processes. Only then must they invest in global funds. Put simply, global funds must not be considered as a stand-alone investment, rather they must form part of a portfolio.
8. How much to invest in global funds? Since global funds must be considered primarily for the purpose of diversification and asset allocation, they should not form a large chunk of your portfolio. Typically, such funds should account for a smaller portion of your portfolio (typically less than 10%); the precise allocation can be assessed only after discussing the same with your financial planner.
9. Don’t rush into investing in global funds Like with investments in domestic funds, investments in global funds need to be evaluated thoroughly after drawing comparisons with comparable offerings. So avoid the urge to rush into investing in a global fund for whatever reasons (media hype, distributor’s persuasion). Evaluate a global fund across parameters (the investment proposition it offers, the fund’s investment processes, long-term track record across market phases, especially the downturns) by comparing it with other global funds of a similar nature. And keep in mind that many open-ended global mutual funds are likely to be launched in the next several months. So don’t just invest thinking you will otherwise be missing an opportunity. Invest only for the right reasons
Dollar Won't harm the Bottom line, isit?
The U.S. dollar got slammed in the first half of 2007, especially in July when the euro and pound sterling reached multi-year highs against the dollar. Most of the analysts we spoke with agree the dollar may have set a bottom, but for the dollar to make a serious recovery, economic reports need to support it.
One sign of a change in the dollar’s current downtrend is that the psychological support of 80.00 in the U.S. Dollar Index is holding. The Dollar Index took out the 2005 lows and briefly broke the 80.00 level on Sept. 24 and again on Aug. 6, but it rebounded both times (see “ Is this the bottom?” below). The Dollar Index hasn’t been this low since 1992.
“If Dollar Index futures do fall below 80.00, this sets up a potential test of the 1992 lows in the 78.50 to 79.00 area” says Heather Mitchell, market analysts at optionsXpress. But the consensus see ms to be that 80.00 will hold. The key factor for the U.S. outlook is going to remain the health of the U.S. consumer.
One sign of a change in the dollar’s current downtrend is that the psychological support of 80.00 in the U.S. Dollar Index is holding. The Dollar Index took out the 2005 lows and briefly broke the 80.00 level on Sept. 24 and again on Aug. 6, but it rebounded both times (see “ Is this the bottom?” below). The Dollar Index hasn’t been this low since 1992.
“If Dollar Index futures do fall below 80.00, this sets up a potential test of the 1992 lows in the 78.50 to 79.00 area” says Heather Mitchell, market analysts at optionsXpress. But the consensus see ms to be that 80.00 will hold. The key factor for the U.S. outlook is going to remain the health of the U.S. consumer.
How To Become A Currency Trader
If you are anything like me, you probably imagine that it is difficult to become a foreign currency trader. Perhaps there are rules, regulations and other hoops that have to be jumped through. Maybe you need large amounts of cash in order to get started.
No.
Becoming a Forex currency trader is incredibly simple!
As mentioned on the right hand sidebar, I signed up with a mini account, used my credit card to add $100 to that account, and downloaded the trading software. It was that simple. That same night I was making trades. I'd say the process took about half an hour. However, I do need to fax in a copy of my identification in order to meet paperwork requirements.
Sweet! I'm a (mini account) Forex trader.
However, I realize that now the more difficult process starts. Now that I have a few dollars on the table I'm ready to start learning the lessons of the trade. Frankly, I won't be able to trade realistically if I am not actually risking my own money, so I have to do it this way. Of course, for most people, $100 is not a big enough sum of money to be a hardship if lost anyway.
So, I'm just blathering because the markets are currently closed for their regular weekend respite. I'm sitting in a precarious position because I have some open trades on my account and there is no telling what shape the market will be in when Sunday evening rolls around. I may be lucky and end up way ahead or I may be unlucky and lose my initial $100 payment. Another potential lesson is looming...
Oh, I should mention, these days Forex trading is quite safe. While there are large risks and large rewards, my risks are essentially limited to the capital that I have put into my account. With wise strategies I can limit risks further, but as a beginner it is comforting to know that I can't lose more than I let sit in my account no matter how foolish a beginner mistake I might make.
UPDATE:
I should stress that you could lose all the capital you put in your account, so do not start out with a large account with the idea that you will only conduct small trades. At the very least, create some sub-accounts and keep the majority of your capital out of harms way until you have blown up your play money account, learned a few lessons, and know how to protect your capital.
No.
Becoming a Forex currency trader is incredibly simple!
As mentioned on the right hand sidebar, I signed up with a mini account, used my credit card to add $100 to that account, and downloaded the trading software. It was that simple. That same night I was making trades. I'd say the process took about half an hour. However, I do need to fax in a copy of my identification in order to meet paperwork requirements.
Sweet! I'm a (mini account) Forex trader.
However, I realize that now the more difficult process starts. Now that I have a few dollars on the table I'm ready to start learning the lessons of the trade. Frankly, I won't be able to trade realistically if I am not actually risking my own money, so I have to do it this way. Of course, for most people, $100 is not a big enough sum of money to be a hardship if lost anyway.
So, I'm just blathering because the markets are currently closed for their regular weekend respite. I'm sitting in a precarious position because I have some open trades on my account and there is no telling what shape the market will be in when Sunday evening rolls around. I may be lucky and end up way ahead or I may be unlucky and lose my initial $100 payment. Another potential lesson is looming...
Oh, I should mention, these days Forex trading is quite safe. While there are large risks and large rewards, my risks are essentially limited to the capital that I have put into my account. With wise strategies I can limit risks further, but as a beginner it is comforting to know that I can't lose more than I let sit in my account no matter how foolish a beginner mistake I might make.
UPDATE:
I should stress that you could lose all the capital you put in your account, so do not start out with a large account with the idea that you will only conduct small trades. At the very least, create some sub-accounts and keep the majority of your capital out of harms way until you have blown up your play money account, learned a few lessons, and know how to protect your capital.
Markets collapse worldwide
Investors monitor falling share prices in front of a panel displaying the Hang Seng Index at a brokerage in Hong Kong, on Tuesday, January 22, 2008. Hong Kong shares prices have fallen dramatically, tumbling 8.0 per cent in the morning session as investors dumped stocks amid fears of a US recession. The benchmark Hang Seng Index fell 1,914.73 points to 21,904.13, the government radio said.
* For the first time in many months, value has emerged, at least in pockets. Not just for stocks, even the Sensex at around 17,000 trades only at 16 times 2008-09 earnings, not including the embedded value that lies in many large-caps. Sensex falls off 19th floor, plunges to 17th as US Panic and FII sell-offs trigger biggest-ever crash on Dalal Street.
* Sensex recorded its biggest ever single-day drop of 1,408.35 points, and investors lost notional wealth worth Rs. 6,63,975 crore.
* Philippine shares close 5.5 percent lower
* South Korean shares down 6.23 per cent
* Aussie stocks extend losses to 6 per cent
* Chinese share prices were sharply lower in Tuesday morning trade, losing 4.07 per cent, amid growing fears of a US recession after sharp selloffs overnight in overseas markets.
* Every fall has a lesson though: empty stories can run till a point but finally the market will whip the froth off. It is best to learn from this fall and move on, perhaps even use the next few difficult weeks to construct a high quality portfolio that is based on hard cash and earnings, shorn of hype and dreams. These may be tough days but it may well turn out to be the best buying opportunity of 2008.
* For the first time in many months, value has emerged, at least in pockets. Not just for stocks, even the Sensex at around 17,000 trades only at 16 times 2008-09 earnings, not including the embedded value that lies in many large-caps. Sensex falls off 19th floor, plunges to 17th as US Panic and FII sell-offs trigger biggest-ever crash on Dalal Street.
* Sensex recorded its biggest ever single-day drop of 1,408.35 points, and investors lost notional wealth worth Rs. 6,63,975 crore.
* Philippine shares close 5.5 percent lower
* South Korean shares down 6.23 per cent
* Aussie stocks extend losses to 6 per cent
* Chinese share prices were sharply lower in Tuesday morning trade, losing 4.07 per cent, amid growing fears of a US recession after sharp selloffs overnight in overseas markets.
* Every fall has a lesson though: empty stories can run till a point but finally the market will whip the froth off. It is best to learn from this fall and move on, perhaps even use the next few difficult weeks to construct a high quality portfolio that is based on hard cash and earnings, shorn of hype and dreams. These may be tough days but it may well turn out to be the best buying opportunity of 2008.
How to calculate Fibonacci retracement and extension levels
Three most used Fibonacci retracement levels are 0.382 or 38.2%, 0.500 (50%) and 0.618 (61.8%).
Three most used Fibonacci extension levels are 0.618, 1.000 and 1.618. Also 1.382 extension can be applied as well.
Let's take a look at the next picture:
In the example above we are in the uptrend. Lowest swing — point A — is 120.75;
highest swing — point B — 121.44.
To calculate retracement levels and enter Long at some point C we do next:
Calculations for Uptrend and Buy order:
B — A = ?
121.44 — 120.75 = 0.69
0.382 (38.2%) retracement = 121.44 — 0.69 x 0.382 = 121.18
0.500 (50.0%) retracement = 121.44 — 0.69 x 0.500 = 121.09
0.618 (61.8%) retracement = 121.44 — 0.69 x 0.618 = 121.01
Fibonacci retracement levels formula for an uptrend:
C = B — (B — A) x N%
Now we need to calculate extension levels:
0.618 (61.8% ) extension = 121.44 + 0.69 x 0.618 = 121.87
1.000 (100.0%) extension = 121.44 + 0.69 x 1.000 = 122.13
1.382 (138.2%) extension = 121.44 + 0.69 x 1.382 = 122.39
1.618 (161.8%) extension = 121.44 + 0.69 x 1.618 = 122.56
Fibonacci extension levels formula for an uptrend:
D = B + (B — A) x N%
Our next example is downtrend.
Highest swing — point A — is 158.20; lowest swing — point B — is 156.44.
Calculations for downtrend and Sell order:
A — B = ?
158.20 — 156.44 = 1.76
Because of the downtrend we need to add to the lowest point B to find retracement.
0.382 (38.2%) retracement = 156.44 + 1.76 x 0.382 = 157.53
0.500 (50.0%) retracement = 156.44 + 1.76 x 0.500 = 157.32
0.618 (61.8%) retracement = 156.44 + 1.76 x 0.618 = 157.11
Fibonacci retracement levels formula for downtrend:
C = B + (A — B) x N%
Now let's find Fibonacci extension levels (downtrend):
0.618 (61.8%) extension = 156.44 — 1.76 x 0.618 = 155.35
1.000 (100%) extension = 156.44 — 1.76 x 1.000 = 154.68
1.382 (138.2%) extension = 156.44 — 1.76 x 1.382 = 154.01
1.618 (161.8%) extension = 156.44 — 1.76 x 1.618 = 153.59
Fibonacci extension levels formula for downtrend:
D = B — (A — B) x N%
Three most used Fibonacci extension levels are 0.618, 1.000 and 1.618. Also 1.382 extension can be applied as well.
Let's take a look at the next picture:
In the example above we are in the uptrend. Lowest swing — point A — is 120.75;
highest swing — point B — 121.44.
To calculate retracement levels and enter Long at some point C we do next:
Calculations for Uptrend and Buy order:
B — A = ?
121.44 — 120.75 = 0.69
0.382 (38.2%) retracement = 121.44 — 0.69 x 0.382 = 121.18
0.500 (50.0%) retracement = 121.44 — 0.69 x 0.500 = 121.09
0.618 (61.8%) retracement = 121.44 — 0.69 x 0.618 = 121.01
Fibonacci retracement levels formula for an uptrend:
C = B — (B — A) x N%
Now we need to calculate extension levels:
0.618 (61.8% ) extension = 121.44 + 0.69 x 0.618 = 121.87
1.000 (100.0%) extension = 121.44 + 0.69 x 1.000 = 122.13
1.382 (138.2%) extension = 121.44 + 0.69 x 1.382 = 122.39
1.618 (161.8%) extension = 121.44 + 0.69 x 1.618 = 122.56
Fibonacci extension levels formula for an uptrend:
D = B + (B — A) x N%
Our next example is downtrend.
Highest swing — point A — is 158.20; lowest swing — point B — is 156.44.
Calculations for downtrend and Sell order:
A — B = ?
158.20 — 156.44 = 1.76
Because of the downtrend we need to add to the lowest point B to find retracement.
0.382 (38.2%) retracement = 156.44 + 1.76 x 0.382 = 157.53
0.500 (50.0%) retracement = 156.44 + 1.76 x 0.500 = 157.32
0.618 (61.8%) retracement = 156.44 + 1.76 x 0.618 = 157.11
Fibonacci retracement levels formula for downtrend:
C = B + (A — B) x N%
Now let's find Fibonacci extension levels (downtrend):
0.618 (61.8%) extension = 156.44 — 1.76 x 0.618 = 155.35
1.000 (100%) extension = 156.44 — 1.76 x 1.000 = 154.68
1.382 (138.2%) extension = 156.44 — 1.76 x 1.382 = 154.01
1.618 (161.8%) extension = 156.44 — 1.76 x 1.618 = 153.59
Fibonacci extension levels formula for downtrend:
D = B — (A — B) x N%
Fibonacci Fan
Fibonacci Fan is another Fibonacci retracement tool that takes both price and time into consideration. Comparing to horizontal Fibonacci lines it offers an additional feature — price movement projection far further in time.
The price projection is based on fan-like trend lines that represent already familiar to us Fibonacci numbers: 0.382, 0.500 and 0.618.
That how it looks on the sketch:
Fibonacci fan sketch
To place Fibonacci Fan on the chart, choose Fibonacci Fan tool from menu on your trading platform and then look for the highest high and lowest low points (in other words two opposite peaks) at any given time to plot the tool on. Simply click on one peak and drug all the way to the other peak, the trading platform will build a fan for you.
Let's now take a look at the real chart:
Fibonacci fan
Fibonacci Fan represents price future support and resistance levels. Traders can expect for the price either to stay in the fan and move in between lines, or break out of it.
When a price holds at any Fan line it indicates presence of support/resistance there. Once the price breaks through the line, it won't usually stop till the next Fan line is met.
If the price quickly passes a Fan line (which means there was no support/resistance there), it will freely move to the next Fan line.
Even trading outside the Fibonacci Fan, price can find strong support/resistance when approaching Fibonacci Fan line.
So, Fibonacci Fan gives traders a simple but effective way to predict future price movements.
However, it is recommended that Fibonacci Fan tool be traded along with other indicators or tools to avoid fake signals.
The price projection is based on fan-like trend lines that represent already familiar to us Fibonacci numbers: 0.382, 0.500 and 0.618.
That how it looks on the sketch:
Fibonacci fan sketch
To place Fibonacci Fan on the chart, choose Fibonacci Fan tool from menu on your trading platform and then look for the highest high and lowest low points (in other words two opposite peaks) at any given time to plot the tool on. Simply click on one peak and drug all the way to the other peak, the trading platform will build a fan for you.
Let's now take a look at the real chart:
Fibonacci fan
Fibonacci Fan represents price future support and resistance levels. Traders can expect for the price either to stay in the fan and move in between lines, or break out of it.
When a price holds at any Fan line it indicates presence of support/resistance there. Once the price breaks through the line, it won't usually stop till the next Fan line is met.
If the price quickly passes a Fan line (which means there was no support/resistance there), it will freely move to the next Fan line.
Even trading outside the Fibonacci Fan, price can find strong support/resistance when approaching Fibonacci Fan line.
So, Fibonacci Fan gives traders a simple but effective way to predict future price movements.
However, it is recommended that Fibonacci Fan tool be traded along with other indicators or tools to avoid fake signals.
Fibonacci method in Forex charts (Part 1)
Now let's have a look at a real forex chart.
Using Fibonacci in the uptrend
Same steps will also apply to downtrend price movement.
Using Fibonacci in the downtrend
A little bit of theory:
Leonardo Fibonacci is a founder of a simple series of numbers related to the natural proportions of things in the universe. Fibonacci numbers create ratios that arise from the following number series: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144: Calculated this way: 0+1=1, 1+1=2, 1+2=3 and so forth.
The ratio of any number in relevance to the next higher number is 0.618. E.g. 55/89=0.618.
There is no need to perform calculation each time you get into a trade, your trading platform is going to do it for you.
Using Fibonacci in the uptrend
Same steps will also apply to downtrend price movement.
Using Fibonacci in the downtrend
A little bit of theory:
Leonardo Fibonacci is a founder of a simple series of numbers related to the natural proportions of things in the universe. Fibonacci numbers create ratios that arise from the following number series: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144: Calculated this way: 0+1=1, 1+1=2, 1+2=3 and so forth.
The ratio of any number in relevance to the next higher number is 0.618. E.g. 55/89=0.618.
There is no need to perform calculation each time you get into a trade, your trading platform is going to do it for you.
The explosion of the Euro market
The rapid development of the Eurodollar market, where US dollars are deposited in banks outside the US, was a major mechanism for speeding up Forex trading. Likewise, Euro markets are those where assets are deposited outside the currency of origin.
The Eurodollar market first came into being in the 1950s when the Soviet Union's oil revenue -- all in US dollars -- was being deposited outside the US in fear of being frozen by US regulators. This resulted in a vast offshore pool of dollars outside the control of US authorities. The US government therefore imposed laws to restrict dollar lending to foreigners. Euro markets then became particularly attractive because they had fewer regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euro markets an advantageous place for holding excess liquidity, providing short-term loans and financing imports and exports.
London was and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London's convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euro market.
Forex Market History
An overview into the historical evolution of the foreign exchange market
This article will follow the historical roots of the international currency trading from the days of the gold exchange, through the Bretton Woods Agreement, to its current setting.
The Gold exchange period and the Bretton Woods Agreement.
Prior to Bretton Woods, the gold exchange standard -- paramount between 1876 and World War I -- ruled over the international economic system. Under the gold exchange, currencies experienced a new era of stability because they were supported by the price of gold.
However, the gold exchange standard had a weakness of boom-bust patterns. As a country's economy strengthened, its imports would increase until the country ran down its gold reserves, which were required to support its currency. As a result, the money supply would diminish, interest rates escalate and economic activity slowed to the point of recession. Ultimately, prices of commodities would hit bottom, appearing attractive to other nations, who would rush in and amid a buying frenzy inject the economy with gold until it increased its money supply, driving down interest rates and restoring wealth into the economy. Such boom-bust patterns abounded throughout the gold standard until World War I temporarily discontinued trade flows and the free movement of gold.
The Bretton Woods Agreement, established in 1944, fixed national currencies against the dollar, and set the dollar at a rate of USD 35 per ounce of gold. The agreement was aimed at establishing international monetary steadiness by preventing money from taking flight across countries, and to curb speculation in the international currency market. Participating countries agreed to try to maintain the value of their currency within a narrow margin against the dollar and an equivalent rate of gold as needed. As a result, the dollar gained a premium position as a reference currency, reflecting the shift in global economic dominance from Europe to the USA. Countries were prohibited from devaluing their currency to benefit their foreign trade and were only allowed to devalue their currency by less than 10%. The great volume of international Forex trade led to massive movements of capital, which were generated by post-war construction during the 1950s, and this movement destabilized the foreign exchange rates established in Bretton Woods.
The year 1971 heralded the abandonment of the Bretton Woods in that the US dollar would no longer be exchangeable into gold. By 1973, the forces of supply and demand controlled major industrialized nations' currencies, which now floated more freely across nations. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s, and new financial instruments, market deregulation and trade liberalization emerged.
The onset of computers and technology in the 1980s accelerated the pace of extending the market continuum for cross-border capital movements through Asian, European and American time zones. Transactions in foreign exchange increased intensively from nearly billion a day in the 1980s, to more than $1.9 trillion a day two decades later.
Exchange rates
Because currencies are traded in pairs and exchanged one against the other when traded, the rate at which they are exchanged is called the exchange rate. The majority of the currencies are traded against the US dollar (USD). The four next-most traded currencies are the Euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP) and the Swiss franc (CHF). These five currencies make up the majority of the market and are called the major currencies or "the Majors". Some sources also include the Australian dollar (AUD) within the group of major currencies.
The first currency in the exchange pair is referred to as the base currency and the second currency as the counter term or quote currency. The counter term or quote currency is thus the numerator in the ratio, and the base currency is the denominator. The value of the base currency (denominator) is always 1. Therefore, the exchange rate tells a buyer how much of the counter term or quote currency must be paid to obtain one unit of the base currency. The exchange rate also tells a seller how much is received in the counter term or quote currency when selling one unit of the base currency. For example, an exchange rate for EUR/USD of 1.2083 specifies to the buyer of euros that 1.2083 USD must be paid to obtain 1 euro.
At any given point, time and place, if an investor buys any currency and immediately sells it - and no change in the exchange rate has occurred - the investor will lose money. The reason for this is that the bid price, which represents how much will be received in the counter or quote currency when selling one unit of the base currency, is always lower than the ask price, which represents how much must be paid in the counter or quote currency when buying one unit of the base currency. For instance, the EUR/USD bid/ask currency rates at your bank may be 1.2015/1.3015, representing a spread of 1000 pips (also called points, one pip = 0.0001), which is very high in comparison to the bid/ask currency rates that online Forex investors commonly encounter, such as 1.2015/1.2020, with a spread of 5 pips. In general, smaller spreads are better for Forex investors since even they require a smaller movement in exchange rates in order to profit from a trade.
Margin
Banks and/or online trading providers need collateral to ensure that the investor can pay in case of a loss. The collateral is called the margin and is also known as minimum security in Forex markets. In practice, it is a deposit to the trader's account that is intended to cover any currency trading losses in the future.
Margin enables private investors to trade in markets that have high minimum units of trading by allowing traders to hold a much larger position than their account value. Margin trading also enhances the rate of profit, but can also enhance the rate of loss if the investor makes the wrong decision.
Leveraged financing
Leveraged financing, i.e., the use of credit, such as a trade purchased on a margin, is very common in Forex. The loan/leveraged in the margined account is collateralized by your initial deposit. This may result in being able to control USD 100,000 for as little as USD 1,000.
There are three ways private investors can trade in Forex directly or indirectly:
* The spot market
* Forwards and futures
* Options
A spot transaction
A spot transaction is a straightforward exchange of one currency for another. The spot rate is the current market price, also called the benchmark price. Spot transactions do not require immediate settlement, or payment "on the spot." The settlement date, or "value date," is the second business day after the "deal date" (or "trade date") on which the transaction is agreed to by the two traders. The two-day period provides time to confirm the agreement and arrange the clearing and necessary debiting and crediting of bank accounts in various international locations.
Forwards and Futures
Forwards make up about 46% of currency trading. A forward transaction is an agreement between two parties whereby one party buys a currency at a particular price by a certain date that is greater than two business days (a spot transaction).
A future contract is a forward contract with fixed currency amounts and maturity dates. They are traded on future exchanges and not through the interbank foreign exchange market.
Options
A currency option is similar to a futures contract in that it involves a fixed currency transaction at some future date in time. However the buyer of the option is only purchasing the right but not the obligation to purchase a fixed amount of currency at a fixed price by a certain date in future. The price is known as the premium and is lost if the buyer does not exercise the option.
Risks
Although Forex trading can lead to very profitable results, there are risks involved: exchange rate risks, interest rate risks, credit risks, and country risks. Approximately 80% of all currency transactions last a period of seven days or less, while more than 40% last fewer than two days. Given the extremely short lifespan of the typical trade, technical indicators heavily influence entry, exit and order placement decisions.
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