Tuesday, 05 May 2009
by John Jagerson

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In the last article, on the hedging ban from the NFA, we commented that hedging makes it impossible to profit and only winds up feeding your dealer or system seller an extra spread and rollover payment. This was the same rationale the NFA used to issue the new ruling. During the comment period no surveyed dealers were able to provide any evidence that hedging could enhance productivity or produce profits at all. Despite these issues we were surprised to receive very polar responses to the article. Considering this confusion we felt that it would be helpful to break down the issue into more a more detailed case study.

Click here to see the first article in this series on the NFA's new rules about hedging

About half the correspondence and comments sent to us were in favor of the new ruling and felt that it was about time the NFA stepped in to protect novice traders who are confused by the pseudo-benefits of hedging. The other half responded (very energetically) that it was us that were confused and that that hedging was key to creating profits. In the spirit of full disclosure some of the pro-hedging comments came from dealers, EA developers and system sellers. I can only assume that traders suffering from a market version of "Stockholm syndrome" was the source of the other comments.

The rationale presented by the pro-hedgers usually rested on the idea that if you were trading a long term strategy but wanted to scalp or short term trade a completely separate strategy you couldn't do it under the new rules. This is not quite correct. In fact, if you consider the effects of the new rules carefully you will see that the net effect on traders determined to "hedge" is nonexistent. They can continue to accomplish the same things they have been doing it just looks a little different within the account.

Trading with fixed risk but unlimited upside is still possible through fx options, click here to learn more.

This can be shown to be true in a short case study. Imagine that you are long 3 mini-lots of the EUR/USD in a long term trade. If you want to scalp 1 mini-lot of the EUR/USD short at the same time you might run into hedging problems. Because you are already long the EUR/USD adding another long scalp trade is fine under the new rules. The table below walks through the situation of a short scalp trade under the old rules and under the new anti-hedging rules. You will find that the bottom line is the same.

Old Hedging Rules
1. Existing Trade = 3K EUR/USD
2. Enter short scalp 1K EUR/USD
3. EUR/USD falls from 1.3000 to 1.2950
4. Long 3K EUR/USD losses = $-150
Short 1K EUR/USD gains = $50
Net Loss = $-100
Loss plus spread = $-102

Anti - Hedging Rules
1. Existing Trade = 3K EUR/USD
2. Enter short scalp 1K EUR/USD
New Position = Long 2K EUR/USD
3. EUR/USD falls from 1.3000 to 1.2950
4. Long 2K EUR/USD losses = $-100
Net Loss = $-100
Loss plus spread = $-102

If hedgers can still accomplish the same things what are the purposes for the new rules? We contacted the NFA and asked the same question. They responded that essentially they were trying to end the misleading marketing of hedging as a potential source of profits. There are also other issues involved in hedging that present indefensible risks to novice traders. For example, a hedge increases the costs of roll-over and in an illiquid market hedgers are more likely to suffer losses from widening spreads. Although those issues are uncommon or may be small they do exist and since there are no possible offsetting benefits the practice is now banned.

In the video I will walk through a case example of a hedger trading under the old rules and under the new rules. You will be able to see that the bottom line is still the same although the mechanics have changed slightly and the costs have been lowered. You can run through the same numbers yourself in a variety of circumstances and the net results will look identical.

It is very important to understand that there is a lot of misinformation being marketed about hedging. Consider this; if your dealer/system/E.A. provider is lying to you about the value of hedging, what else are they lying about?

Monday, 04 May 2009
By Ryan Teeples

Sadly, the newspapers and TV news shows are full of talking heads and so-called "experts" predicting the future of the market and the new direction of the US economy. Most of these experts and pundits couldn't trade a dollar for a donut. But many of these jokers are telling the world we're at the start of a new bull market in equities, while others continue to preach doom and gloom and predict protracted recession and bearishness.

We who are in the market are left wondering who do believe, and pondering the question: "Is this a new bull market for US stocks or will the down-trend continue?" And if so, why should you as a forex trader care?

To learn more about the way markets interact, be sure to watch our daily Intermarket Analysis Video and read How Stocks and Bonds Work Together.

A look at the daily chart (below) of the Dow Jones Industrial Average indeed is impressive. We see a nice solid uptrend over a solid period of time. But that's not the entire story.



As we take a look at the weekly chart (below), we see a different picture. While we've seen a nice run up from a bottom in March, we are still well below our long-term resistance levels. In fact, from a technical perspective, this week is an important one for the Dow, as it is approaching a 100% fibonacci level which has been an area of consolidation in the past.

If these concepts of support and resistance are unfamiliar to you, be sure to read Understanding Support and Resistance.

Until we get on top of those resistance levels, we would be unwise to call it a bull market.

So why should forex traders care? There are two specific reasons why US equities prices are an important factor in forex trading.



Bond Demand and Prices

As the US stock market grows, so too does demand for individual stocks, funds and indexes. Large institutions put a large portion of their portfolios in conservative US Dollar-backed investments (like bonds) when the stock market is uncertain, expecially when the global economy is down. But as stocks become attractive, those investors begin moving money out of those conservative instruments and into stocks.

This drives down demand for the USD and it can weaken against the majors. Interest rates being equal.


Inflation

Growth in US equities is often associated with inflation. When that happens, the Federal Reserve is inclined to raise the Fed Funds Rate, causing demand for the USD to rise due to the higher yield on US backed instruments.

So while demand for USD backed investments declines when stocks are growing, it can quickly rebound if the Fed raises rates.

So keeping on top of the US stock market becomes critical.

by John Jagerson

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The NFA (National Futures Association) proposed a rule change to the CFTC (Commodity Futures Trading Commission) last year that was approved and will begin applying to forex dealers in the U.S. on May 15th 2009. There are two unrelated features in the rule change. The most controversial feature has to do with "hedging" or hedged forex positions. The second feature has more to do with the conditions that must be applied before a trader's position can be adjusted by a dealer. This article will discuss the changes and why they may not be such a bad thing.

Anti-Hedging Rule
There are some unique trader behaviors in the spot forex market. Some order types exist here and nowhere else and some of the trading strategies and techniques that can be seen applied here are almost unknown in other capital markets.

Sometimes this is due to the nature of the most liquid and actively traded market in the world that presents unique opportunities to profit. However, often it is because the retail forex market has a larger percentage of first time active-traders than any other and there are plenty of other parties waiting to take advantage of these emerging investors.

The anti-hedging rule is supposed to address a confusing trading technique used by many inexperienced traders called hedging. Traditionally, hedging is what someone that owns a spot commodity will do to fix their price rather than suffering from unpredictable market movements in the future. For example, a corn producer may sell corn futures against their stock so that if the price of corn goes down they will have profits to offset their inventory losses.

The nature of a true hedge will eliminate the possibility of losses from price movement but it will also eliminate the ability to profit from favorable price movement. This is ideal for a commodity producer but serves no purpose for forex traders who are essentially speculators.

Despite its disadvantages, however, unscrupulous system sellers and dealers have marketed the ability to hedge your forex positions. That means that it is possible to hold long and short positions on the same currency pair at the same time even though they will clearly cancel each other out. Some traders do this as a replacement for stops or as a component of overly-complicated, spread and commission generating-systems or EAs.

A hedge like this only leads to losses. Rather than paying one spread to enter a trade, a hedger pays two spreads. Additionally, interest roll over will always be negative, which in the longer term could add up to significant losses if the trade is very leveraged.

Dealers told the NFA during the comment period that they did not know why anyone would want to hedge but that because customers were asking for it they provided the functionality. This behavior was definitely good for dealers and system or EA sellers who are paid based on the spread and are probably the parties generating the "demand" for hedging in the first place.

After May 15th a trader entering a short position on a currency pair they are already long will have their position closed or washed out. The same is true in reverse. If a trader was determined to continue hedging they could enter the contrary position within a different margin account but that adds another layer of complexity to an already impaired trade. While this is only a U.S. rule right now it is likely to be applied in the other major retail forex markets in the near term.

There are ways to legitimately "hedge" or fix risk in a forex trade while leaving the upside unlimited with options. Click here to start our free course on forex options.

Adjusting Trader Positions
In the past if there were "server errors" or other miscellaneous problems in the price feed from your dealer and your trade was filled at the wrong price the dealer could alter that position according to their terms of service. It is not a surprise that most trade adjustments were in favor of the dealer.

In the future, dealers will only be able to adjust a trade price in two circumstances.

1. The trade is adjusted in favor of the customer.
2. The dealer has a STP (Straight Through Processing) dealing model that has no human intervention and they were given a bad price by their liquidity provider. This means that if your STP dealer gets a bad price from their counterparty then the dealer can pass that adjustment through to you.

This pass-through can only be done if one of the dealer's principles sign off on the adjustment and provide documentation of their bad price to you. That does make it more difficult to adjust prices and could save a lot of traders a considerable amount of frustration.

Some traders are reacting to the rule changes with an attitude that the NFA should but out of their business and others are more positive. Regulation is a sensitive subject as there are many rules that make no sense but these two changes do not seem to fall into that category. The spot forex has been the "wild west" of the trading world for too long and some increased maturity is needed.

Sunday, 26 April 2009
By Ryan Teeples

Here's a second installment in what was a popular article, outlining common mistakes made by new and experienced forex traders alike that cause them to "blow up" their accounts and lose all their money.

Knowing these pitfalls, and the ways to avoid them can help you avoid learning hard lessons. If you missed it, here's the link to part 1: Avoid Losing All Your Money in the Forex.

Here is the next batch of common mistakes, and information to help you avoid them:

Lack of Diversification - Trading only one pair

Often we find that traders who have wiped out their account have focused all their attention on one pair, or a narrow grouping of pairs. Diversifying across multiple pairs (and markets) allows you to smooth the volatility curve and improve long-term gains.

Read Portfolio Diversification in the Forex to learn more.


Frequent whipsaws and fakeouts caused by too tight stops

It's happened to all of us. We do some sound analysis, evaluate a position, and jump into a solid trade. The market subsequently moves to the downside (or upside) really fast and stops us out of the trade. Then the pair heads right in the way of our analysis, but we miss the opportunity because our stop caused us to get whipsawn.

Read Dealing with Throwbacks and Fakeouts in the Forex to learn more.


Not accounting for trading costs

So often a system, strategy or trading methodology works well on paper, and our backtesting looks strong, but when we execute it in the live market, we find our gains are minimized and our losses mount. Often this is because we fail to consider trading costs.

Read Understand Your Hidden Trading Costs to learn more.

It's heart-breaking, but we get an email like this at least once a week: "I tried trading forex because a friend recommended it, but I quickly lost all my money. Now I am trying to learn to trade smartly."

The worst of these emails tell us the money the lost is their "entire savings" or "retirement money."

Sadly, it's very easy to lose all your money trading forex if you aren't prepared and haven't learn solid trading principles.

Here are the most common mistakes, and information to help you avoid them:

Inconsistent Position Sizing

The amount you put in each trade, in actual dollars and as a percentage of your account value, can make a major difference in trade success. Erratic behavior in this area can kill your account fast.

Read Position Sizing in Forex to learn more.

Misuse of margin and leverage

Not only is margin and leverage in the forex mis-used, it's widely mis-understood as well. It's a hard lesson to learn if you get on the wrong side of a margin and leverage error.

Read Margin and Leverage in Forex to learn more.

Trading too much in the short-term

While all the information out there on the forex touts its short term "get rich quick" properties, the sad truth is that most traders who trade short-term lose all their money. Learn to be moderate in your trading and timeframes.

Read Short Term vs. Long Term Trading to learn more.

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You will see a lot of marketing materials out there explaining why the spot market is so much better and cheaper than the currency futures market, but how much of it is fact and how much is hype? What are the real differences between these two closely related markets? Is it really cheaper to trade spot forex? Aren’t there also advantages to trading futures? This is an important topic because so many of the differences are related to trading costs, which is often a neglected subject among both new and experienced traders.forex futures

Warning: It is very common to see incorrect or misleading information about futures and the trading costs associated with them in a spot forex dealer’s marketing materials, or in the materials that some forex educational sites give you that are just copied from the dealer’s propaganda. When in doubt, check it out. If what you read here doesn’t jibe with what you previously understood, you may have been given faulty information.

Let’s begin this lesson by analyzing the major attributes of each market—futures and spot. Doing so will help us determine if either market really has an advantage. We will be ignoring some non-issues like leverage rates, expiration and “guaranteed” orders.

1. 24 Hour Market—Advantage: Neither

Some spot forex advertising makes it seem like the only place you can trade 24 / 7 is in the spot forex market. That is not actually true. Both currency futures and spot forex effectively trade 23-24 hours a day, 5 days per week. The market is essentially closed from Friday afternoon through Sunday afternoon in North America.



2. Spread—Advantage: Currency Futures

The spread in the currency futures market is not fixed. Depending on the liquidity of the market at the time, the spread can be one pip or less, and an effective limit order may cut the spread to nothing. In the spot forex market, you can have a variable spread like this, which may widen with market conditions, or a fixed spread, which does not change but is usually wider (2-3 pips on the majors on average) than a variable spread.

It is important to note that some spot dealers offer spreads on some pairs that are below one pip, but that is not the case for all of the pairs they offer. For example, a very good dealer is currently showing their average spread on the EUR/USD as 0.9 pips. That is lower than the currency futures market by 0.1 pips. However, they are showing an average spread of 2.5 pips on the GBP/USD, which is a full pip higher than the average for the GBP/USD currency futures contract. On average, the spread in the futures market is narrower across the majors and major crosses than the spot market because the futures market has more liquidity and price competition than an individual dealer.



3. Commissions—Advantage: Spot Forex

Spot forex dealers do not usually charge commissions. The spread is where they make their money, which is one reason it is a little wider on average than the currency futures market. However, let’s put this in perspective. A quick survey of good futures brokers put the average commission costs at $3.15 per side. That means an entry and exit (round trip) would cost $6.30 per contract, or 6/10ths of a pip. Once commissions are added to the spread cost above, the advantages between currency futures versus spot forex become much closer to neutral.



4. Flexibility—Advantage: Spot Forex

Spot forex dealers are extremely flexible on lot sizes. This is great since a full 100K lot may be too large for many new traders. Some dealers will slice the lot sizes anywhere from 10,000K to 1,000K. The currency futures market generally has two lot sizes. A full-size contract is usually a little larger than the 100K lot in the spot market. A mini contract, which is only available on some pairs, is usually about one-half the size of a full-size contract. Larger lot sizes can make money management in a small account extremely difficult and may be the only clear advantage spot forex has over the currency futures market.



5. Roll-Over Interest vs. Carrying Charges—Advantage: Currency Futures

Because one of the ways a forex dealer makes money is by trimming the interest payment or increasing the interest charge on a particular pair, the roll-over premium you receive from a futures contract tends to be a little higher than what you would receive from a spot forex contract. However, the cost or benefit of this interest premium is integrated into the price of the futures contract itself, which makes it harder to see at first glance.

Here’s how it works. Imagine that you are 45 days away from the GBP/USD futures contract expiring. That contract’s current price is 1.9811 but the spot price is 1.9866. This difference (also known as the cost of carry) is created by the value of the interest premium that will accrue between now and expiration. By the time this contract expires in 45 days, the futures price will equal the current spot price exactly. That means that if the spot price held steady, you would make the equivalent of 55 pips as the futures price came up from 1.9811 to meet the spot price at 1.9866. By contrast, the highest rollover rate we could find from a forex dealer on the GBP/USD would pay the equivalent of 38 pips in interest premium during the same 45 day period. Similarly, the charges for being on the non-interest paying side of the transaction is less in the futures market than with a spot forex dealer.

Advantage: Forex Futures

6. Transparency—Advantage: Currency Futures

Currency futures are exchange traded, which means that you can see order flow, volume, open interest and outstanding orders. Forex dealers do not share that information. And because the market is so distributed, information available from any one dealer is probably not comprehensive enough to give a clear picture of what is happening in the market as a whole. To get an idea of the volume of contracts that you can glean information from in the currency futures market, take a look at this—$83 billion worth of currency futures trade on the CME exchange every day alone. Contrast that with the largest retail forex dealer in the market who only trades $11 billion a day in total notional value.

Advantage: Forex Futures

Summary

The fact that forex dealers will split up a forex lot into very small slices makes the spot forex market the hands down winner for small traders.

Larger retail traders, on the other hand, should seriously consider the futures market as an alternative to the spot forex market. Trading costs are nearly identical, the exchange is more transparent, the product breadth is equivalent and interest premiums are better.

Every trader should realize that trading cost differences are not just limited to whether or not you are paying commissions. Trading costs include average spread, commissions and interest premiums or charges. When looked at together, these two markets look a lot more similar than you may have thought.




Thoughts

There is a lot of debate about the “future” of the currency market. Will the OTC dealers win or will the innovations and size of the futures exchanges crush the remaining benefits offered by the spot dealers? During the next couple of years, don’t be surprised to see exchanges begin listing flexible spot contracts along side futures contracts.

Make sure to watch the video above, and then continue to Finding Forex Trades Guide

Sunday, 19 April 2009
By Ryan Teeples

The descending resistance level on the EUR/USD has been very consistent for the last month or so, while support has remained fairly horizontal over the same time period.

The descending triangle formed by these support and resistance levels was nearing convergence in the consolidation zone last week, and we were watching for the breakout.

Editor's Note: If you aren't familiar with these principles be sure to read Charting with Support and Resistance or Technical Patterns to learn more.

The break from the consolidation zone came a bit earlier than expected, as Friday the pair pushed dramatically through resistance, and now looks to establish a new trend and new support and resistance levels.

Analysis continues below...



So where do we think those levels of S&R will be now? Well, if we take a look back a couple months to mid-January, we see the EUR/USD was in a similar position. The pair was in a downward trend, and when it hit around the 1.30 level, it began to consolidate before ultimately trending down to a new low, and new resistance level, at 1.25.

So here we are, seeing a break from the descending triangle, and looking at the 1.30 level again. It's not unlikely that we'll see similar movement this go round on the pair. Consolidation is likely, now that we've established the 1.30 level as a key fibonacci level, and a break below that level leaves possible new support at 1.25 again.

Next: Support and Resistance Levels.

To see the rest of today's market videos and education, click here.

by John Jagerson

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The Iraqi dinar "investment" opportunity is a scam that has been around for a few years and has recently been regaining much of its former popularity. The opportunity is pitched as a way to profit from a nearly worthless Iraqi dinar that is "sure" to appreciate in the future. The scammers promise that millions of dollars in profits are virtually guaranteed if you buy the dinars at today's values (about 1,000 dinar to 1 US Dollar) and then exchange the dinars back for dollars at a later date once the dinar exchange rate has improved.

However, there are some fundamental problems with the Iraqi dinar scam that potential buyers should be aware of before they begin investing in one of the most illiquid currency markets in the world.

Lack of registration
It is illegal in the U.S. and most other major economies to market an investment without appropriate securities registration. The scammers get around this requirement in two ways. First, it is technically legal to sell hard currency for its numismatic value. In other words it is possible to sell hard currency as a collector's item. And second, some dealers will register with the U.S. Treasury as a Money Service Business (MSB).

Registering as an MSB is something that dinar dealers will do to put on the appearance of registration and government oversight. However, the difference between legitimate MSBs and dinar dealers is that they are not marketing an investment. So ask yourself; if a business has to lie to get around registration are they really making a legitimate offer?

Dinars are sold on misleading hype
The potential value of an investment in dinars is often illustrated with references to what happened to the Kuwaiti dinar following the first Gulf War and the German deutschmark following World War 2. These would be good examples except that neither one was a free-floating currency at the time so the value was mostly a function of policy making and official currency management.

Will the Iraqi government pursue a policy of currency appreciation in the future? Since an appreciating currency makes funding your brand new government and paying off past debts more expensive it seems unlikely.

In fact, more recent currency history would argue that it is more likely that the dinar will depreciate further in the near term. The fallacy that dinar dealers are relying on is that a growing economy will result in a stronger currency. That is not the case. As the recent examples of Venezuela, Turkey and Mexico show; a growing economy is as likely to be accompanied by an inflating (weakening) currency as not.

Many dinar dealers refer to the value of the Iraqi dinar prior to the 1990 Kuwaiti invasion (1 dinar = $3+ US Dollars) as evidence that the potential for the dinar is theoretically unlimited. They don't mention that the pre-1990 dinar has been demonetized (worthless) and that its value was arbitrarily set by an autocratic regime led by Saddam Hussein. Following the embargo, the ability for the Iraqi government to manage its currency's value collapsed and it spent the next 10 years at 2,000 - 3, 500 dinars to the U.S. Dollar.

Investment risks they won't tell you about
In the next article on this subject we will outline the major risks of investing in hard currencies like the dinar. If an investor was determined to take a risk on a currency like this they should be prepared for what is likely to happen to their value and they won't hear it from dinar dealers.

Monday, 13 April 2009
By Administrator

Click here to view video

Many forex traders blow their accounts up and ultimately fail as traders because they do not understand two key concepts in the forex market: Leverage and Margin.

Leverage—Leverage is probably the one characteristic of the forex market that intrigues individual investors the most. Leverage is the ability to convert a small amount of power into a larger amount through the use of a tool. Imagine you are asked to move a large boulder from the spot where it is currently resting. You could certainly try to push and move the boulder with your bare hands, but your job will be much easier if you can use a tool—like a large pole—that you can place under the boulder that will give you some leverage.

The same principle holds true when you are investing in the forex market. You can make money by investing just your own money, but you can make much more money if you can use the tool of financial leverage by borrowing money from your dealer.

You can lever, or increase the investing power of, your forex accounts by using some of your own money to enter a trade and then borrowing the rest from your dealer. For example, if you have 100:1 leverage in the forex market, you can control $100,000 with as little as $1,000 of your own money. That means you only have to pay for 1 percent of the position with your own money. You can borrow the remaining 99 percent of the purchase price from your dealer.

Of course, some dealers offer leverage levels up to 400:1—which means you can control $400,000 with as little as $1,000 of your own money. While this may look appealing, don’t be fooled by the promise of potential profits higher levels of leverage offer. More likely than not, higher levels of leverage will destroy your account before they help it grow.

The leverage you enjoy in the forex market is determined by the margin you are required to post for each trade.

Margin—The forex market is an exciting market because your dealer is willing to lend you money so you increase your profit-generating potential in all of your trades. Before your dealer lets you borrow money, however, you have to show that you have some money to cover any losses you may incur. Margin is the money you set aside with your dealer for safe keeping to prove that you are able to cover your losses.

For example, if you want to buy the EUR/USD, you will be required to set aside one percent of the position size as margin. That means if the position size is $100,000, you will be required to set aside the equivalent of $1,000 to prove to your dealer that you can cover losses of at least $1,000 should your trade move against you.

Different currency pairs have different margin requirements. Major currency pairs have lower margin requirements because their high levels of liquidity make it easier to enter and exit your trades quickly—which gives your dealer added confidence it will be able to close out your positions without incurring unexpected losses. Exotic currency pairs have higher margin requirements because their low levels of liquidity make it harder to enter and exit your trades quickly.

Many beginning forex traders get confused by thinking that the money they set aside as margin actually goes toward purchasing currencies. It does not. You borrow 100 percent of the purchase price from your dealer. Your margin only shows your dealer you have money to cover any losses that you may incur.

When you buy a currency pair, you do not have to come up with the cash on your own. Your broker loans you enough of one currency to buy enough of the other currency in the pair. For example, if you click on the “Buy” button to buy the EUR/USD pair at 100,000 units, your dealer will loan you enough U.S. dollars (USD) to buy 100,000 euros (EUR). If the EUR/USD exchange rate is 1.4000 at the time, your dealer will loan you $140,000 to buy €100,000.

Make sure to watch the video above, and then continue to Short- vs. Long-term Trading

Tuesday, 07 April 2009
By Ryan Teeples

In relative terms, the forex as a retail market is still very young, especially in the US. The US government is passing regulation annually to give the industry more regulation to bear, but it's still pretty light compared to other, more mature capital markets. This makes the forex a tool of opportunity for frauders and scammers.

To help combat the rampant slime in the market, we frequently offer tips and hints for avoiding forex scams. Here's a link to our most recent article on Avoiding Trading Scams.

To supplement that, I thought I'd give a few links to recent forex scams in the news as a warning for traders to watch and be prepared.

A man in Washington state used his church connection to run a forex scam:
http://www.hedgeco.net/news/04/2009/...-citizens.html

The CFTC raids a Florida company in the middle of the night and secured documents proving the company's forex investment product was a $17 million scam:
http://www.naplesnews.com/news/2009/...ion-investmen/

Surprise! A Forex Investing company in Nigeria wasn't quite on the up and up:
http://www.thetimesofnigeria.com/Article.aspx?id=1581

An article on the general cost and pain of investment scams:
http://www.politonomist.com/the-unsp...ce-tag-002096/

Monday, 06 April 2009
By John Jagerson

CLICK HERE to view video

Currency traders debate the benefits of over-the-counter (OTC) style forex and currency futures available on an exchange. These instruments are very similar but there are some key differences. We have compared the pros and cons of forex versus futures in an earlier article and the balance shifted to the OTC style for one reason - flexible contract sizes.

Many retail forex traders cannot trade full size lots (100,000 base currency units) and maintain proper risk management. Almost all forex dealers offer a "mini" version of a forex lot that is 1/10th the size of a full size lot or 10,000 units of the base currency. These mini lots are ideal for a smaller trader who want more control over their market exposure.

In the past, currency futures have only be available in full size lots and in a few cases a half size lot. However, the balance has shifted with the introduction by the Chicago Mercantile Exchange of E-micro currency futures. These micro lots are priced like an OTC mini lot at 12,500 - 10,000 units of the base currency.

Perhaps the most significant advantage of currency futures over the OTC market is transparency. An exchange traded product helps to eliminate counter-party risk. This means that the exchange aggregates buyers and sellers without acting as the counter party to each trade like a dealer does in the OTC market. Because the exchange works like this; pricing, spreads and commissions are a product of a more competitive process.

The CME will provide equal access to order depth and volume information to retail and institutional traders. This provides a lot more information about market liquidity and volume than OTC forex traders have. Typically, OTC traders have no access to reliable order depth or volume data. Click here for one example of how this futures order-depth information is provided by the exchange.

The video with this article will go into more detail about how trading costs compare with the spot forex and why traders may want to consider having accounts to access both markets. There are still some advantages forex dealers can provide in the OTC that the exchange cannot. However, for access to the six most actively traded currency pairs, the futures exchange may be an ideal alternative.

Tuesday, 31 March 2009
Administrator
Forex Getting Started

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“Interest,” “roll-over,” “tomorrow-next,” and “cost of carry” are all terms used by dealers to describe the premium paid, or charged, on each currency pair.Carry trade

Each currency pair has an interest payment and charge associated with holding the position long or short. For some pairs, you may receive a payment if you are in a long position and pay a charge if you are short the pair.

But for other pairs, you may receive an interest payment if you are short and pay a charge if you are long the pair. Some dealers list the premiums and charges you receive or pay within their trading software, while others list the premiums and charges on their website. These premiums and charges can change on a daily basis but will typically not change very much.

So how do dealers determine what rates they are going to charge and pay? Dealers derive the interest premiums and charges they use from the difference in the short-term interest rates of the two economies represented by the currencies in the pair you are trading. The short-term interest rate typically used is the overnight LIBOR rate. LIBOR rates are set by the British Banker’s Association (BBA) and are updated on a daily basis.

Let’s take a look at the interest premiums and charges that were once paid and charged on the AUD/USD for example.

Imagine that you were long one contract of the AUD/USD and the current interest rates, as defined by the overnight LIBOR rates, were 6.67 percent and 4.28 percent, respectively. When you are long the AUD/USD, you are actually long the Australian dollar (AUD) and short the U.S. dollar (USD) and will benefit as the AUD rises in value relative to the USD. If you were to net those two interest rates, multiply that amount by the total amount of the base currency and then divide that number by 360, you arrive at a close approximation of the interest premium.

Step 1: Determine the difference between the overnight LIBOR interest rates of the two currencies involved in the pair.
(AUD 6.67%) – (USD 4.28%) = 2.39%

Step 2: Multiply the difference between the two interest rates by the amount of the base currency you have tied up in your trade
2.39% × 10,000 (one mini-lot) = $239

Step 3: Divide the amount in step 2 by 360 days to determine the interest payment amount in the base currency
239/360 = 0.66 AUD

Step 4: If the base currency is different than the currency you hold your account in, use the current exchange rate between the base currency and your account currency to convert the amount into your account currency
(0.66 AUD x 0.8685 = $0.57)



If you were short the AUD/USD, you would reverse this equation and find the amount you would be charged to be holding the position.

That sounds pretty good, and it is. However, because you are working with a dealer, you will find that they are paying you a little less than you may have expected, and they are also charging you a little more. Dealers take a portion of the interest premium as part of their service charges to you, the trader. The actual premium paid on any single position will vary a lot from dealer to dealer and with different account types.

Interest premiums are paid in different ways, depending on the dealer.

The most common ways that dealers pay, or charge, interest in through an actual cash payment—which can be approximated with the calculation above—or by resetting your entry price to a new price. The process of resetting your entry price means that if you were long a currency pair and are owed a premium, your entry price is reset to be lower (i.e. better off) than when you first entered the trade. Likewise, if you were short a currency pair and are owed a premium, your entry price will be reset to be slightly higher (i.e. better off) than it was when you first entered the trade.

Conversely, if you were long a currency pair and owe an interest payment, your entry price is reset to be higher (i.e. worse off) than when you first entered the trade. Likewise, if you were short a currency pair and owe an interest payment, your entry price will be reset to be slightly lower (i.e. worse off) than it was when you first entered the trade.

In the AUD/USD example above, if your dealer was resetting your positions rather than making a cash payment, your long entry position would have been reset by .000057—or a little more than half a pip. That means that instead of receiving a cash payment, your net profit in the position went up a little because your entry price was set to a more favorable level.

While it is common for these payments and charges to be made somewhere between 10:00 pm and 12:00 am GMT, they vary by dealer. In some cases, dealers spread the premium into a continuous payment based on how long you held the position. Like many things in the forex market, it is also important to understand how dealers compete based on these rates. You should also understand some of the pitfalls you can avoid related to this premium.

Consider these tips to get the most out of your dealer:

Tip #1 – Most dealers will pay more if you are willing to carry a lower maximum leverage rate in your account. That means that if you are willing to have a maximum leverage rate of 50:1 instead of 200:1, your dealer will pay you a higher premium and charge you a lower interest rate on the other side of the transaction. Since a 50:1 leverage rate is still extraordinarily high and will probably never be maxed out in your own account anyway, this is a good deal for you. Over time, the difference in interest paid and interest charged can be very large.

Tip #2 – On Wednesdays, the interest premium is triple the normal amount. That may make a difference in your trade timing if you are considering a currency pair with a very high interest payment/charge. This is done because the market is essentially closed on Saturday and Sunday so the value date is extended to Monday.

Tip #3 – The premium payment is one of the factors dealers will use to compete for your business. If you are trading a strategy, such as the carry trade, which relies on high interest payments, you should consider opening an account with the dealer offering the most consistently attractive premiums for that particular strategy. You may also want to consider opening different accounts with different dealers. Having an account with more than one dealer can be a very good thing and can help you take advantage of each dealer’s strengths.

Tip #4 – Some dealers will give you a better rate if you CALL THEM AND ASK FOR IT. If you are working with a dealer you like but the premium seems low, call and find out what it takes to get the higher rate. You may be surprised by what they are willing to do for you. Remember who works for whom.

Make sure to watch the video above, and then continue to Margin and Leverage

Sunday, 29 March 2009
By Ryan Teeples

The EUR/USD is at a point forex traders will want to watch very closely this week, both on the daily chart and the hourly chart.

The chart below shows the daily chart for the last six months or so, and we see that the pair has been consolidating inside this descending triangle, a typical consolidation pattern. (Learn more about Continuation Patterns here.)

As I write, the pair has reached an important point in our Fibonacci retracement study as well. We're right at the 23.6% level, where we'll want to watch closely to see if we get a bounce, or a break through. A bounce means we're likely headed back up toward resistance around 1.36, but a break through support leaves support at our previous recent low in the 1.25 range.



While that's a look at the daily chart, a move to the hourly chart shows similar support levels at a crossroads. In the chart below we can see two different trends, in two different time-frames (one a little longer-term), but both show the pair finding itself at support, solidifying our analysis from the daily chart.

Next: Support and Resistance Levels or click on the flags below for charts for each pair.

Forex Trading and CPI - Part 1

Forex trading is often a mix of technical and fundamental analysis. In the case of currencies, these fundamentals are usually economic fundamentals. This lesson is the first in a series on the most important regular fundamental releases. In this lesson I will be discussing the meaning, problems and opportunities of the CPI release.

In part one I will walk through what CPI is and why traders think that it will affect yields and therefore currency values. In a normal (non-crisis) market this relationship is very clear and relatively easy to understand. However, there are some big problems inherent in the measure that helps lead to its breakdown when the market is in crisis-mode.
forex trading
1. CPI is subjective: The CPI measure looks at a number of different consumer items and calculates their price changes within a basket with different weightings attached to each item. That sounds simple but it is completely subjective and therefore it is usually very misleading.

2. Price shocks are confusing: CPI is usually divided into two components. The first component includes the entire basket of "stuff" which includes food and energy prices. Core CPI, the second component, excludes food and energy from the same basket and for very debatable reasons is often emphasized as more important than the total basket. Clearly the issue with this is that price shocks in the food or energy market will break the normal inflation cycle and the division in the measure makes it very confusing for traders to understand what is going on.

3. Comparison is difficult: CPI in the U.S. is not the same as CPI in the Euro-zone or China or any other economy. This makes comparison very difficult which is problematic for forex traders who obviously trade currency pairs.

In the next part we I begin discussing how forex traders can use CPI in forecasting risk as well as timing a trading strategy. Although CPI has problems, simplifying the analysis and looking at trends, can help understand what is going on in the market and what a trader can do about it.

Click here to view video

Forex Trading and CPI - Part 2

CPI can lead to price changes in the forex in a couple of ways. First, like all announcements, if CPI misses or exceeds expectations the market for the USD will respond to it immediately. Which direction that movement will take is uncertain and it can lead to a lot of "whipsaws" or a lot of big price moves up and down. This is problematic for short term traders but can create some nice profits for forex dealers (including the interbank dealing desks) as traders move in and out of their positions after being stopped out. Fortunately CPI can be predictive for the trend in the longer term.
forex trading CPI's long term predictability partially rests on the normal cycle of economic growth. Economic growth leads to higher wages/employment/spending which leads to higher interest rates and yields which leads to a more valuable USD. In the video I have a couple of good examples of how a faster positive rate of change in CPI lead to exactly these kinds of trends. As we know, however, this relationship breaks down when the economy is contracting at the same time that the oil market is experiencing price shocks. This doesn't mean that inflation analysis is useless during those periods it just means that the same information has to be used differently.

During these periods, the Fed will have a very difficult time trying to manage their "inflation target" because the normal tools of monetary policy will only make the problem worse. During these periods it seems likely that a decline in the USD is unavoidable. Knowing the likely trend is helpful as you plan trades and this kind of simplified trend-based approach to inflation data can help cut through the inherent problems of the release.

What do you think about CPI or economic analysis in general? What do you struggle with the most? Join us in the discussion forum for follow up conversation on this topic and answers to questions.

Click here to view video

CLICK HERE to view video.

by John Jagerson

There are several ways to classify traders but one of the most significant differences is the one between short term and long term traders. Traders in both camps may use technical analysis and stop and limit orders in very similar ways but with some important differences that can lead to disaster if not properly understood.

At Learning Markets we hear from traders quite frequently and lately, as the market has become more volatile, a common issue has been recurring. The problem relates to the use of short term style stops and position sizing in long term trading opportunities and vice versa.

Transposing short term methods for risk control and position sizing on a long term trade, inevitably leads to whipsaws and losses. Similarly, applying long term methods for stops and position sizing against a short term position leads to an unfavorable risk/reward ratio.

In the video I will detail this issue in two case studies on the GBP/JPY.

The solution to this problem is to understand how consistent and proportional position sizing applies to different time frames. In the video I detailed this issue using two case studies on the GBP/JPY. Both case study trades were short and utilized technical analysis. In both it was assumed that a stop was set above resistance to protect capital.

Case #1: Long Term
As you can see in the image below, the GBP/JPY began consolidating in a rising wedge pattern from March through August of 2008. When the breakout occurred in August an initial profit target, based on the prior trend, provided a projected upside potential of about 5,500 pips. The stop loss could have reasonably been placed almost 1,000 pips above the breakout, near resistance, to protect capital.

GBP/JPY Daily Chart



The large stop in this case was perfectly reasonable to account for volatility that may occur in the near term as the trend began to reemerge. If you assume that you had a $10,000 account balance and were willing to risk 5% on any given trade, you would round up and only be trading 1 mini lot in this case.

Case #2: Short Term
The GBP/JPY recently formed a triple top and subsequently broke down to an initial profit target of 335 pips. A stop above resistance could have been placed at least 100 pips away. Assuming the same kind of portfolio sizing calculation was done in this trade as in the last one, you could have been trading 5 lots.

GBP/JPY 4 Hour Chart



As you can see in these two contrasting examples, the analysis was similar but the position sizing was proportional. Traders applying a 100 pip stop loss in the long term position would have accumulated large losses as the market remained volatile. Similarly, an extremely large stop loss would have essentially left the short term position uncovered.

The issue is compounded by the fact that a longer term trader applying a short term stop loss may have been getting in too heavily. We have found that it is very common for traders taking advantage of a long term trade to get spooked very early because they are in the trade with too much size.

If any of this sounds familiar to you, take a minute to reevaluate how you are position sizing and make sure that your initial targets and stop losses are proportional to the opportunity rather than transposed from another time frame.

Note: In the video, I will discuss another difference between long and short term trading - costs. Trading in the short term can be fun but it is expensive. The forex is one of the most expensive markets to trade in the short term and in this example the costs associated with the short term trade could easily have been 1.5% of profits. In the long term example, costs were .0009% of profits. That makes a huge difference over many trades and could ultimately make the difference between an annual profit or loss.