learn forex first

Currency movements, as in any other market, are driven by two main forces: supply and demand.

Think for instance of the car selling business in a small village. At first there will be just a few car vendors. As the village grows, more and more people will need cars to satisfy their needs, pushing up the demand for cars. At this point the demand for cars is greater than the quantity supplied, pushing prices up. As people realize selling cars is such a great business opportunity, more people will be attracted the car business and will start selling cars. As this happens, more and more cars will be available, pushing up the supply of cars. At some point, the supply will be greater than the demand of cars. If car vendors don’t lower their prices, they won’t be able to sell their cars, so they are forced to lower them.

The same goes for currencies, when a currency increases its value, the demand is greater than its supply. When a currency decreases its value, its supply is greater than its demand.

What factors influence the supply and demand of one currency?

The two main factors that influence the movements in one exchange rate are:

1. The capital flows

2. The trade flows

These two components constitute what economics call balance of payments. The main purpose of the balance of payments is to quantify the demand and supply for a currency of one country, over a period of time.

Balance of Payments = Capital Flows + Trade Flows

A negative balance of payments indicates that the capital leaving the country is greater than the capital entering the country (not much demand)

A positive balance of payments means that the capital entering the economy is greater than the capital leaving the economy (increasing demand of the domestic currency)

Theoretically, a balance of payments equal to zero indicates the right value of one currency.

Capital Flows

Capital flows is the net quantity of currency traded (bought or sold) through capital investments.

The capital flow can be divided into: physical flows and portfolio investments.

Physical Flows - They happen when foreign entities sell their local currency and buy foreign currency to make foreign direct investments (for joint ventures, acquisitions, etc.) When the volume of this kind of investment increases, it reflects the good shape and health of the economy where it is invested.

Portfolio investments - These are investments made on global markets, variable and fixed income market investments (Forex, stocks, T-bills, etc.) An example of portfolio investments is when a hedge fund in Japan invests in the US equity markets.

Trade Flows

Trade flows measure the net exports and imports of a given country. These two components (exports and imports) constitute what economists call the current account.

Countries that have a positive current account (exports greater than imports) are more likely to depreciate their currency; this way the consumer abroad will perceive the foreign currency to be cheaper (and can purchase more goods and services). A good example is Japan.

On the other hand, countries that have a negative current account (imports greater than exports) are more likely to appreciate their currency since they need to sell the local currency and buy foreign currency in order to purchase goods and services. United States is an example of a net importer country.

Purchasing Power Parity (PPP)

This theory states that exchange rates are determined by the relative prices of a similar basket of goods in different countries. In other words, the ratio of prices of a basket with similar goods of two countries should be similar to the exchange rate.

If a Personal Computer in Australia costs AU$1,500, and the same PC in United States costs US$1,200. According to the PPP, the exchange rate AUD/USD would be 1.2500 (1,500/1,200).

If the exchange rate was at 1.3000 (or above 1.2500) it states that in the long run it will decrease its value until 1.2500 is reached. On the other hand, if the exchange rate was at 1.0500 (or below 1.2500) the exchange rate in the long run will increase its value until 1.2500 is reached.

This example is just illustrative, in the real world it is not just one good, but a basket of goods.

The major weakness of this theory is that it assumes that there are no costs related to the trade of goods (tariffs, taxes, etc). Another weakness is that it does not consider other factors that might influence the exchange rate (i.e. interest rates etc)

Modern monetary theories include the capital markets to the PPP theory arguing that capital markets have less costs of trading.

Interest Rate Theory

This theory states that interest rates differentials neutralize the increase or decrease of any currency against another currency. Therefore there are no arbitrage opportunities.

For instance if the interest rate of Australia is 6.25% and the interest rate of United States is 3.5%, then the AUD should depreciate against the USD, so that there are no arbitrage opportunities.

There are also other theories that try to explain the value of a currency pair. But as with every theory, they are based on assumptions that may or may not be present in the real world.

by a.anies

http://www.trade-4x.blogspot.com

There are two basic ways to approach the analysis of the FOREX markets: Technical analysis and Fundamental Analysis. Someone who is using a fundamental analytical approach will look at the current economic climate, political events, a variety of economic indicators, and so on to try to predict currency moves. What we will examine is technical analysis, or the use of historical price patterns in economic data to predict future moves in the FOREX. We will also look at the tools used for technical analysis.

The three major assumptions underlying technical analysis are:

1 - All market forces are taken into account in price movement. Many things can affect the price of a currency. Some of these factors would be economic conditions, political happenings, natural disasters, seasonal supply and demand and even the weather. Technical analysis, however, does not attempt to take these into account because the market has already done that. Rather, a technical analyst is concerned with the actual movements of the market, not with the reasons for the movement.

2 - There are observable trends in currency prices movements. There are known market patterns that follow predictable paths.

3 - There are historical trends in price movements. Over a century of FOREX data collection has shown that human nature interacts with events in predictable ways. Thus, when circumstances are similar in the market, the same patterns will show up.

Technical Analysis: Is It Necessary?

Day traders in the FOREX usually use technical analysis most heavily, though they may supplement it with fundamental analysis. Technical analysis has the huge advantage of being applicable to a wide range of currencies and markets simultaneously. To properly do fundamental analysis requires a good knowledge of events and conditions in a certain country so the number of markets any particular trader can analyze by the fundamental approach is necessarily limited.

Technical analysis can seem so complicated to the beginner that they may be tempted to wonder if it is really needed. The truth is that all investing requires a strategy and technical analysis is a proven way to set strategy by predicting FOREX movements. Of course, no strategy or method is always successful, which is one reason many technical traders also do some fundamental analysis as a supplement.

USing Price Charts In Technical Analysis

Charts lie at the heart of technical analysis and you will find a good selection available from any online FOREX broker. Not only are the charts updated constantly, real time, but they can be viewed in a variety of ways. You can see movement over various periods of time, broken down into different time scales, and with various analytical overlays applied. With the software provided you can see the broad picture over a long period or zoom into the most minute detail. The basic software is free from most online Forex brokers but there may be a fee for the more professional, in-depth, information.

Sometimes the charts are a built-in part of the broker’s software package. Alternately, they may be available on the broker’s website.

Practice, or demo, accounts are available from most brokers on their website. These allow you to use the charts and tools of that particular software to learn the techniques of following charts, noticing and learning about trends and studying market movements. Nothing can substitute for this valuable period of becoming intimately familiar with charts and market behavior.

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The Froex was founded in 1971. Today the current turnover of the Forex is said to be between 1 and 1.5 trillion dollars a day compared to the stock market’s turnover of about 10 billion a day.

Major currencies being traded on the Forex are the US Dollar, Japanese yen, British pound, Swiss franc and the Euro.

Investors can trade on the Forex from any location, using telephone services, the Internet or secured access. Traders can also trade for long periods or decide to trade for just one day.

Another exciting fact is that the Forex market (unlike other foreign exchange services or the stock market) does not have a closing time, so you can trade 24/7 (round the clock). Forex trading includes a measure of risk. That is, you can gain a lot of money or lose money. However, you can operate on lower risks by making use of market analysis methods such as discussed below, in addition to “stop loss” and “take profit” order mechanisms available to traders.

Factors that influence the trend of the Forex market include but are not limited to transfer of capital between countries, economic factors (such as interest rate and inflation differentials, equity market flows et.c.), activities of large financial funds based on forecasts, political factors, psychological factors and market volatility (irregularity in the investment market). These factors affect the currency exchange rate and the price movements on the Forex. Two basic methods are used to analyse foreign exchange markets. These methods are frequently used to inform trading decisions on the Forex. These are:

• Technical analysis
• Fundamental analysis

Fundamental analysis involves the use of external indicators such as economic factors, political, social and psychological factors to predict price movements and trends on the Forex market.

On the other hand, technical analysis uses charts to identify price trends; these price charts are believed to have (already) taken into account the effects of external factors (such as economic, political and social factors) on prices. The implication of this is that, there is no need to study these external effects separately. Another important believe of technical analysts is that the price has a trend and this trend enables you to predict and make profitable decisions. This information leads us to the last important assumption made when using technical analysis - history repeats itself. The point being that human beings tend to react to situations in the same way they reacted when they came in contact with a similar situation in the past. All these assumptions are the bases used to analyse the Forex market and make decisions.

To trade online you need an online trading platform that includes automated online brokerage services that enables you to buy and sell via the Internet. In other words, you don’t need a physical broker; you can get an online trading platform that will provide you with all the broker services you need to trade on the Forex. There are a number of reputable broker websites online that provide this service.

One of the most common platforms is the MetaTrader 4.The MetaTrader has a user-friendly front-end trading interface. The software provides technical analysis; charts and Expert Advisors that help you build up your own trading strategy. This software is fully compatible with Forex automated trading robot. Automated trading software are developed to simplify the complication that comes with trading on the Forex; most especially to reduce risk levels and human errors while trying to analyse the market. Automated trading involves the use of Expert Advisors.

Expert Advisor are written programmes compatible with trading platform software and enables automated trading to take place without human intervention. The Advisor can notify you of profitable opportunities and also complete deals automatically on your behalf. It is important to note that you can use a demo account that does not involve real money investments to learn how the Forex works. When you are comfortable with this and you are ready to invest, you can go ahead and open a real account.

In summary, this article examined in layman’s terms, simple facts that new investors need to understand about trading on the Forex. More specifically, the article touched on the history of the Forex market, the level of risk involved, factors that influence foreign exchange rates and tools used for market analysis. We also delved into online Forex trading and what it entails.

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Automated Forex Software Reviews:

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Background

Long Term Capital Management(LTCM) was a hedge fund established in 1994 by John Meriwether, a very successful bond trader at Salomon Brothers. At Salomon, Meriwether was one of the first on wall street to hire top academics and professors. Meriwether established a team of academics who applied models based on financial theories to trading. At Salomon, Meriwether’s group of geniuses generated amazing returns and demonstrated an unparalleled ability to precisely calculate risk and other market factors.

In 1994, Meriwether left Salomon and established LTCM. The partners included two Nobel Price-winning economists, a former vice chairman of the Board of Governors of the Federal Reserve, a professor from Harvard University, and other successful bond traders. This elite group of traders and academics attracted initial investment of about $1.3 billion from many large institutional clients.

Strategy

The strategy of LTCM was simple in concept but difficult to implement. LTCM utilized computer models to find arbitrage opportunities between markets. LTCM’s central strategy was convergence trades where securities were incorrectly priced relative to one another. LTCM would take long positions on the under priced security and short positions on the overpriced security.

LTCM engaged in this strategy in international bond markets, emerging markets, US Government bonds, and other markets. LTCM would make money when these spreads shrunk and returned to the fair value. Later, when LTCM’s capital base increased the fund engaged in strategies outside their expertise such as merger arbitrage and S&P 500 volatility.

These strategies, however, focused on tiny price differences. Myron Scholes, one of the partners, stated that “LTCM would function like a giant vacuum cleaner sucking up nickels that everyone else had overlooked.” To make a significant profit on small differences in value, the hedge fund took high-leveraged positions. At the start of 1998, the fund had assets of about $5 billion and had borrowed about $125 billion.

Results

LTCM achieved outstanding returns initially. Before fees, the fund earned 28% in 1994, 59% in 1995, 57% in 1996, and 27% in 1997. LTCM earned these returns with surprisingly little downside volatility. Through April 1998, the value of one dollar initially invested increased to $4.11.

However, in mid 1998 the fund began to experience losses. These losses were further compounded when Salomon Brothers exited the arbitrage business. Later in the year, Russia defaulted on government bonds, a LTCM holding. Investors panicked and sold Japanese and European bonds and bought U.S. treasury bonds. Thus, spreads between LTCM’s holding increased, causing the arbitrage trades to lose huge amounts. LTCM lost $1.85 billion in capital by the end of August 1998.

Spreads between LTCM’s arbitrage trades continued to widen and the fund experienced a flight to liquidity causing assets to shrink in the first 3 weeks of September from $2.3 billion to $600 million. Although assets decreased, because of the use of leverage the portfolio value did not shrink. However, the decrease in assets elevated the the fund’s leverage. Ultimately, the Federal Reserve Bank of New York catalyzed a $3.625 billion bail-out by the major institutional creditors in order to avoid a wider collapse in the financial markets caused LTCM’s dramatic leverage and huge derivatives positions. At the end of September 1998, the value of one dollar initially invested decreased to $.33 before fees.

Lessons from LTCM’s Failure

1.Limitation of Excess Leverage Use

When engaging in investment strategies based on securities converging from market price to an estimated fair price, managers must be able to have a long term time frame and be able to withstand unfavorable price changes. When using dramatic leverage, the ability of capital to be invested long term during unfavorable price changes is limited by the patience of the creditors. Normally, lenders lose patience during market crisis, when borrowers need the capital. If forced to securities during an illiquid market crisis, the fund will fail.

LTCM’s use of leverage also highlighted the lack of regulation in the over-the-counter (OTC) derivatives market. Many of the lending and reporting requirements established in other markets, such as futures, were not present in the OTC derivatives market. This lack of transparency caused the risks of LTCM’s dramatic leverage to not be completely recognized.

The failure of LTCM does not mean that any use of leverage is bad, but highlights the potential negative consequences of using excessive leverage.

2.Importance of Risk Management

LTCM failed to manage multiple aspects of risk internally. Managers mostly focused on theoretical models and not enough on liquid risk, gap risk, and stress-testing.

With such large positions, LTCM should have focused more on liquidity risk. LTCM’s model’s underestimated the probability of a market crisis and potential for a flight to liquidity.

LTCM’s models also assumed that long and short positions were highly correlated. This assumption was historically based. Past results do not guarantee future results. By stress testing the model for the potential of lower correlations, risk could have been better managed.

In addition to LTCM, the hedge fund’s large institutional creditors failed to properly manage risk. Impressed by the fund’s all star traders and large amount of assets, many creditors provided very generous credit terms, even though the creditors engaged in significant risk. Also, many creditors failed to understand their total exposure to specific markets. During a crisis, exposure in multiple areas of a business to specific risks can cause dramatic damage.

3.Supervision

LTCM failed to have a truly independent check on traders. Without this supervision, traders were able to create positions that were too risky.

LTCM demonstrates an interesting case of the limitations of predictions based on historical information, and the importance of recognizing potential failure of models. In addition, the story of LTCM illustrates the risk of limited transparency in OTC derivatives market.

To learn more about finance and investing, please visit the Sharpe Investing blog.

Matt Golberg is a finance major and attending a well regarded business school.

I’m going to take the time to share with you some forex currency trading beginner tactics that I’ve developed over the last few years. This is a big global market with over three trillion dollars a day being moved around. Just getting a tiny slice of that pie would be enough for you to retire on. This is what attracts a lot of traders to this market. The problem with that assumption is that it doesn’t take into the fact that you need to be smart. You just can’t join in and get rich quick. People have lost a lot of money in this market because they didn’t know what they were doing. I’m going to share a little of what I’ve learned during my time.

I think one of the most important things you have to understand is how you will sabotage yourself. What I’m talking about is your emotions. They have this way of making you reject logic and reason, for a feeling. Obviously this isn’t a smart move and always has bad consequence in the long term. If you’re someone that gets gut feelings, or stresses out easily, you need to learn to control it. If these feelings start to influence trades, you’ve just turned this from a business into gambling.

Another important forex currency trading beginner tactic is having the right tools to get the job done. A lot of people try to avoid getting trading software because they want to “do it themselves”. There’s just too much information to take in this market to do it completely on your own. It’s open 24hrs a day, so eventually you’ll have to sleep and you need software to watch over the market and your trades.

The Secret Forex Code is a great place to start. Not only does it give you a complete course on how to profitably trade, it comes will all the tools you will need, including trading software.

Learn more at the Secret Forex Code Review.