Forex vs. Commodity Markets – Good Trading Systems Handle Both (3/3)

If your forex trading system is capable of being used in commodity or other instrument trading then you can make a good use of the very same strategy with a completely different instrument.

Another example – proving the interchangeability of trading systems between different products –  which is much closer to the technical trend analysts is the principle of pattern trading. Triangles, double tops, wedges, head-and-shoulders and so an can be formed in the chart of any instruments and a break out from these patterns signal entry points for a bunch of technical traders. I would like to emphasize here that this logic is likely to make more sense for the shorter-term trades. Although, If your forex trading system is capable of being used in commodity or other instrument trading then you can make a good use of the very same strategy with a completely different instrument.

The idea behind the Stealth Forex Trading System is exactly what I have just mentioned. The system focuses on the different technical trade set-up and give a razor sharp entry point for the trade. Your chose graph may belong to the EURUSD, to USDJPY, to gold, silver, copper or oil the price of this instrument is likely to move in the direction what was triggered by a given technical sign.

This is what I like about technical analysis. It is almost completely independent of the instrument behind; a good forex trading system is all about trends, reversal patterns and break out’s. If you stick to this logic and spice it up with a bit of guidelines from money management strategies and add some mathematical calculations to it than you will surely increase your chances to make profit at the end of the day.

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Forex vs. Commodity Markets – Good Trading Systems Handle Both (1/3)

There is an ever growing need for a good forex trading system that is completely based on the weaponry and tools of the technical trend analysis. And if it is so, then what makes a difference for those who want to trade gold or want to trade the EUR/USD with this underlying forex trading system.

The cold fact is that even though the wheels of fundamental analysis roll in a completely different way in case of commodity trading an in case of the forex market but if you take a closer look at both of them from a technical point of view then you will clearly see that pretty much the same principles apply and predominate.

Moreover, what you see as a high potential entry sign on the chart of any currency pair may indicate you  the very same action on the graph of silver, oil, corn or copper. Try to imagine what the technical analysts may search for on a graph and tend to implement it into your very own forex trading system. If you can manege to soft tune your own forex strategy to the different markets than you can have a weapon to shoot at all the markets and if you do a good job than it will prove to be working for you in the forex market and in the commodity market as well. I can even tell you a more exciting fact though. It will also work for the stock market and the the market of national bonds also because it is exactly the same technical set-up’s that will drive the price movements.

Anyways, if you believe that technical analysis is the key to your financial goals and the most important motive for you to become a successful trader then go to google and dig for a appealing forex trading system which will meet your requirements and which can be tuned in a way that the same logic would apply to multiple instruments.

Keep in mind that the different markets are like different rooms in a big club where DJ’s play different music in the different halls. People are dancing in all of the rooms pretty much the same way (this is the technical analysis) but they are still a little bit distinctive from each other (that is your self-tuned strategy). You have to find a proper combination of the two but a good forex trading system is very likely to be capable of handling this matter.

Now all you have to do is to find the strategy that will serve this purpose but this will be the topic of my upcoming post soon. Until then, please take a minute or two and write a comment if you have experience with trading systems that you used for multiple instruments!

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Competition of Forex Trading Systems (and the Truth Behind Them) (3/4)

So the question any more is not if brokers make profit from forex trading competitions or not.

The correct question is as follows: What do they make their profit from and how do they turn the information piles into real money at the end of the contest?
Naturally, nothing is as simple as it seems to be for the first sight. And no one knows it better than us, who have likely tried out dozens of forex trading systems already. Anyways, that is quite obvious that after the trading rally gets over the sales representatives of the company start calling and emailing and contacting the competing traders in every single possible way. They must be doing it quickly because in case the service provided throughout the trading competition was of quality then traders may decide to switch broker and transfer their funds to the new firm that they have just had a good impression with. Most of the traders make their decisions about  choosing the broker based on emotional reasoning.
The sales team probably cannot succeed with every single trader who took part in the contest of the forex trading systems and the sales cannot manage to turn every single contestor into company clients. And let’s be honest here: It is a 100 percent sure that best offers will also be declined due to a great variety of reasons but brokers will naturally not accept refusal immediately. They will go after the clients and so the marketing campaign takes off with news letters, special offers, discounts, educational material and so on. They will leave need no stone unturned to pull in new clients.
Okay, so is customer acquisition the major drive for brokerage firms to hold forex trading competitions? And my answer is still NO although, this is, indeed, a great opportunity for the broker to increase the number of its clientele. Although, in this case the question arises: What else on Earth would motivate a brokerage firm to organize these competitions for forex trading systems? I will reveal the real facts in the closing part of my series of posts.

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Forex vs. Commodity Markets

How can any forex trading systems be effective with completely different instruments? The answer to this question is more simple than you would ever imagine.

We all learnt from the first part of this article that forex trading systems can be tuned in such a way that they will be capable of handling the expectations of the different types of instruments out there in the market. Although, this approach can only make sense to those traders who follow the principles of the technical trend analysis and may not make any sense for those traders who believe in the justification of the fundamental analysis. I consider myself a more-technical type of person and understand what this way of thinking suggests.

But how can any forex trading systems be effective with completely different instruments? The answer to this question is more simple than you would ever imagine. One common rule applies in the world of technical analysis which is the idea of the ‘self-fulfilling prophecy’, which is nothing else but pure psychology. That is right, a great deal of psychology lays behind the price movements so does behind commodity and forex trading strategies. The more traders await for a certain reaction from the markets to come then the more of them would like to be in that certain wave of price movement when it actually occurs. But while the masses of traders open their positions and get ready for the wave they will influence the prevailing price and shift it in towards the desired direction.

This latter idea derives from a basic concept of economics. If the majority of the traders assume that the price of any currency pair or stock or bond or commodity is lower than it should be then they see this case as a potential opportunity to make money. They believe that market will effectively price the underlying security so they start purchasing it as soon as they spot the price gap. This is one reason – but not the main reason – to have a forex trading system. Although, when the number of buyers increase compared to the number of sellers in the market – it happens when demand is greater the supply – then prices tend to rise to generate equilibrium between the two trading parties. It goes on until the buyers pull back and let the prices flow in the direction of weakest resistance. This example shows us that the market reacts to certain occurrences in pretty much the same way irrespectively what this instrument really is.

I will present you another example proving that good trading systems are completely interchangeable between a wide range of products in my next post.



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Forex Option Trading

When most people think of trading currency they think of trading forex spots or currency pairs traded directly on the market. Not many people trade forex options, but they can actually be a very good method of either hedging your investment or outright speculating in them. An options is what the name implies: An option to buy or sell something at an agreed price sometime in the future. Now, you may think that sounds a lot like ‘futures’? That’s true, but not quite. An option is only that, the OPTION, to buy or sell something, while a future is a contract to do so, you must either buy or sell with a future. So with that out of the way, let’s look at options a little more closely and how you can make money from forex option trading.

Options are usually most discussed when talking about stocks and bonds, mostly stocks. I am sure you have heard of CEO’s and executives being given stock options, but ordinary traders also use stock options either on behalf of their companies or for themselves. Currency options are many times used by companies who do business abroad to hedge, or insure, themselves against currency risk. By having forex options they can offset some of the loss that a currency rate swings would mean. Options are essentially meant for this purpose, as a type of insurance used to deal with swings in the financial markets. Every portfolio of some size has options in it. But how can you use forex options to speculate and should you?

It’s not hard to trade options at all. There’s two types of options in general: Call and Put options or Buy and Sell. Call options are options to buy and Put options are options to sell.

Besides that there’s two sides of the Options market, the writers of options and the buyers of options. Remember that I told you how options where just options? That’s true if you’re a buyer of options. If you’re a writer on the other hand, then you must either buy or sell something if the buyer of the option wants too. This means that writers of options are usually only banks and big corporations.

Back to forex options. Forex option trading means trading long term. You buy an option to either sell or buy a currency in the future. Just like with futures you make money if the currency pair is worth more than what you agreed to (Call option) or less than what you agreed too (Put option). Or you can make money by selling your option before it expires. Option pricing is another much more difficult topic that we won’t go into here though!

Option trading may be for you,if you don’t want to spend every waking hour on the computer and prefer to think and trade longterm or you just want to hedge some other investments. If you’re looking for a more active type of trading, forex spots are probably more for you.

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Trading on the News

Trading in foreign currencies is never an easy occupation.  The market is enormous, as is the stature and financial capacity of most major participants.  For a single retail trader to assimilate every bit of news and financial data and out-guess the “Big Boys” is often an effort in futility.  The exercise becomes more one of managing risks and searching for a strong trend to latch onto for an extended period of time.  Losses are inevitable, but if controlled, then one good trend can offset several losing trades and offer potential profits and the opportunity to utter that favored phrase, “The trend is my friend!”
One learns quickly that major news releases can be a “double-edged sword”.  If you are unaware of a pending major economic release, the subsequent volatility can wreck the most well-intentioned trading strategy.  Fundamental data releases from government agencies around the world influence stock, commodity, and currency markets daily.
However, the forex market tends to react more severely to these releases since the relative value, i.e., exchange rate, of a given currency pair is determined by the global consensus of traders’ evaluation of economic variables.  Typically, the forex market stalls before a major release, then an initial “head fake” ensues while analysts assimilate the data to form an opinion, and once an opinion is formed, the market moves quickly in one direction.  The resulting trend can last for hours, even days in some cases.
Employment data appears to be the largest market mover in this category.  The release of Non-Farm payroll data on the first Friday of every month by the U.S. Department of labor is a much-anticipated event.  The chart below is indicative of the unfolding events:

The market reaction of the “GBP/USD” currency pair is depicted for this previous Friday’s release, the first such release in 2011.  The data is generally released on the first Friday of every month at 8:30 EST, or 13:30 Greenwich Mean Time, GMT, as per the chart above.  As one follows the timeline from the left, the market anticipated good results in the data that would strengthen the Dollar, the “head fake” so to speak.  After recovering during the “assimilation period”, the market reacted in the opposite direction, a 120-pip move, as the employment data was not as strong as the market had believed that it would be.
“Trading on the news” is the moniker given to this short-term trading strategy.  It is often said that it is not for the faint of heart because market movements can be radical with many “head fakes” to deal with before the solid trend takes over.  The shear volume of trading orders also becomes problematic, often inundating the servers and switchboards of forex brokers, such that order execution becomes paramount and the responsibility for executing stop-loss orders is often exempted by your broker agreement.
For those traders that feel worthy of the task, it is highly recommended that you practice several times with your forex trading demo account before venturing into these volatile trading waters.  It is not necessary that you perfectly time the market or guess which direction will be the most likely to occur.  The objective is to grab onto the trend once it has formed which typically takes about forty-five minutes from the release point.
The British Pound pair is generally accredited with the most potential for movement.  In this case, the 120-pip move would have generated a 70 basis point return.  The comparable returns for the EUR, JPY or AUD were in the 55 to 60 basis point range.

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Currency trading strategy

In this article we look at the different types of currency trading strategies and systems the forex trader can choose from before commencing their FX trading journey.

The Best Currency Trading System

There are many many different currency trading systems out there for sale, some even claim to be the best currency trading strategy ever! Unfortunately, these systems sold online rarely (if ever) live up to this bold claim. And the reality is, if these forex strategies were really any good, it is unlikely they would be for sale. The owner of the system would be using it to make money currency trading, instead of spending his time and possibly money marketing the strategy.

Carry Trade Strategy

The carry trade is an extremely popular trade in the FX Market. It is made possible by the fact that different countries have a different benchmark interest rate. At the time of writing this article, Japan’s benchmark interest rate was just 0.5%, whilst the benchmark rate for New Zealand was 8.25%. Interest rates fluctuate based on economic conditions. It is USUALLY the case when one benchmark rate is on an upward trend and another country’s benchmark rate is on a downward trend, the currency on the upward trend will appreciate against the currency that is on the downward trend. This is not a guarantee, but it is a common occurrence. Each time you buy a currency pair that has a positive interest rate differential, you will receive a credit each day for the interest rate differential. However, the reverse is true if the pair you are trading has a negative interest rate differential. For example, a long NZD/JPY position would receive a credit each day (also known as the swap) whilst a short NZD/JPY position would have to pay the negative interest daily.

Trend Trading System

As the name suggests, trend trading systems attempt to capture trends. Some forex pairs trend very well indeed in the long term. On that really springs to mind is EUR/USD. It has been in a long upward trend for many years, with few significant retracement, making many record highs along the way. In the forex market the trend really is your friend. Never open a long term position against the long term trend.

Forex Scalping Strategy

A Forex scalping strategy aims to profit from very small price movements. Scalping positions are usually opened and closed within a short time frame. It’s important to choose a broker with as low a spread as possible for when scalping to minimize the number of spreads the trader has to pay.

Forex News Strategy

There are many news trading systems out there. Many people attempt to trade the initial news spike after a data release. Price can move one direction very quickly seconds after a new release, leaving a good opportunity to trade. The move is often bigger if there is a surprise in the numbers. I remember a shock interest rate hike by the bank of england in January 2007. The pair GBP/USD rose around 150 in less than a minute!
If you want to trade news spikes it is important to have a very fast news feed that can get the numbers to you as quickly as possible, before the market moves. An example of a budget news feed is Tradethenews. Bloomberg and Reuters both offer professional news feed, they are not cheap though.
It also important to have a broker that has very fast execution around the news releases. Many retail forex brokers do not like news traders, so it is important to find a broker that best suits your needs. Due to the high volatility around the news releases execution on a live account is often very different to that of a demo account.

Automatic Forex System Trading

The idea of an automatic trading system that makes you lots of money and requires minimal maintenance is appealing to many for obvious reasons. The most common form of automated forex trading is the use of the platform Metatrader4. This allows the trader to create a piece of software that will trade according to a specified set of rules. Unfortunately, most of these systems do not stand the test of time. Some may do well in the short term, but very few indeed earn money long term. There are many of these automated currency trading systems for sale, often with a big price tag. Generally it is best to stay clear of these. The same line of thinking as mentioned above applies, if the strategy was making money, why would they be selling it?

Conclusion

In conclusion, the best online currency trading system is the one that suits you best. Many new traders have a day job and are unable to spend several hours a day trading, so some strategies may be unsuitable. For example, if your FX trading strategy was to profit from carry trades in the long term. You could just open a position and leave it alone. However, if you wanted to scalp the forex market, this would probably require a much bigger time commitment. Of course, you can use many different strategies to try and spread your risk out as well.

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Scalping strategi

Forex scalping is a trading technique that involves opening an FX position and closing it within a short space of time with the intention of speculating that price will move slightly in favour of your position before closing it, for a small profit.
Typically, forex scalpers make a very large number of trades and it is not uncommon for a scalping trader to make well in excess of 100 trades in a week.
Most traders who attempt to scalp the forex market fail rather miserably. This is because for the inexperienced scalper the odds are set well against them. I will demonstrate why this is below:
Let’s say a scalper wants to earn 10 pips by speculating that the price of GBP/USD (Cable) will move from 1.9990 to 2.00. Typically, with most retail the brokers the spread for this pair is 3 or 4 pips. In this example we will use 4 pips. We will also use a 10 pip stop loss.
If the scalper is correct and price hits 2 before the stop loss, he will earn the 10 pips minus the spread of 4 pips, a net gain of 6 pips.
However, if the stop gets hit, the scalper loses 10 pips plus spread, which nets -14 pips.
So in this instance, the winning trade made 6 pips net profit and the losing trade made a 14 pip loss. OUCH!
With this example the trader would need to win 70% of his traders to just break even!
The spread you trade with can massively affect the outcome with FX Scalping. In this above example, if the spread was 2 pips instead of 4 pips, the trader would only need to win around 60% of their trades to break even. A big difference.

Forex Broker for Scalping

There are many FX brokers out there nowadays, but many of them are unsuitable for scalping. Some brokers do not like their clients to scalp the forex market, whilst others have too wide a spread for it to be profitable. One broker that does not seem to have any objections to scalping is Oanda and their spreads about the lowest around. Some ECN Brokers may be suited for currency scalping, for example mbtrading.com. ECN brokers often have lower spreads, sometimes much lower, but there is often a commission fee to pay for each trade.

Scalping Forex Strategy

There are many forex scalping techniques used when scalping the forex market. Some rely on indicators whilst others rely on support and resistance. One simple scalping strategy I have tried personally is marking major support and resistance points on my chart and putting a limit order at them and try to catch a few pips on the bounce. It’s important not to be greedy with this strategy and just get a quick scalp.

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Free Forex Strategies and Systems

In this section I have tried to put together a group of FX Trading Strategies for you to try. Most of these free forex trading systems can be used on any size of trading account including micro, mini and standard.

Proven Forex Trading Strategies

They have been tried either by myself or by my trading friends and they have shown to be winning forex strategies. However, as with any forex trading strategy, excellent risk management must be used at all times.

Choosing a Forex strategy

When choosing a currency trading strategy , it is important to select one that best suits your needs. It would be no use using a strategy that required you to watch the market during the whole of the London session if you had a day job. The strategies below are all easy forex strategies to follow. You can of course modify them if you feel you can improve on them.

Forex Scalping System

This is an easy little strategy to follow. It involves pinpointing major support and resistance point. You can use fibonacci retracements for these. Then when price hits a major support point, go long. Whenever it hits a major resistance point, go short. Tight stops must be used as well as small take profits. This allows the trader to capitalize on the bounce. There is usually at least a small bounce at major support and resistance points. It would be a good a idea to use a broker with a small spread for this strategy so the spreads don’t eat into your profits too much. This is a good forex strategy with a lot of potential, but be sure to try it on a demo account first.

Forex Hedging Strategy

A popular FX hedging strategy is to buy GBP/JPY and to simultaneously sell CHF/JPY. The goal is to profit from the interest rate differentials as well as the price movements. Currently a long GBP/JPY earns considerable swap interest due to the large difference between rates. You have to pay interest on the short CHF/JPY, but it’s considerably less than on the long GBP/JPY position. Typically a good ratio to use is 1.8 lots for the short CHF/JPY to every 1 lot of GBP/JPY. However, different amounts can be used.
It’s a good idea to leave enough margin in your account to weather at least a 1,000 pip swing against you.
This strategy does involve considerable risk because the currency pair CHF/JPY is not guaranteed to go in the opposite direction to GBP/JPY. However, it could be a lower risk method of taking part in the popular carry trade. This is potentially a very effective forex trading strategy.

Forex Arbitrage System

A clear arbitrage exists between mainstream currency trading brokers and spread betting forex brokers. The arbitrage situation exists because with spread betting you have the option to have your pips priced in different currencies. For example you could have a long gbp/usd position so that the pips are priced at £5 per point. To hedge we could use a short GBP/USD position with a normal forex broker, using 1 standard lot.


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Forex Trading Charts

Forex trading charts are an invaluable tool used by forex traders. The first thing you are going to notice when you fire up your trading platform will be those flashing numbers and graphs. These graphs are the bread and butter of forex trading. They will show you everything you need to know and with a little practice, you will be able to read and trade on them. In the beginning you will probably feel a bit overwhelmed by all the options and settings, but give it a few weeks and you will be reading ‘candlesticks’ and trend lines, like you have done nothing else your entire life. This article will look at some of the most commonly used signals on forex trading charts.

• Simple Moving Average

The simple moving average is often the first signal that forex traders learn. It’s a line running trough your graph showing you the running average for each time period. The moving average shows you the average price over a period of time. It’s different from a simple average in that the simple average will only return one number out of for example a set of 30, but the moving average will show you 30 averages from a set of 30 prices. This shows you the general trend over time and can be used to determine if you should buy or sell. If the price of a currency is above the moving average, then it may be a good time to sell and on the other hand, if the price is below the moving average, then you should consider buying.

• Bollinger Bands

Next signal on our list is the Bollinger Bands. This technical indicator shows you two lines that show you both the liquidity and volatility in the market. They are similar to support and resistance level lines. If the two lines are set far apart, it implies that there is a lot of action in the market, buying and selling. If they are close, then it means that the market is quite. After a quiet period, it often happens that the market moves in one direction forcefully. You can therefore use the Bollinger Bands in combination with other signals to look for these opportunities.

• Stochastics

Stochastics show if the market is overpriced or underpriced by using a statistical measure. It involves using the simple or exponential moving average to test for these assumptions. Stochastics are good buy/sell signals.

• Parabolic Stop And Reversal

Also known as SAR, this is an indicator that can be used to determine if the trend has topped or bottomed out. This indicator can be used with other indicators to make sure you enter the market at the bottom and sell on the top or the other way around if you have a short position.
These are only some of many indicators, but they will go along way to helping you max out your profits and they are easy to learn and simple to spot on the charts.


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Foreign Exchange Rates

Foreign exchange rates are the ratio between two different currencies and are used to calculate the relative value between them. Everyone has come into contact with foreign exchange rates at some point in their lives. If it was changing money for a family vacation, buying something online from abroad or actually trading forex for profit. Big banks, governments and corporations use foreign exchange rates the most to do business. Governments keep currency reserves to preserve the value of their own currency trough central banks and corporations and banks either trade for profit or to hedge against currency risks. Foreign exchange rates are determined on what is known as the Interbank market, which is not an actual physical market, but rather a make-shift fictive market that comes into play every time someone wants to change one currency for another. Foreign exchange rates tell us how much of one currency we will need to buy one unit of another currency. So, if the exchange rate between USD/EUR (Dollar and Euro) is 1.3 then that means you will need 1.3 Dollars in order to buy 1 Euro. The foreign exchange market is subject to the same laws of demand and supply as all other markets.

Foreign exchange rates are delivered by large data centers and then sent out to banks, traders and brokers. As a forex trader you will usually receive your price data from either the platforms data feed or from the broker themselves. A forex broker is the link between the Interbank market and the individual traders. Before the internet really took of, there was no real way for private individuals to trade forex. You would have to have a currency account with a bank and have them trade for you. Today there are more than 100 brokers online who can connect you to the internet and you can trade from the comfort of your own home.

Foreign exchange rates are also the actual price of a currency as no currency can have a price by itself, it must always be measured against something else. You make money in forex trading by selling one currency to buy another and hoping that the one you bought appreciates in value. That way you will be able to buy back more of the first currency and make a profit. The thing that makes forex trading so unique is the ability to leverage your investments. Leverage means gearing your trades with money that you ‘borrow’ in the market. The interest paid is called Margin and must be met. With a normal forex account you can leverage your trades by more than 100 times the money you actually have in your account. This means that if you deposit $3000, then you can actually trade for $300,000. It’s not difficult to see how this can be explosive. You can make a lot of money from leveraging your trades in forex, but you must also be careful not to exceed your margin limits. It’s always good to start out with a smaller amount first and then work your way up.

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Fibonacci Forex Trading

Fibonacci forex trading is one of the most used mathematical tools used by forex traders and the background for most trend line and support line calculations. This famous sequence of numbers literally brings in billions of dollars for traders every year. Some of you may have heard about Fibonacci numbers briefly in high school or university, but your teacher most likely didn’t tell you that these numbers could end up making you lots of money. Chances are, if your teacher had known, he or she wouldn’t be stuck teaching anymore!

Fibonacci numbers are named after the famous Italian mathematician by the last name of Fibonacci. Fibonacci discovered that there was a sequence of numbers that seemed to be favored and included in everything in nature. You may have heard of the Golden Ratio in art. This ratio of a rectangle has been used by artists for thousands of years because it is aesthetically pleasing to humans. The thing is, not only is the Golden Ratio prevalent in nature as well, it’s also directly linked to the Fibonacci number sequence.

Let’s look at what makes up the Fibonacci sequence. Start by taking the number 1 then add the number with itself, 1+1=2. Then add the resulting number with the number before it: 1+2=3, 2+3=5,5+3=8 which gives the sequence: 1,1,2,3,5,8,13,21,44,65 and so on. This ratio of numbers can be drawn as a set of squares which if added together make up the Golden Ratio. However interesting this may be it’s not what we will use Fibonacci numbers for.

Instead, consider that the ratio of a number divided by the number next to it in the sequence is always either .382 or .618 depending on if you go left or right in the sequence. Fibonacci number ratios are used in forex trading very often to predict trend lines and support and resistance levels. Why is this? Nature and man seems to favor these ratios on an unconscious level, so whenever the ratios are present, something seems to happen. This makes being aware of these lines even more important.

Another factor is the psychological factor. Because forex traders understand this concept of preference for Fibonacci numbers, they themselves influence the market by indirectly making it a self fulfilling prophecy. So the benefits of using Fibonacci become greater and if you’re not using Fibonacci, you will miss out.

Fibonacci numbers may seem confusing and complicated which they are. After all, it took many thousand years for people to discover the link between them and their meaning. Don’t worry to much though. No one today really calculates these ratios manually. This is all something that decent charting software should be able to do with the click of a mouse. It never hurts to understand the theory behind the practice, so if you are interested in this unique sequence of numbers you can read more on many other websites. Otherwise, just rest assured that you are likely to benefit from them in some way.

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Currency Trading Basics

In this text we will look at the basics of currency trading. Currency trading or forex trading may seem complicated at first glance, but the currency trading basics are not that difficult to understand. Currency trading is simply the act of exchanging one currency for another on the currency market. Every time a family changes money to go on vacation or a company makes a foreign purchase, a transaction on the forex market is carried out. The currency market exists only when a transaction is made. Unlike other financial markets such as the stock or bond market, there is no forex exchange and neither any regulating body. The market that is commonly referred to as the currency market is the banks internal market called the Interbank market. Because of this, it has traditionally been difficult to trade forex for money, but this all changed when the internet brought unlimited possibilities to connect traders to the exciting world of forex trading.

Currency Trading Basics

Let’s look at how currencies are traded. All currencies have a floating price, as you can’t trade a currency by itself, you must always either buy or sell another currency as well. This is why currencies are traded in pairs of two currencies such as the USD/JPY or USD/EUR. There are many currencies in the world, but only a few are traded and used globally. For forex traders, these are the main currency pairs of interest as they hold the largest liquidity and the biggest opportunity for profit. The major currency pairs are:

USD/EUR, USD/JPY, GBP/USD, USD/CHF, EUR/CHF

These pairs put together account for more than 85% of all forex transactions, so it is very reasonable to focus on one or more of them as a forex trader. There are of course also less traded pairs called ‘exotic pairs’ and while they are a lot less liquid, they do hold opportunity for profit if you know what you’re doing.

When a forex trade is carried out, two things happen: One currency is bough and one is sold. If you believe that one currency will appreciate in value, for example the USD, then you buy that currency with another currency, this could be EUR. If the USD then goes up in value against the EUR, you can change your USD back into EUR and get more EUR than you initially had. This is how profits are made. Let’s assume you bought 10 USD for 10 EUR, not the real rate but used to keep things simple. What has happened is that you have sold EUR and bought USD. If the relative worth of USD increases to 15 EUR. You can then sell your USD and buy EUR back and since you only paid 10 EUR to begin with, you have now made a profit of 5 EUR. This mechanism becomes extra powerful when you combine it with leverage, which is gearing your investments with loaned money. In forex, it’s common to leverage your trades up 100 times. That means you can trade for $100,000 with only a $1000 deposit. This unique option for leverage is a huge reason for the popularity of forex trading.

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How to Become a Forex Trader?

Forex trading is full of promises, but also pitfalls and perils. Being a successful forex trader is the dream of countless beginners, yet those who achieve this goal are not very numerous. Many are tempted to think that the low success rate of retail traders in comparison to the supposedly better returns of hedge funds and institutional investors is caused by the lack of access to special tools and secret trading methods. But this is not true. Instead, large and successful investors always plan everything in advance, carefully determine their purposes, consider the risk and reward potential of every scenario before acting on them. It will take the beginner some time before he has acquired the discipline and the mental attitude necessary for successful trading; on the other hand, with commitment and determination, it is not exceptionally difficult to get rich in trading forex.

Establish your goals

Obviously, the first step of planning your destiny in forex trading must involve the planning of your goals. What is your purpose in beginning a career in trading? Do you seek a small income boost that will be a small hobby for you? Or do you just seek the thrill of taking part in a risky activity? If these are your aims, obviously you shouldn’t risk much, and must not get carried away by occasional sizable profits that will come your way, even though you don’t quite know what you’re doing. If you seek a sizable extra profits to supplement your full-time job, and do not plan or want to turn forex into your main source of income, you can afford to risk a bit more than the thrill-seeking gambler discussed above, but you must still make sure that you do not have great expectations from your trading activity. In the absence of training and commitment, achieving great returns in forex is similar to winning the lottery: possible, but not very likely. Finally, if you want to achieve financial independence through currency trading, if you seek to make a lot of money in this lucrative business, and don’t mind taking the time to learn the ropes, and study your lessons, you can set the bar high. In this case, you must adjust your life, your daily schedule, and your activity plans in accordance with your newly decided career as an independent trader.

Choose a broker

Once you have decided on what you want from trading, and have a clear plan and schedule for the future, it’s time to decide on which broker you want to open an account with. This is the most crucial stage of this entire process, as the choice that you make now may well determine the lifespan and profitability of your trading job. Even if you have an excellent background perfectly suited to currency trading, and you possess the tools and faculties necessary for creating excellent strategies, if your broker is a crook, or if he is inefficient and incompetent, it is almost impossible that you will derive any quick benefit at all from learning forex, and investing your energies in trading, and the dangers are obvious. So make sure that you choose the right broker for your level of knowledge, risk tolerance, and expectations from currency trading. If you invest enough time to this stage of your debut in the forex market, you will be building your palace on a foundation of granite.

Open an account

After deciding on the broker, go and open a demo account. Play with the various features of the software. Do everything you can in a risk-free environment to gain a good understanding of the platform. Do not consider anything extreme, create difficult and unexpected strategies and scenarios and test them in your demo account to see what you can expect in the forex market. Make sure to try high leverage too. Seeing your account wiped out in demo trading may be unnerving, but it is surely nothing in comparison to the pain of seeing actual savings evaporate as a result of faulty choices.

Once you’re confident that you have a good grasp of demo trading and the trading platform, it is time to move to the next stage of your career with a live account.

Practice and study

To become a real forex trader, you must get a real education. The educational process involves hard work, patience, study, and lots of practice. You don’t need a teacher to gain a good understanding of trading, but it is of course necessary that you devote a considerable amount of time to comprehending what drives the price action, how the markets move, and how you can create the big picture. Without these components, you’ll be like a fish in the mud: however hard you struggle, your efforts are futile and fruitless. Indeed, in today’s world study and education are key to success in every field, and it is only fitting that trading requires the same kind of investment in time and energy.

We have described these steps to give you an idea of the journey that awaits you as you perfect your skills and reach greater levels of proficiency in the markets. While it is not that hard to become a forex trader, becoming a great trader requires considerable investments, just as with any other activity. Acquiring this mentality, and approaching the problems and difficulties of trading with a rational and logical approach is the key to success in the long run. The good news is that once you acquire the right attitude, profits and success are quick to come, and pleasant surprises are plentiful too.

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Peter Bain – Forex Mentor Review

Everyone can use a helping hand once in a while and it’s certainly no different in Forex trading. Before we can begin to make big profits and trade with thousands of dollars, we must first learn the basics and advanced tactic’s and strategy that we will use.

That is where a forex trading course like Peter Bains Forex Mentor is relevant. In my experience the number one stumbling block that most new traders face is the sometimes very steep learning curve in forex trading, and it is often the reason for why many choose to give up before they even really get going. There is just so much information and things you must learn, that it can seem overwhelming. And how can you even know which forex course is right for you? Sure, they all promise the world, but how many actually deliver?

I struggled with these questions, just like everyone else, when I started out. I am also a skeptical person by nature, so I find it hard to commit my time and money to anything without proof that it works.

Luckily, I stumbled across a great guy with a great course, and I want to share that course with you in this review. It already has tons of positive reviews, so I thought I would just add my personal experience.

Peter Bains Forex Mentor Course is one of the most respected and sought after courses on the market, not least because of the man behind it all, Peter Bain. Have you ever read about this or that guy on the net who is supposed to be a forex ‘guru’, but when you actually check up on him, there is not much information available? Well, Peter Bain is not that kind of web ‘guru’. He is a real life forex authority that does live seminars across the globe and they sell out fast. I am sure you can check his schedule somewhere.

Let’s take a look at the actual Forex Mentor Course. First of all, this program is very comprehensive and full of information, yet not to a degree where you need to have a PHD in math to understand. He has also included direct pivot analysis feedback that you will get directly from him on your trades. Send him your failed or successful trades and he will get back to you with his take and encourage you to learn from them. It is really like having a real life forex mentor looking over your shoulder.

This is what you get in the program:

1. 250 Page Interactive Forex Technical Manual
2. 20+ Interactive Video Tutorials
3. 100 Page Forex Core Principles Manual
4. 2 Exclusive DVDs Containing Over 3 Hours of Live Instruction
5. 6 Months Unlimited Access to Peters VIP Members Area
6. 3 Amazing Bonuses Worth Over $450!
7. 30 Day Money Back Guarantee

All in all, I think you will agree this is very good value for money. But put all that aside for a moment. Can I say it worked for me? Have I become a forex millionaire? Was it easy money?

Well, first of all, let me say, nothing worthwhile is easy in this world. Personally I wouldn’t say it was easy, it took some work and some dedication, but frankly if you don’t have that, I don’t think forex is worth it.

I made an initial deposit of $2,500 to test this system and within the first month I had actually managed to turn that into $4,766! Making more than $2,000 in profit in only one month was almost unreal for me, seeing as I have never made more than $1,000 before.

I am not going to go out and say that it will be that easy for everyone, because I did go into this with an open mind and I did follow the instructions to the point, If you are willing to do that, I suspect you will have success.

This is what I did:

• I read trough ALL of the course material, both on the website and on the DVD’s
• I papertraded using the software on one of Peter’s CD’s. You will be asked to analyze a graph of the London Open and you are asked to write down your take and what you make of it.
• I did watch the AM Reviews for more than a week before trading.
• I asked Peter’s advice on my bad trades. This is a great service he is offering to his clients. He got back to me within 48 hours each time. This is one of the real money making secrets in this program. Having Peter himself actually go over your trades is invaluable!
• I watched and traded during London Open and only that. I think this was very important! If you are willing to buckle up and trade during those hours and using Peter’s system I am confident you will find success. Some guys who complain never even follow the rules set forth! You have to commit to doing this the right way!

My conclusion? I would feel very comfortable to recommend this course! Peter Bains Forex Mentor Course is a sound investment in your future as a trader and I believe it is indeed very profitable if you TAKE ACTION and follow the instructions! You can’t just do parts of this program, you will have to commit 100%! If you do, I believe you will make money in the first month!

Peter Bain’s Video Forex Course demonstrates simple yet powerful pivot currency trading systems used by professional traders.

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Spot Forex Trading

There are several options available for the trader who wants to trade forex instruments. You have options, futures and not least forex spots which are the most popular type of forex instrument traded. They each hold their own unique advantages and negatives. The difference between them may not seem that big for the inexperienced trader, but it’s definitely there and the way your earn profits is also different. In this article we will look at how spot forex trading stands apart from particularly forex futures as these can easily be confused.
Let’s look at futures first. Futures where originally developed as financial instruments that commodity suppliers and producers could use to fix their prices ahead of delivery. A company that uses oil in production could fix their prices at a low point and save some money. A supplier could also fix the price to guarantee his income. A future is a contract obligating the buyer and seller of the underlying asset to buy and sell at an agreed price at a future time. So the deal is made at the point of the sale/buy of the future, but the actual exchange of the asset takes place in the future.

A spot on the other hand is a trade that is carried out when two parties agree to buy and sell. Theoretically a buyer and seller put their orders out on the market and waits for someone to agree to pick it up, but in reality all forex spot trades are filled instantly because the market is so liquid. This is of course an advantage of the forex market, which is 50 times larger than the stock market and 15 times larger than the bond market. To recap, forex futures are contracts that obligate two parties to buy or sell at some agreed time in the future. Forex spots are trades between a buyer and a seller and are carried out instantly.

Before the internet revolutionized forex trading, spots were the domain of big banks and corporations only, which needed quick access to foreign currency to carry out a trade or investments. Today, spot trading is done instantly such as when you go to a money changer and changes one currency into another. The spot market is now huge and growing by the day.

Spot trading holds some other measurable advantages over futures trading. As you may know, all futures are regulated and traded on the Commodity and Futures Exchange which is regulated by the National Futures Association. The NFA takes a fee for carrying out the trades. Spots are not regulated as they are traded on the interbank market, which is non-regulated.

Spots are also available at lower lot sizes than futures, particularly if traded trough an mini or micro account.

In conclusion, spot forex trading holds many advantages over futures. Forex spots can be traded on most forex brokers and platforms.

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Forex Trading Articles

The participants of the Forex Market
How to detect Forex Broker Scams
Forex Glossary
Forex Broker Safety
How to profit from a Falling Dollar
How the news moves the Forex Market
The participants of the Forex Market

Historical Data Articles

How to analyse forex price data
Historical Price Data

Backtesting Articles

Forex Backtesting Rules
All about Forex Backtesting

Other Articles

Trading Software
The truth about managed forex accounts
Spreadsheet showing smoothing approaches

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Forex Currency Trading Training

My aim here is to save you some money. You may be tempted to

purchase an expensive currency trading training course. There is no
need, the content at fxtradingguide.com is high quality and is FREE!
We also help you to avoid the scams too.

Forex for Beginners

Why Trade Forex?
Forex Market Overview
Forex Trading Basics
Learning to Trade
What are Trends?
Trading Mindset
Trading Mindset 2
Trading Mindset 3

Forex Trading System Training

Trading System introduction
Build your own forex system
Building a complete System
Price Movements in Trading Systems
Risk Management
Trading Rules

These Forex training tutorials should help you get started with
your fx trading. As mentioned in many of these tutorials, it is strongly
recommended that you begin your trading on a demo account before
going live. Mistakes are inevitable when first starting, all
experienced traders made them at first.

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Is the Chinese Yuan the Most Reliable Forex Trade?

Over the last six years, the appreciation of the Chinese Yuan has been as reliable as a clock. Since 2005, when China tweaked the Yuan-Dollar peg, it has risen by 28%, which works out to 4.5% per year. If you subtract out the two year period from 2008-2010 during which the Yuan was frozen in place, the appreciation has been closer to 7% per year. There is no other currency that I know of whose performance has been so consistently solid, and best of all, risk-free!

As I wrote in an earlier post on the subject, the economic case for further appreciation is actually somewhat flimsy. When you factor in the 5-10% inflation that has eroded the value of the Yuan over the last few years, its appreciation in real terms has more than exceeded the 25-40% that economists and politicians asserted as the margin by which it was undervalued. While prices for many services remain well below western levels, prices for manufactured goods already equal or exceed those that Americans pay. (As a resident of China, I can assure you that this is the case!). Given that Chinese GDP per capita (a proxy for income) is 12 times less than in the US, that means that relative price levels in China are already significantly greater than the US. Thus, further appreciation would only cause further distortion.

Regardless, investors continue to brace for further appreciation, and expectations of 5-6% for the foreseeable future are the norm. Even futures contracts – which typically lag actual appreciation because of their non-deliverable nature – are pricing in higher expectations for appreciation. Perhaps the greatest indication is that 9% of all of the capital pouring into China is so-called “hot-money.” That means that despite the 27% appreciation to date, a substantial portion of investment in China is connected only to the expectation for further Yuan appreciation.

Even though the Yuan is not fully-tradeable, its continued rise has serious implications for forex markets. First of all, there will be follow-on effects for other currencies. Almost every emerging market economy competes directly with China, and all are thus keenly aware that China pegs its currency against the US dollar. By extension, many of these economies feel they have no choice but to intervene daily in forex markets to prevent their respective currencies from appreciating faster than the RMB.

At the very least, the appreciation in Asian and Latin American currencies will keep pace with the Yuan: “This is a long-term secular trend for emerging market currencies especially in Asia. Asian currencies have long been undervalued and they are on a convergence path with the United States and the G7 more broadly and that’s going to lead to an appreciation,” summarized one analyst.

All of this action will cause the dollar to depreciate. The Chinese Yuan alone accounts for 20% of the Federal Reserve Bank’s trade-weighted dollar index, and Asia ex-Japan accounts for another 20%. Regardless of the other G4 currencies perform, that means that a conservative 7% annual appreciation in Asia will drive a minimum 3% annual decline in the trade-weighted value of the dollar. Even worse is that this cause a broad loss of confidence in the dollar, driving the dollar lower across-the board. And this doesn’t even aaccount for the multiplier effect that net exporters will no longer need to indiscriminately accumulate dollar-denominated assets. China, itself, has unloaded part of its massive hoard of US Treasury securities for five consecutive months.

The implications for how long-term investors should position themselves are clear. Unfortunately, while further appreciation in the Chinese Yuan is all but guaranteed, achieving exposure to this appreciation is beyond difficult. Neither of the ETFs that claim to represent the Yuan (CNY, CYB) have budged over the last couple years, and they are a poor substitute for the actual thing. In other words, your only chance for exposure is indirectly via Chinese stocks and bonds, which are far from transparent and an extremely dubious investment. Or you could try opening a Chinese Yuan bank account with the Bank of China (which now has branches in the US), but it’s unclear whether you will be able to capture 100% of gains from the Yuan’s appreciation.

Otherwise, emerging market Asia seems like a pretty good proxy. Of course, you need to be aware that even though the Korean Won, Malaysian Ringgit, Thai Baht, New Taiwan Dollar, Indonesian Rupiah, Philippine Peso, etc. will probably at least match the rise in the Yuan, they are imperfect substitutes for the Yuan, since they are driven more by country-specific factors than by association to China.


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Aussie is Breaking Away from Kiwi

The correlation between the Australian Dollar and New Zealand Dollar is among the strongest that exists between two currencies. Given their regional bond and similar dependence on commodities to drive economic growth, perhaps this is no wonder. Over the last year, however, the Aussie has slowly broken away from the Kiwi. While the correlation between the two remains strong, the emergence of distinct narratives has given rise to a clear chasm, which can be seen in the chart below. Given that the NZD is evidently among the most overvalued currencies in the world, does that mean the same can be said about the AUD?

Alas, geographic proximity aside, the two economies have very little in common. Australia is rich in coal, precious metals and other natural resources , while New Zealand produces and export primarily agricultural products. Granted, the prices for both types of commodities have exploded over the last decade (and especially the last year), but let’s be clear about the distinction. This has enabled both economies to achieve trade surpluses, but oddly current account deficits. Australia’s economy is projected to grow by more than 4% in 2011, compared to 2% in New Zealand. Australia’s benchmark interest rate is also higher, its capital markets are deeper, and the supply of its currency necessarily exceeds that of New Zealand.

Taken at face value, then, it would seem commonsensical that the Aussie should rise both against the Kiwi and the US Dollar. Indeed, it recently touched an all-time high against the latter, and is now firmly entrenched above parity. On a trade-weighted basis, it has been among the world’s best performers over the last two years.

In fact, some are wondering (myself included), whether the Australian Dollar might have risen too much for its own good. According to OECD valuations based on purchasing power parity (ppp), the Aussie is now 38% overvalued against the dollar, behind only the Swiss Franc and Norwegian Krone. In fact, exporters of non-commodity products (i.e. those whose customers are actually price-sensitive) have warned of mounting competitive pressures, declining sales, and inevitable price cuts. In other words, the portion of the Australian economy that doesn’t deal in commodities is actually in quite fragile shape. Given that China’s economy is projected to slow over the next two years and that booming investment in Australia’s mining sector should boost output, the commodity sector of the economy might soon face similar pressures.

For that reason, the Reserve Bank of Australia (RBA) has avoided raising its benchmark interest rate is fast as some analysts had expected, and inflation hawks had hoped. There is a chance for a 25 basis point hike as soon as June – bring the base rate to an even 5% – but the RBA’s own statements indicate that it probably won’t be until June and July. Regardless of when the RBA tightens, Australian interest rate differentials will remain strong for the foreseeable future, and likely continue to attract speculative inflows for as long as risk appetite remains strong.

So why does the Australian dollar continue to rise? It might have something to do with gold. As you can see from the chart above, the correlation between the Aussie and gold prices is almost just as strong as the relationship between the Aussie and the Kiwi. Given that Australia is the world’s second largest gold exporter, it is perhaps unsurprising that investors would see rising gold prices as a reason for buying the Australian dollar. However, it seems equally possible that demand for both is being driven by the pickup in risk appetite. While some gold buyers might counter that gold is best suited for those who are averse to risk (i.e. afraid that the financial system will collapse), the performance of gold over the last five years suggests that in fact the opposite is true. When risk appetite is high, speculators have bought gold and the Australian dollar (among other assets).

It’s unclear whether this will remain the case going forward. The Wall Street Journal recently reported that gold is increasing attracting risk-averse investment, as buyers fret about the eurozone sovereign debt crisis and other threats to the system. However, the same cannot be said about the Australian Dollar. For as long as risk is “on,” demand for the Aussie will remain intact. And if the Aussie Dollar Barometer survey – which found that “exporters expect the Australian dollar to reach a post-float record of $US1.16 by September and to remain above parity well into next year” – is any indication, risk appetite will indeed remain strong for the foreseeable future.

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New Zealand Dollar: Come Back to Earth!

In March, I wondered aloud about whether the New Zealand Dollar might be the most overvalued currency in the world. Since then, it has continued its unlikely ascent, rising 10% on a correlation-weighted basis and 3% against the US Dollar, hitting a 26-year high in the process. While there are signs that the New Zealand economy might be able to withstand an expensive currency, at some point, the chickens must come back to roost.

Surely the expensive kiwi must be wreaking havoc on the New Zealand dollar? “How is New Zealand supposed to rebalance its economy away from consumption, importing, borrowing and asset selling towards investment, production, exporting and asset buying when our currency is headed for record highs?” Wonders one commentator. In fact, exporters are coping just fine, and New Zealand just recorded its highest quarterly trade surplus on record. Never mind that this is due almost entirely to soaring prices for commodities and unflagging demand. In spite of two earthquakes and other related downside factors, the New Zealand economy is nonetheless forecast to grow by 2.3% in 2011.

On the other hand, New Zealand’s current account deficit continues to rise, as foreign investors pour in to New Zealand to make acquisitions, portfolio investment, and loans to the government. New Zealand’s largest dairy conglomerate could soon be sold to Chinese investors, while China’s sovereign wealth fund (which manages a portion of the country’s sprawling forex reserves) has announced plans to purchase a big chunk of New Zealand government debt. This is just as well, since a record 2011 budget deficit will require a significant issuance of new debt.

Meanwhile, New Zealand price inflation is currently 4.5%, which means that the country’s real interest rate is -2%, certainly among the lowest in the world. Moreover, even as two-year inflation expectations tick up, rate hike expectations remain unchanged. The consensus is that the Reserve Bank of New Zealand will avoid hiking its benchmark until the first quarter of 2012. Regardless of what happens in the interim, it seems unlikely that Bank president Alan Bollard will give in, for fear of stoking further speculative interest in a currency that is already “undesirably high.”

Let’s review: record low interest rates and record low real interest rates. Record budget deficit. Large current account deficit. Declining expectations for GDP growth. Record high New Zealand Dollar. Does anyone see a contradiction here? It’s no wonder that the IMF recently speculated that the Kiwi might be overvalued by as much as 20%, echoing the sentiments of yours truly.

At the same time, commentators concede that “The New Zealand dollar or any currency can deviate for a long period of time from academic measures of valuation.” And that is why making fundamental bets on currencies is so difficult. Even if all signs point to down (as is basically the case here), a currency can continue rising for many more months, before suffering a massive correction. For what it’s worth, this is the fate that the New Zealand Dollar is resigned to. Whether it will happen tomorrow or next year, alas, will depend more on global macroeconomic factors (such as the ebb and flow of risk aversion) than on what happens in New Zealand.


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High-Frequency Traders Descend onto Forex Markets

According to a recent report by the Wall Street Journal, high-speed traders are quickly establishing themselves as the main force in forex markets. Just like in other financial markets, a significant portion of trading volume is dominated by computerized trading, in which huge blocks of currency can change hands multiple times in mere milliseconds. While this is certainly old news for hedge funds and other institutional traders, it may come as a slight surprise to retail traders, many of whom still see forex as the neglected stepsister of stocks, bonds, and other assets. Nonetheless, there are a number of implications for the forex markets, and retail traders would be wise to heed them.
Here are the facts: “High-frequency trading accounted for roughly 30% of all foreign-exchange flows, as of 2010, compared with 13% in 2004, according to Boston-based consulting firm Aite Group. (By contrast, 66% of global stocks trading is high frequency.” According to Aite Group, it will jump to 42% by the end 2011 and to 60% in 2012. “About 85% of the currency market’s growth in volume from 2007 to 2010 came from financial institutions like hedge funds [represented as other financial institutions in the chart below] rather than Wall Street’s traditional bank currency dealers, thanks partly to high-frequency traders.”

According to the Wall Street Journal, this is changing the way in which currencies are traded. Previously, for big blocks of currency, traders would have to manually request a quote from Wall Street brokerages, which still dominate forex trading through the interbank market. The brokerage would match up buyer and seller (or step in and fulfill one of the roles itself) and take a cut, in the form of the spread. Retail traders, on the other hand, have never known such a troublesome process, having always been afforded electronic quotes and instant execution. However, the price paid for this convenience comes in the form of wide spreads, since both your retail broker and its representative on the interbank markets must both earn a profit.
In fact, wide spreads recently came under attack by Karl Deninger and sparked a fierce debate about whether it is still possible for retail traders to turn a profit using high-frequency (albeit non-computerized) trading methods. Fortunately, the Wall Street Journal is reporting that spreads have already fallen to one pip (though it didn’t specify the currency pair) thanks to new systems that have been set up to cater to high-frequency traders. It seems only a matter of time before these systems are either adapted to the retail market and/or replace the interbank market as the market-maker for retail brokerages. (Given that a handful of banks are currently under investigation by the SEC for deceptive quoting practices, a changing of the guard probably isn’t such a bad thing!)
In addition, while high-frequency trading has increased liquidity and lowered spreads, it has probably increased volatility. Sudden spikes quickly becomes exacerbated as automatic stop orders flood the market. You can see from the chart below the abundance of such spikes, the most recent one on March 11 caused by the Japanese natural disasters. Overall volatility is also at elevated levels, though it’s impossible to know how much of this is due to an increase in high-frequency trading and how much is simply due to post-financial crisis uncertainty. In any event, retail traders with ultra-short time horizons have no choice but to play the same game, by maintaining active stop-loss orders. Traders should also consider reducing leverage, since sudden spikes can trigger margin calls and wipe out entire accounts. (For the record, of the dozens of interviews I have conducted over the last couple years, I have yet to find one expert that condones the use of leverage greater than 5:1.In my opinion, leverage is still nothing more than a cynical marketing tool), but I digress…)

Ultimately, I think this is just further evidence that day-trading forex is only going to become more difficult. According to a research paper (that I spotlighted in an earlier post), algorithmic trading has already caused a decline in the power of technical analysis. Presumably, this is because computerized trading systems are better than humans at identifying trends and faster at executing trades designed to profit from them. In the end, outsmarting computers is unlikely, since both human traders and their electronic counterparts use the same forms of deductive reasons to spot potential trading opportunities. At the same time, the algorithms are still “stupid.” They are designed by humans and can only consider the variables that have been inputted them, which are inherently technical in nature. To beat them, you merely have to beat their human designers. In practice, this probably means designing more creative strategies based on more complex analytical tools and/or considering fundamental factors in addition to technical ones.


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