Friday, June 15, 2007
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Monday, June 4, 2007
Introduction to ForexThe Foreign Exchange market (also referred to as the Forex or FX market) is the largest financial market in the world, with over $1.5 trillion changing hands every day. This section covers the basic essentials of understanding forex and should help you decide if forex is right for youWhat is Forex?The Foreign Exchange market (also referred to as the Forex or FX market) is the largest financial market in the world, with over $1.5 trillion changing hands every day. That is larger than all US equity and treasury markets combined! Unlike other financial markets that operate at a centralized location (i.e., the stock exchange), the worldwide Forex market does not have a central location. It is a global electronic network of banks, financial institutions and individual Forex traders, all involved in the buying and selling of national currencies. Another major feature of the Forex market is that it operates 24 hours a day, corresponding to the opening and closing of financial centers in countries all across the world, starting each day in Sydney, then Tokyo, London, and New York .At any time, in any location, there are buyers and sellers, making the Forex market the most liquid market in the world.Whether or not you are aware of it, you already play a role in currency trading. The simple fact that you have money in your pocket makes you an investor in currency. By holding US Dollars, for example, you have elected not to hold the currencies of other nations. Your purchases of stocks, bonds, or other investments – along with money deposited in your bank account – represent investments that rely heavily on the integrity of the value of the US Dollar. Due to the changing value of this denominated currency and the resulting fluctuations in exchange rates, your investments may change in value, affecting your overall financial status.With this in mind, it should be no surprise that many investors have taken advantage of the fluctuation in exchange rates, using the volatility of the foreign exchange market as a way to speculate on currency pairs. Traditionally, access to the Forex market has been made available only to banks and other large financial institutions. With advances in technology over the years, however, the Forex market is now available to everybody, from banks to money managers to individual Forex traders. Trading ForexUsing fundamental and technical analyses, the individual trader attempts to determine trends in the price movements of currencies, and by buying or selling currency pairs, attempts to gain profits. The most often traded currencies, the major currencies, are those of countries with stable governments and respected central banks that target low inflation. Currencies that often trade along with the U.S. Dollar include the European Euro, the Japanese Yen, the British Pound, and the Swiss Franc as they are the most liquid. "Exotic" currencies, on the other hand, are often tightly regulated and simply too illiquid. Traders can generate profits (or losses) whether a currency is rising or falling by buying one currency, which is anticipated to gain value against another currency or selling one currency, which is anticipated to lose value against another currency.Taking a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. Alternatively, a short position is one in which the trader sells a currency that he anticipates to depreciate and aims to buy the currency back later at a lower price. Buying or selling currencies in response to economic or political events which occur are reactive, whereas buying or selling currencies on anticipated events is speculative. The bulk of currency activity is generated by market participants anticipating the direction of currency prices. In general, the value of a currency versus other currencies is a reflection of the condition of that country’s economy with respect to the other major economies. Foreign exchange is a continuous global market, providing participants with 24-hour market access. The only breaks in trading occur during a brief period over the weekend. Although foreign exchange is the most liquid of all markets, the fact that it is an international market and trading 24-hours a day, the time of day can have a direct impact on the liquidity available for trading a particular currency.The major dealer centers and time zones are that of Sydney, Tokyo, London, and New York. Therefore, traders must consider which players are in the market, since in the modern interconnected financial world, events that occur at any hour, in any part of the globe, can affect some or all parts of the investment community. In addition, although trading in the "spot" market, the difference in time zones accounts for a two-day settlement period. The 24-hour nature of the foreign exchange market is a substantial attraction to many of its participants. A proficient trader employs both technical and fundamental analyses prior to entering any trades. Fundamentals include watching the world news, and particularly studying variables that may cause the market price of a currency to fluctuate, including monetary and fiscal policy, political conditions, trade patterns, economic indicators (i.e. GDP, CPI, PPI), interest rates, inflation and unemployment numbers. Faith in a government’s ability to stand behind its currency also impacts currency price. From time to time, central banks use intervention as an effective method of enforcing market adherence to their desired exchange rate comfort zones. Technical analysis, which has grown dramatically in popularity in the foreign exchange market since the 1980s, involves computer charting, using trend lines, support and resistance levels, reversals, and numerous patterns and analyses to study the behavior patterns of market crowds to track and identify buying and selling opportunities. Over long historical periods, currencies have displayed identifiable trends and patterns which provide investors with potential trading opportunities. It is the trader’s option to take either a conservative or a more risk-taking approach. Employing a conservative approach, the trader establishes and liquidates positions quickly and efficiently to capitalize on even the slightest of price fluctuations, using limit and stop orders to manage risk. A limit order is placed to ensure a position is established once a price level in the market has been reached.* A stop order is placed to automatically liquidate a position at a chosen price level in order to limit potential loss on a particular trade. By placing orders in relation to technical support and resistance levels, the trader may profit incrementally from the minor price fluctuations that occur each day. Fundamental AnalysisForex traders almost always rely on fundamental analysis to map out their currency trading strategies at the beginning of each year. Fundamental analysis involves heavy examination of the value of a nation’s currency based on macroeconomic indicators, asset markets, and political affairs. Getting acquainted with fundamental analysis and predicting market changes require gaining an understanding of the factors that most easily influence changes in the currency market.It is important for Forex traders to stay informed of developing circumstances that may affect the value of currencies. The purpose of fundamental analysis is to measure the intrinsic value of a particular currency based on major news announcements such as economic indicators, changes in government policies, and catastrophic events. These news announcements, due to their effects on the economy, influence the value of a particular currency or group of currencies. The ability to identify such effects on a currency can make the difference between earning and losing money while trading currencies. Examples of economic indicators include statistical reports on employment, retail sales, gross domestic product (GDP), gross national product (GNP), and interest rates. The stability, growth, or decline in any of these sectors may have an effect – direct or indirect – on the value of a particular currency in a country or countries utilizing that currency. Changes in political policies may include increasing or decreasing the money supply or changing interest rates. These moves might be made to curb inflation, maintain economic stability and encourage economic growth. Another example is charging tariffs, which might encourage domestic manufacturing, thus bringing more money into the economy. Catastrophic events, such as a natural disaster or a terrorist attack, can have a very significant impact on a country’s economy. Besides the unfortunate devastation of human lives in these instances, they would curtail government spending, hurt consumer confidence, and cause instability. CMS Forex provides extensive Reuters News™ and expert commentaries to traders for the purpose of fundamental analysis. Some traders base their decisions solely on fundamental analysis, while others focus on technical analysis. With CMS Forex, traders have easy and in-depth access to both. Technical AnalysisThe technical trader is concerned with studying patterns of price movement on the chart in order to predict the direction of current and future trends in the Forex market. The decision to buy, sell, or hedge a current position – or to stay out of the market entirely – is made upon this analysis. Identify recurring patterns and make educated assessments to guide your decisions; should you initiate a trade at the current price, or set your system to open a position at a future price? The goal of the technical analyst is simple: to make profitable Forex trades by identifying past patterns that have historically led to a predictable outcome. However, the potential risk should always be considered. A recurring pattern is not precise and does not guarantee a desirable or expected price movement. Using various chart types and technical indicators, more accurate predictions can be made from better analysis of the Forex market. Technical indicators can be utilized to help you track specific, identified patterns. Once a pattern is recognized (not all are apparent), the Forex trader can decide whether to place a trade, or wait and monitor the price to see if the predictions were accurate. Additional drawing tools can be used to identify common trend qualities.
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