Sunday, August 30, 2009
TRADING TRAP # 8: Failure To Truly, Madly and Deeply Believe In Yourself
Magic is believing in yourself. If you can do that, you
can make anything happen...But remember to give thanks to God...Johann Wolfgang von
Goethe
This trap is deceptively simple because most people, when questioned, will tell you that they totally believe in themselves
and deserve to be successful as traders.
Yet, when you expose the majority of people to the myriad of real time decisions afforded by the market, this belief
system reveals how fragile and fleeting it is, and begins to fall apart. Traders spend more than 90 percent of their time
thinking, questioning, doubting, reassessing, struggling to keep focused, being whipsawed by emotions and just plain
worrying if they are doing or not doing the right thing. What part of any of these activities reflects authentic belief in
oneself?
When I say believe in yourself, I am not talking about superficial muttering for the sake of political or social correctness. I
am talking about a deep-seated, absolutely incontrovertible and unshakeable belief in yourself as a consistently successful
trader. This is among the most difficult challenges you face because it requires you to construct an adequate and realistic
self-image and then use that image to propel you to achieve your trading goals. It is like making a movie of yourself or
setting the stage for the most eloquent performance of your life.
More than that, it requires that you go deep within yourself to those messages which were given to your limbic rat brain
memory at an early age. Many of you can identify with these messages. They may be hurtful, painful and very deepseated.
How many times when you were growing up did you hear the word “No?" How many times were you told that
you were bad because you did this or that, or you would be punished if you did not say things in a certain way, and all of
Page 2 © Copyright 2008 – Janice Dorn, M.D., Ph.D. www.thetradingdoctor.com
the horrible things that might happen to you if you disobeyed or did not listen? How many times were you told that you
would never amount to anything and that you were just plain not good enough?
These limbic rat brain memories are intensely powerful and also very sneaky because many of you have spent your lives
hiding from them or denying them. Because few want to admit that they harbor massive insecurities, they act out their
lives in such a way as to make these messages self-fulfilling and then sit around scratching their heads and wondering
why they are not getting anywhere or why they are failing to achieve their goals. In essence, what people are doing in
this situation is affirming the negative messages stored in their brains. If your self-image is one of shame, guilt, anxiety
and insecurity you will sabotage your trading IN ORDER TO LOSE. Yes. You will set yourself up, just as more than 50% of
traders do, to actually lose. This then reinforces that you deserve nothing good and deepens the shame and selfcontempt.
I know it's not easy for many of you to hear this, let alone wrap your brain around it as it applies to you. But,
you must be strong enough to do it, because it means the difference between failure and success in your trading and
your life.
What do you do about this? It's simple, but not easy. You must reprogram your brain with new messages about yourself.
You must literally begin to see yourself as successful, confident and powerful. You do this by making new mental images,
by re-etching your limbic system with messages of empowerment. Make a new movie of your life, with bright and colorful
pictures of joy and unlimited success and happiness.
Some people do this through constant and unrelenting affirmations which they practice on a regular basis several times a
day until the messages get through. It takes approximately 21 days of consistent and dedicated practice to change a
habit. It takes 21 days of constant, dedicated repetition for one positive message to get entrained into your nervous
system.
What is required to change your belief system about yourself is to truly see yourself as successful. It is like taking a
photograph of yourself right now and then stepping back and looking at how you would like it to be if you were living up
to your full potential. There are many ways to do this and I will go into much more specifics in a future edition of The
Trading Doctor Monthly Newsletter. For beginners, try this simple experiment: Right now, pay attention to how you are
sitting in your chair, the look on your face, how your shoulders are positioned, your posture and demeanor, and how you
are feeling about yourself. Be radically honest about it. Take a snapshot of it in your mind. Now - stand up and walk away
from the chair to the other side of the room. Look at the empty chair and picture yourself sitting in that chair as the
person you would like to be. Picture how you would look and feel if you had everything you wanted. Keep taking
snapshots of success in your mind. Keep doing it. Now, walk back to your chair, sit down and be that snapshot of success
and fulfillment and true esteem of yourself. How does that feel?
This is the beginning of neurological entrainment of positive affirmations. . This is the start of believing in your ability to
do anything you want to do. This is the start of your new truth which you will etch onto your brain one day at a time as
you master your mindset on the way to full realization of your true and authentic self as a powerful trader and human
being. You are more powerful and precious than you will ever know. Everything that you truly are, you are now
becoming. It works if you work it, so make it work now. Lights, camera, action...Go for it. You can do it, and you deserve
it!
Some people say I have attitude - maybe I do...but I think you have to. You have to believe in yourself when no one else
does - that makes you a winner right there...Venus Williams.
can make anything happen...But remember to give thanks to God...Johann Wolfgang von
Goethe
This trap is deceptively simple because most people, when questioned, will tell you that they totally believe in themselves
and deserve to be successful as traders.
Yet, when you expose the majority of people to the myriad of real time decisions afforded by the market, this belief
system reveals how fragile and fleeting it is, and begins to fall apart. Traders spend more than 90 percent of their time
thinking, questioning, doubting, reassessing, struggling to keep focused, being whipsawed by emotions and just plain
worrying if they are doing or not doing the right thing. What part of any of these activities reflects authentic belief in
oneself?
When I say believe in yourself, I am not talking about superficial muttering for the sake of political or social correctness. I
am talking about a deep-seated, absolutely incontrovertible and unshakeable belief in yourself as a consistently successful
trader. This is among the most difficult challenges you face because it requires you to construct an adequate and realistic
self-image and then use that image to propel you to achieve your trading goals. It is like making a movie of yourself or
setting the stage for the most eloquent performance of your life.
More than that, it requires that you go deep within yourself to those messages which were given to your limbic rat brain
memory at an early age. Many of you can identify with these messages. They may be hurtful, painful and very deepseated.
How many times when you were growing up did you hear the word “No?" How many times were you told that
you were bad because you did this or that, or you would be punished if you did not say things in a certain way, and all of
Page 2 © Copyright 2008 – Janice Dorn, M.D., Ph.D. www.thetradingdoctor.com
the horrible things that might happen to you if you disobeyed or did not listen? How many times were you told that you
would never amount to anything and that you were just plain not good enough?
These limbic rat brain memories are intensely powerful and also very sneaky because many of you have spent your lives
hiding from them or denying them. Because few want to admit that they harbor massive insecurities, they act out their
lives in such a way as to make these messages self-fulfilling and then sit around scratching their heads and wondering
why they are not getting anywhere or why they are failing to achieve their goals. In essence, what people are doing in
this situation is affirming the negative messages stored in their brains. If your self-image is one of shame, guilt, anxiety
and insecurity you will sabotage your trading IN ORDER TO LOSE. Yes. You will set yourself up, just as more than 50% of
traders do, to actually lose. This then reinforces that you deserve nothing good and deepens the shame and selfcontempt.
I know it's not easy for many of you to hear this, let alone wrap your brain around it as it applies to you. But,
you must be strong enough to do it, because it means the difference between failure and success in your trading and
your life.
What do you do about this? It's simple, but not easy. You must reprogram your brain with new messages about yourself.
You must literally begin to see yourself as successful, confident and powerful. You do this by making new mental images,
by re-etching your limbic system with messages of empowerment. Make a new movie of your life, with bright and colorful
pictures of joy and unlimited success and happiness.
Some people do this through constant and unrelenting affirmations which they practice on a regular basis several times a
day until the messages get through. It takes approximately 21 days of consistent and dedicated practice to change a
habit. It takes 21 days of constant, dedicated repetition for one positive message to get entrained into your nervous
system.
What is required to change your belief system about yourself is to truly see yourself as successful. It is like taking a
photograph of yourself right now and then stepping back and looking at how you would like it to be if you were living up
to your full potential. There are many ways to do this and I will go into much more specifics in a future edition of The
Trading Doctor Monthly Newsletter. For beginners, try this simple experiment: Right now, pay attention to how you are
sitting in your chair, the look on your face, how your shoulders are positioned, your posture and demeanor, and how you
are feeling about yourself. Be radically honest about it. Take a snapshot of it in your mind. Now - stand up and walk away
from the chair to the other side of the room. Look at the empty chair and picture yourself sitting in that chair as the
person you would like to be. Picture how you would look and feel if you had everything you wanted. Keep taking
snapshots of success in your mind. Keep doing it. Now, walk back to your chair, sit down and be that snapshot of success
and fulfillment and true esteem of yourself. How does that feel?
This is the beginning of neurological entrainment of positive affirmations. . This is the start of believing in your ability to
do anything you want to do. This is the start of your new truth which you will etch onto your brain one day at a time as
you master your mindset on the way to full realization of your true and authentic self as a powerful trader and human
being. You are more powerful and precious than you will ever know. Everything that you truly are, you are now
becoming. It works if you work it, so make it work now. Lights, camera, action...Go for it. You can do it, and you deserve
it!
Some people say I have attitude - maybe I do...but I think you have to. You have to believe in yourself when no one else
does - that makes you a winner right there...Venus Williams.
Saturday, August 29, 2009
Friday, August 28, 2009
Thursday, August 27, 2009
Tuesday, August 25, 2009
Monday, August 24, 2009
TRADING TRAP #7: FAILURE TO LEARN AND PRACTICE PATIENCE
One moment of patience may ward off great disaster. One moment of impatience may ruin a whole life...Chinese Proverb
Our society is driven increasingly by the need for speed and incessant movement. As such, we are becoming increasingly
dopamine-driven and psychophysiologically destabilized. What does this mean to you as a trader, investor and human
being?
Everything is faster today than it was a few hours ago. Technology is advancing at a logarithmic rate and we are
becoming more and more addicted to and unable to separate from technology. Every person reading this has a computer
and is wondering what to do about the increasing number of e-mail and instant communications which require response
now. Almost every person reading this has access to some kind of trading platform, trading tools or systems which afford
instant access to the financial markets. Almost every person reading this knows that the Pavlovian bell will ring to open
the casino on Monday, and he or she will be waiting for an opportunity to pounce on this or that trade based on this or
that hot tip based on this or that piece of information which he or she received at almost the same time that millions of
other people received it.
It means that we want it all and we want it yesterday. Today's news has its fifteen or fewer minutes of fame and then
flames out as we continue to be bombarded with the next piece of information and then the next and then the next. It is
fashionable to be totally busy all the time. We are hypertexting, hypercommunicating, hypercomputing and hyperliving.
As a logical corollary, many are hypertrading.
Do you see yourself in any of following mindsets? Have you ever done or thought anything like this? If you have not, then
please stop reading since you have attained trading mastery and don't need any words from me:
“No time to wait for setups. It looks like it might work, so I am going to get in now.
No time to wait for this to play out, I have a small profit and it might turn around and go against me, so I am going to
get out now.
My position went against me, and it looks bad so even though it did not break support and the downage was on light
volume, I better get out now.
The markets are running away without me. I have to find something so I can get in now. Just about anything should
work and the most important issue that I don't miss out on this great move, so I am going to just buy something now.
This setup looks good and I just made some cash on the last two trades and am feeling pretty good, so it's OK for me to
deviate from my system, and get in now.
I lost a lot on the last two trades, and am feeling pretty lousy about the losses so I need to get into something and
maybe double up now to try to get it back now.
I don't have time to wait for setups since I can only trade a couple of hours in the morning before I go to work, so I have
to do something now.
I am leaving this frigging service because I want to be trading all day. The markets are here now and I want and need to
be in and out of stuff all day so that I can make bank now.
I am feeling so bored right now and just need to put on a trade in order to do something. “
The litany is endless, and, at its very core represents the inability to contemplate, to move at a considered pace, to wait
for opportunity and to just plain have patience. At its foundation, impatience is a subset of fear and greed and is among
the most common reasons for trader and investor failure.
More insidiously, the inability to be patient and wait for trades to come to you or to work out for you, coupled with the
continual need to be always doing something in the markets is a form of compulsive gambling. Not speculation, not
rigorous systematic trading, but gambling. Not good.
There are strong similarities between obsessive compulsive trading and pathological gambling. There are also specific
antidotes to this dis-ease. Among these are the ability to cultivate an attitude of mindful contemplation that will enable
you to attain higher levels of awareness, patience and trading success.
The journey to trading mastery is a marathon, not a sprint. It is time to slow down, breathe deeply, become a distant
observer of yourself, and take a good look at what you are doing to dopamine your life.
Peaceful warriors have the patience to wait until the mud settles and the water clears. They remain unmoving until the
right time, so the right action arises by itself. They do not seek fulfillment, but wait with open arms to welcome all
things... Dan Millman
Our society is driven increasingly by the need for speed and incessant movement. As such, we are becoming increasingly
dopamine-driven and psychophysiologically destabilized. What does this mean to you as a trader, investor and human
being?
Everything is faster today than it was a few hours ago. Technology is advancing at a logarithmic rate and we are
becoming more and more addicted to and unable to separate from technology. Every person reading this has a computer
and is wondering what to do about the increasing number of e-mail and instant communications which require response
now. Almost every person reading this has access to some kind of trading platform, trading tools or systems which afford
instant access to the financial markets. Almost every person reading this knows that the Pavlovian bell will ring to open
the casino on Monday, and he or she will be waiting for an opportunity to pounce on this or that trade based on this or
that hot tip based on this or that piece of information which he or she received at almost the same time that millions of
other people received it.
It means that we want it all and we want it yesterday. Today's news has its fifteen or fewer minutes of fame and then
flames out as we continue to be bombarded with the next piece of information and then the next and then the next. It is
fashionable to be totally busy all the time. We are hypertexting, hypercommunicating, hypercomputing and hyperliving.
As a logical corollary, many are hypertrading.
Do you see yourself in any of following mindsets? Have you ever done or thought anything like this? If you have not, then
please stop reading since you have attained trading mastery and don't need any words from me:
“No time to wait for setups. It looks like it might work, so I am going to get in now.
No time to wait for this to play out, I have a small profit and it might turn around and go against me, so I am going to
get out now.
My position went against me, and it looks bad so even though it did not break support and the downage was on light
volume, I better get out now.
The markets are running away without me. I have to find something so I can get in now. Just about anything should
work and the most important issue that I don't miss out on this great move, so I am going to just buy something now.
This setup looks good and I just made some cash on the last two trades and am feeling pretty good, so it's OK for me to
deviate from my system, and get in now.
I lost a lot on the last two trades, and am feeling pretty lousy about the losses so I need to get into something and
maybe double up now to try to get it back now.
I don't have time to wait for setups since I can only trade a couple of hours in the morning before I go to work, so I have
to do something now.
I am leaving this frigging service because I want to be trading all day. The markets are here now and I want and need to
be in and out of stuff all day so that I can make bank now.
I am feeling so bored right now and just need to put on a trade in order to do something. “
The litany is endless, and, at its very core represents the inability to contemplate, to move at a considered pace, to wait
for opportunity and to just plain have patience. At its foundation, impatience is a subset of fear and greed and is among
the most common reasons for trader and investor failure.
More insidiously, the inability to be patient and wait for trades to come to you or to work out for you, coupled with the
continual need to be always doing something in the markets is a form of compulsive gambling. Not speculation, not
rigorous systematic trading, but gambling. Not good.
There are strong similarities between obsessive compulsive trading and pathological gambling. There are also specific
antidotes to this dis-ease. Among these are the ability to cultivate an attitude of mindful contemplation that will enable
you to attain higher levels of awareness, patience and trading success.
The journey to trading mastery is a marathon, not a sprint. It is time to slow down, breathe deeply, become a distant
observer of yourself, and take a good look at what you are doing to dopamine your life.
Peaceful warriors have the patience to wait until the mud settles and the water clears. They remain unmoving until the
right time, so the right action arises by itself. They do not seek fulfillment, but wait with open arms to welcome all
things... Dan Millman
Sunday, August 23, 2009
Saturday, August 22, 2009
Jesse Livermore's Stock Trading Rules
*Markets are never wrong - opinions often are.
*Buy rising stocks and sell falling stocks.
*Do not trade every day of every year. Trade only when the market is clearly bullish or bearish. Trade in the direction of the general market. If it's rising you should be long, if it's falling you should be short.
*Co-ordinate your trading activity with pivot points.
*Only enter a trade after the action of the market confirms your opinion and then enter promptly.
*Continue with trades that show you a profit, end trades that show a loss.
*End trades when it is clear that the trend you are profiting from is over.
*In any sector, trade the leading stock - the one showing the strongest trend.
*Never average losses by, for example, buying more of a stock that has fallen.
*Never meet a margin call - get out of the trade.
*Go long when stocks reach a new high. Sell short when they reach a new low.
*Don't become an involuntary investor by holding onto stocks whose price has fallen.
*A stock is never too high to buy and never too low to short.
*The highest profits are made in trades that show a profit right from the start.
*No trading rules will deliver a profit 100 percent of the time.
*Buy rising stocks and sell falling stocks.
*Do not trade every day of every year. Trade only when the market is clearly bullish or bearish. Trade in the direction of the general market. If it's rising you should be long, if it's falling you should be short.
*Co-ordinate your trading activity with pivot points.
*Only enter a trade after the action of the market confirms your opinion and then enter promptly.
*Continue with trades that show you a profit, end trades that show a loss.
*End trades when it is clear that the trend you are profiting from is over.
*In any sector, trade the leading stock - the one showing the strongest trend.
*Never average losses by, for example, buying more of a stock that has fallen.
*Never meet a margin call - get out of the trade.
*Go long when stocks reach a new high. Sell short when they reach a new low.
*Don't become an involuntary investor by holding onto stocks whose price has fallen.
*A stock is never too high to buy and never too low to short.
*The highest profits are made in trades that show a profit right from the start.
*No trading rules will deliver a profit 100 percent of the time.
Friday, August 21, 2009
Thursday, August 20, 2009
Wednesday, August 19, 2009
Tuesday, August 18, 2009
Getting back to the trend instead of intellectualizing...
Before I had studied Zen for thirty years, I saw mountains as mountains, and waters as waters.When I arrived at a more intimate knowledge, I came to the point where I saw that mountains are not mountains, and waters are not waters.But now that I have got its very substance I am at rest.For it's just that I see mountains once again as mountains, and waters once again as waters.
Ching‐yuan
To do that, I usually re‐read some of my favorite books about trading. One I particularly like is Zen in the Markets, by Edward Toppel. I have talked about this book before in these pages. The author cuts right to the chase in this book. He clearly shows the battle for trading success isn't with the market; it is a battle against our ego.
The basic premise of the book is "you never know what the market will do," and the best you can do is follow Mr. Market. Therefore, if that is the best you can do, then you should only believe what you see, not what you think. It's the thinking part which gets us into trouble.
Mr. Toppel provides a few major examples of thinking vs. what was seen and how many players' lost money or left a bunch on the table by not staying in the moment of the trend, including: The powerful US bull market rally following what was believed to be the world‐ending 1987 stock market crash. The Mexican peso default in the summer of 1982 led many to believe the budding bull market would be derailed and hurt the US economy. It didn't and the market continued to soar. My favorite example was the popping of bubble in Japan in the early 90's; strategists thought it would roil markets everywhere--again it was barely noticed.
Could we see China's stock market crumble and it have no impact on other world markets? Why yes, even though we have thought it would be the touchstone indicator that triggers risk aversion across all asset classes.
The problem with thinking risk aversion will be triggered by a Chinese stock market crash means need two things need to happen for it to prove true:
1) It does happen, which is no guarantee, and
2) Aristotelian cause and effect analysis proves correct, and risk flows across global markets. Thus, forecasts (guess) and effect (never a guarantee) need to be right. Toppel has already shown that even if the forecast is right, the effect is always a whole nother kettle of fish, as my fine English mate often shares with me.
Thus Toppel's point, by staying in the now moment of the trend (judged by prices going up or down), it is much easier to do right--there are fewer things you need to get right, thus your probability of success rises.
And that perspective...
1.If you take trades in‐line with the trend your probability of success will increase
2.Accept the market IS right about the trend (because we can see it and riding it puts money in the account; no better proof than that).
3.The trend is measured in the time‐frame you are most comfortable trading.
4.Stop getting caught up in the intellectually appealing cause and effect trap
5.Buy high and sell higher, sell low and sell lower (because we never know how high or how low prices of anything will go, except maybe to zero)
6.When you don't see the trend, don't trade
It is so darn simple, yet so darn hard because our ego makes it so.
Does this mean we eschew all forms of fundamental analysis and just say, whoopee, the trend is my friend--stop reading the paper or reading research? Not necessarily. (But if that better orients you to the trend, then so be it.)
It does say that all the stuff we read and think about MUST be validated by price before we act. Otherwise we get into the mindset the market is wrong and I am going to top pick right here. (I am guilty again as charged!)
Doing your research homework should be about helping you position more quickly when you see a major conversion flow of consensus from one view to the other-- trading with the new trend of the market early, but not trying to pick the exact turning points.
We often hear of the famous contrarian who picked the exact top or bottom in a market, which helps on the fame and fortune front for a while. But this is survivorsip bias. What we don't hear about are all those contrarians who were carried out because their intellects picked too many tops or bottoms that never happened.
For now, the trend of the stock market is up. The trend of the dollar is down. We capitulate as soon as we define the new trend. Stay tuned.
Ching‐yuan
To do that, I usually re‐read some of my favorite books about trading. One I particularly like is Zen in the Markets, by Edward Toppel. I have talked about this book before in these pages. The author cuts right to the chase in this book. He clearly shows the battle for trading success isn't with the market; it is a battle against our ego.
The basic premise of the book is "you never know what the market will do," and the best you can do is follow Mr. Market. Therefore, if that is the best you can do, then you should only believe what you see, not what you think. It's the thinking part which gets us into trouble.
Mr. Toppel provides a few major examples of thinking vs. what was seen and how many players' lost money or left a bunch on the table by not staying in the moment of the trend, including: The powerful US bull market rally following what was believed to be the world‐ending 1987 stock market crash. The Mexican peso default in the summer of 1982 led many to believe the budding bull market would be derailed and hurt the US economy. It didn't and the market continued to soar. My favorite example was the popping of bubble in Japan in the early 90's; strategists thought it would roil markets everywhere--again it was barely noticed.
Could we see China's stock market crumble and it have no impact on other world markets? Why yes, even though we have thought it would be the touchstone indicator that triggers risk aversion across all asset classes.
The problem with thinking risk aversion will be triggered by a Chinese stock market crash means need two things need to happen for it to prove true:
1) It does happen, which is no guarantee, and
2) Aristotelian cause and effect analysis proves correct, and risk flows across global markets. Thus, forecasts (guess) and effect (never a guarantee) need to be right. Toppel has already shown that even if the forecast is right, the effect is always a whole nother kettle of fish, as my fine English mate often shares with me.
Thus Toppel's point, by staying in the now moment of the trend (judged by prices going up or down), it is much easier to do right--there are fewer things you need to get right, thus your probability of success rises.
And that perspective...
1.If you take trades in‐line with the trend your probability of success will increase
2.Accept the market IS right about the trend (because we can see it and riding it puts money in the account; no better proof than that).
3.The trend is measured in the time‐frame you are most comfortable trading.
4.Stop getting caught up in the intellectually appealing cause and effect trap
5.Buy high and sell higher, sell low and sell lower (because we never know how high or how low prices of anything will go, except maybe to zero)
6.When you don't see the trend, don't trade
It is so darn simple, yet so darn hard because our ego makes it so.
Does this mean we eschew all forms of fundamental analysis and just say, whoopee, the trend is my friend--stop reading the paper or reading research? Not necessarily. (But if that better orients you to the trend, then so be it.)
It does say that all the stuff we read and think about MUST be validated by price before we act. Otherwise we get into the mindset the market is wrong and I am going to top pick right here. (I am guilty again as charged!)
Doing your research homework should be about helping you position more quickly when you see a major conversion flow of consensus from one view to the other-- trading with the new trend of the market early, but not trying to pick the exact turning points.
We often hear of the famous contrarian who picked the exact top or bottom in a market, which helps on the fame and fortune front for a while. But this is survivorsip bias. What we don't hear about are all those contrarians who were carried out because their intellects picked too many tops or bottoms that never happened.
For now, the trend of the stock market is up. The trend of the dollar is down. We capitulate as soon as we define the new trend. Stay tuned.
Monday, August 17, 2009
Sunday, August 16, 2009
FOREX TRADING PLAYERS
Most people who are just beginning to learn to trade forex don't really know who are their "competitors" (yes, trading forex is a cut throat competition, not a friendly game), and like to think of trading forex in the same way that you would trade baseball cards. They say that 95% of all those who enter the forex market will lose, which ultimately means that those 5% (and the brokerage firms who bet against their clients) make out like bandits. Bottom line: if you want to learn to trade forex, you first need to know your competition then you can start to pull together strategies....So who are your competitors?
The Central Banks-
These guys are the banks from every country and most have more than just money at stake here. Unlike you and I, they don't necessarily trade for the same reasons. The central banks main motivation with trading forex is to provide stability to whatever currency they are associated with and thus protect the economic interests of their country.What they do is buy and sell their own currency, thus affecting the price of the currency. What you can pretty much bet is that if the currency is following a downtrend, the central banks are trading in the opposite direction.
Export and Import Businesses-
I got a taste of these kinds of traders from an acquaintance who was bidding on re-building roads in Iraq. Basically what he did was use the forex to pay his suppliers or accept payments in another currency. These corporations are rarely in it for profit. Just like the central banks, these corporations are able to virtually move the market because when they trade, it typically is in the millions of dollars.
Foreign Direct Investors-
These guys are not trading in the same sense that you and I would either. Foreign Direct Investors trade for the long term and essentially hold currencies in the same way that a bank would store money in a savings account.As you probably could imagine, when they do liquidate their position, it could create a pretty good ripple in the market. Just like Central Banks, most of these investors deals with millions of dollars at a time.The investors above don't actively trade for profit but have their own interests in mind when holding currencies. They also hold the lion's share of currencies in comparison to you and I and even some of the "investment banks" and hedge funds. However, as powerful as they are, they only make up roughly 5% of all the trader's that trade. So, what about the other 95% of forex traders? Well, that brings up to our final investor....
Speculators-
Now, I have read in several forex websites that would like to make the claim that trading forex is not gambling. However, just the term "speculator" brings to mind a gambler of sorts, right? Anyway, speculators make up 95% of all currencies traded on any given day and these are your competitors.They are made up of investment banks, hedge funds, money managers, corporations, and of course, the small fries...the retail traders like you and me.As you can probably tell from the list, there are still some major players here that make their living making money for their clients. These guys will use advanced charting methods and know a thing or two about how the market moves. And everytime someone like you or me lose some pips, chances are there is some speculator out there that is making money from our loss.The reason why I bring this up is not to try to persuade you away from Forex trading. I just believe that if you want to learn how to trade forex, you should have a clear understanding of the players involved in the currency markets and how each can affect you. Now will this help you trade better? Probably not. But hopefully, understanding this will help you realize exactly what you are up against when you decide to trade.
The Central Banks-
These guys are the banks from every country and most have more than just money at stake here. Unlike you and I, they don't necessarily trade for the same reasons. The central banks main motivation with trading forex is to provide stability to whatever currency they are associated with and thus protect the economic interests of their country.What they do is buy and sell their own currency, thus affecting the price of the currency. What you can pretty much bet is that if the currency is following a downtrend, the central banks are trading in the opposite direction.
Export and Import Businesses-
I got a taste of these kinds of traders from an acquaintance who was bidding on re-building roads in Iraq. Basically what he did was use the forex to pay his suppliers or accept payments in another currency. These corporations are rarely in it for profit. Just like the central banks, these corporations are able to virtually move the market because when they trade, it typically is in the millions of dollars.
Foreign Direct Investors-
These guys are not trading in the same sense that you and I would either. Foreign Direct Investors trade for the long term and essentially hold currencies in the same way that a bank would store money in a savings account.As you probably could imagine, when they do liquidate their position, it could create a pretty good ripple in the market. Just like Central Banks, most of these investors deals with millions of dollars at a time.The investors above don't actively trade for profit but have their own interests in mind when holding currencies. They also hold the lion's share of currencies in comparison to you and I and even some of the "investment banks" and hedge funds. However, as powerful as they are, they only make up roughly 5% of all the trader's that trade. So, what about the other 95% of forex traders? Well, that brings up to our final investor....
Speculators-
Now, I have read in several forex websites that would like to make the claim that trading forex is not gambling. However, just the term "speculator" brings to mind a gambler of sorts, right? Anyway, speculators make up 95% of all currencies traded on any given day and these are your competitors.They are made up of investment banks, hedge funds, money managers, corporations, and of course, the small fries...the retail traders like you and me.As you can probably tell from the list, there are still some major players here that make their living making money for their clients. These guys will use advanced charting methods and know a thing or two about how the market moves. And everytime someone like you or me lose some pips, chances are there is some speculator out there that is making money from our loss.The reason why I bring this up is not to try to persuade you away from Forex trading. I just believe that if you want to learn how to trade forex, you should have a clear understanding of the players involved in the currency markets and how each can affect you. Now will this help you trade better? Probably not. But hopefully, understanding this will help you realize exactly what you are up against when you decide to trade.
FOREX TRADING PLAYERS
Most people who are just beginning to learn to trade forex don't really know who are their "competitors" (yes, trading forex is a cut throat competition, not a friendly game), and like to think of trading forex in the same way that you would trade baseball cards. They say that 95% of all those who enter the forex market will lose, which ultimately means that those 5% (and the brokerage firms who bet against their clients) make out like bandits. Bottom line: if you want to learn to trade forex, you first need to know your competition then you can start to pull together strategies....So who are your competitors?
The Central Banks-
These guys are the banks from every country and most have more than just money at stake here. Unlike you and I, they don't necessarily trade for the same reasons. The central banks main motivation with trading forex is to provide stability to whatever currency they are associated with and thus protect the economic interests of their country.What they do is buy and sell their own currency, thus affecting the price of the currency. What you can pretty much bet is that if the currency is following a downtrend, the central banks are trading in the opposite direction.
Export and Import Businesses-
I got a taste of these kinds of traders from an acquaintance who was bidding on re-building roads in Iraq. Basically what he did was use the forex to pay his suppliers or accept payments in another currency. These corporations are rarely in it for profit. Just like the central banks, these corporations are able to virtually move the market because when they trade, it typically is in the millions of dollars.
Foreign Direct Investors-
These guys are not trading in the same sense that you and I would either. Foreign Direct Investors trade for the long term and essentially hold currencies in the same way that a bank would store money in a savings account.As you probably could imagine, when they do liquidate their position, it could create a pretty good ripple in the market. Just like Central Banks, most of these investors deals with millions of dollars at a time.The investors above don't actively trade for profit but have their own interests in mind when holding currencies. They also hold the lion's share of currencies in comparison to you and I and even some of the "investment banks" and hedge funds. However, as powerful as they are, they only make up roughly 5% of all the trader's that trade. So, what about the other 95% of forex traders? Well, that brings up to our final investor....
Speculators-
Now, I have read in several forex websites that would like to make the claim that trading forex is not gambling. However, just the term "speculator" brings to mind a gambler of sorts, right? Anyway, speculators make up 95% of all currencies traded on any given day and these are your competitors.They are made up of investment banks, hedge funds, money managers, corporations, and of course, the small fries...the retail traders like you and me.As you can probably tell from the list, there are still some major players here that make their living making money for their clients. These guys will use advanced charting methods and know a thing or two about how the market moves. And everytime someone like you or me lose some pips, chances are there is some speculator out there that is making money from our loss.The reason why I bring this up is not to try to persuade you away from Forex trading. I just believe that if you want to learn how to trade forex, you should have a clear understanding of the players involved in the currency markets and how each can affect you. Now will this help you trade better? Probably not. But hopefully, understanding this will help you realize exactly what you are up against when you decide to trade.
The Central Banks-
These guys are the banks from every country and most have more than just money at stake here. Unlike you and I, they don't necessarily trade for the same reasons. The central banks main motivation with trading forex is to provide stability to whatever currency they are associated with and thus protect the economic interests of their country.What they do is buy and sell their own currency, thus affecting the price of the currency. What you can pretty much bet is that if the currency is following a downtrend, the central banks are trading in the opposite direction.
Export and Import Businesses-
I got a taste of these kinds of traders from an acquaintance who was bidding on re-building roads in Iraq. Basically what he did was use the forex to pay his suppliers or accept payments in another currency. These corporations are rarely in it for profit. Just like the central banks, these corporations are able to virtually move the market because when they trade, it typically is in the millions of dollars.
Foreign Direct Investors-
These guys are not trading in the same sense that you and I would either. Foreign Direct Investors trade for the long term and essentially hold currencies in the same way that a bank would store money in a savings account.As you probably could imagine, when they do liquidate their position, it could create a pretty good ripple in the market. Just like Central Banks, most of these investors deals with millions of dollars at a time.The investors above don't actively trade for profit but have their own interests in mind when holding currencies. They also hold the lion's share of currencies in comparison to you and I and even some of the "investment banks" and hedge funds. However, as powerful as they are, they only make up roughly 5% of all the trader's that trade. So, what about the other 95% of forex traders? Well, that brings up to our final investor....
Speculators-
Now, I have read in several forex websites that would like to make the claim that trading forex is not gambling. However, just the term "speculator" brings to mind a gambler of sorts, right? Anyway, speculators make up 95% of all currencies traded on any given day and these are your competitors.They are made up of investment banks, hedge funds, money managers, corporations, and of course, the small fries...the retail traders like you and me.As you can probably tell from the list, there are still some major players here that make their living making money for their clients. These guys will use advanced charting methods and know a thing or two about how the market moves. And everytime someone like you or me lose some pips, chances are there is some speculator out there that is making money from our loss.The reason why I bring this up is not to try to persuade you away from Forex trading. I just believe that if you want to learn how to trade forex, you should have a clear understanding of the players involved in the currency markets and how each can affect you. Now will this help you trade better? Probably not. But hopefully, understanding this will help you realize exactly what you are up against when you decide to trade.
Saturday, August 15, 2009
A Trader's Introduction to the New Zealand Dollar
According to Wikipedia.org, New Zealand has a 2008 estimated population of around 4.2 million people, which is the first important fact for us to understand for two reasons. Firstly, as New Zealand's domestic market is so small, it must rely heavily on exports to drive economic growth, making the country especially susceptible to growth or decline in the global economy. This is particularly true when looking at the health of its main trading partners, the largest of which is Australia, followed by the United States, and Japan. Secondly, unlike other countries with a larger population, as the population of New Zealand is small, migration of people into and out of the country can have a significant effect on its economy, and therefore the currency. As Kathy Lien points out in her book Day Trading the Currency Market, strong population migration into New Zealand has contributed significantly to the performance of its economy, because as the population increases, so does domestic consumption.
Like Canada and Australia, New Zealand is a country with vast natural resources, making the economy and therefore currency heavily reliant on exports of commodities such as Wool, food and dairy products, wood and paper products. As Australia is the country's main export market and as the Australian Dollar is also heavily influenced by commodity prices, changes in commodity prices can have a particularly potent affect on the New Zealand Dollar. Although this correlation has broken down somewhat in recent months, as you can see from this chart, the NZD/USD and AUD/USD currency pairs are highly correlated as a result of these factors:Chart Showing NZD/USD and AUD/USD Correlations:The last major fundamental factor that it is important to keep in mind when trading the New Zealand Dollar is, like the Australian Dollar here again, New Zealand, as of this lesson, has one of the highest interest rates in the industrialized world currently at 8.25%. This has driven the NZD/USD pair to 25 year highs recently, before selling off a bit as a result of slower growth in the New Zealand. This is important to keep in mind, as the currency has been one of the primary beneficiaries of the carry trade flows we learned about in module 3 of this course, so interest rate expectations going forward will weigh heavily on the future direction of the currency.
Like Canada and Australia, New Zealand is a country with vast natural resources, making the economy and therefore currency heavily reliant on exports of commodities such as Wool, food and dairy products, wood and paper products. As Australia is the country's main export market and as the Australian Dollar is also heavily influenced by commodity prices, changes in commodity prices can have a particularly potent affect on the New Zealand Dollar. Although this correlation has broken down somewhat in recent months, as you can see from this chart, the NZD/USD and AUD/USD currency pairs are highly correlated as a result of these factors:Chart Showing NZD/USD and AUD/USD Correlations:The last major fundamental factor that it is important to keep in mind when trading the New Zealand Dollar is, like the Australian Dollar here again, New Zealand, as of this lesson, has one of the highest interest rates in the industrialized world currently at 8.25%. This has driven the NZD/USD pair to 25 year highs recently, before selling off a bit as a result of slower growth in the New Zealand. This is important to keep in mind, as the currency has been one of the primary beneficiaries of the carry trade flows we learned about in module 3 of this course, so interest rate expectations going forward will weigh heavily on the future direction of the currency.
A Trader's Introduction to the Australian Dollar
Like Canada, Australia's economy is a service based economy, with over 68% of GDP coming from the service sector. Although agriculture and mining account for only 4.7% of Australian GDP, they account for over 65% of the country's exports. This makes the currency highly sensitive to increases or decreases in the price of commodities, especially gold, as Australia is the world's 3rd largest exporter of gold.
While the country and currency are similar to Canada in many ways, a primary difference is the trade relationships that Australia has developed with Asia, and in particular Japan and China, which represent its two largest export markets. This gives the currency a unique exposure to Asia, which generally does not exist with the other non Asian currencies we have studied up to this point.
As Kathy Lien points out in her book Day Trading the Currency Market, the Australian economy was able to whether the Asian financial crisis relatively well, so while there is exposure there, it is also important to keep a watch on the country's historically strong domestic consumption, in times of global economic slowdowns.
The last major factor to keep in mind about the Australian Dollar, is that Australia has one of the highest interest rates in the developed world, currently at 7.25% as of this lesson. This has made the currency one of the primary beneficiaries of carry trade flows, which we learned about in my 3 part series on the carry trade, in module 3 of this course. These flows, combined with the facts that many commodities that Australia exports are at all time highs, and the Australian economy has remained relatively strong through the current crisis, has moved the AUD/USD to 25 year highs as of this lesson.
While the country and currency are similar to Canada in many ways, a primary difference is the trade relationships that Australia has developed with Asia, and in particular Japan and China, which represent its two largest export markets. This gives the currency a unique exposure to Asia, which generally does not exist with the other non Asian currencies we have studied up to this point.
As Kathy Lien points out in her book Day Trading the Currency Market, the Australian economy was able to whether the Asian financial crisis relatively well, so while there is exposure there, it is also important to keep a watch on the country's historically strong domestic consumption, in times of global economic slowdowns.
The last major factor to keep in mind about the Australian Dollar, is that Australia has one of the highest interest rates in the developed world, currently at 7.25% as of this lesson. This has made the currency one of the primary beneficiaries of carry trade flows, which we learned about in my 3 part series on the carry trade, in module 3 of this course. These flows, combined with the facts that many commodities that Australia exports are at all time highs, and the Australian economy has remained relatively strong through the current crisis, has moved the AUD/USD to 25 year highs as of this lesson.
A Trader's Introduction to the Canadian Dollar
In today's lesson we are going to begin a discussion of the world's main commodity currencies, starting with a look at the Canadian Dollar.There are two dominant themes that it is important to understand when analyzing the Canadian Dollar from a fundamental standpoint.
The first, as its designation as a commodity currency implies, is the fact that exports of natural resources (especially gold and oil) make up a significant part of the Canadian economy. This is important to understand because as Canada is the world's 14th largest producer of oil and 5th largest producer of gold, the price of these and other commodities normally has a direct affect on the Canadian Dollar's Exchange rate.
The second thing that it is important to understand here, is the fact that as the Canadian population is relatively small in comparison to its land mass, the economy is heavily reliant on exports, which ties the country more closely together with the international economy as a whole. This is particularly true in regards to economy of the United States, as the US is Canada's largest trading partner, and 81% of Canadian Exports flow to the US.
While many people believe that the US relies most heavily on the middle east for its oil imports, it is actually Canada that is the largest supplier of oil to the United States. As the US is the world's largest oil consumer and Canada is one of the largest producers, fluctuations in the price of oil have double the impact. As we learned in our lesson on trade flows, as the US is a net oil importer and Canada is a net oil exporter, then all else being equal, a rise in the price of oil should strengthen the CAD and weaken the USD.
While exports of commodities are still a very important component of the Canadian economy, the country's service sector has experienced massive growth in recent decades, to the point where the service industry now accounts for 2/3rds of the country's economic output. This is important to understand because, as the United States is its largest trading partner, a slowdown in the US Economy can hurt the Canadian economy and its currency, even if commodity prices remain high.
The first, as its designation as a commodity currency implies, is the fact that exports of natural resources (especially gold and oil) make up a significant part of the Canadian economy. This is important to understand because as Canada is the world's 14th largest producer of oil and 5th largest producer of gold, the price of these and other commodities normally has a direct affect on the Canadian Dollar's Exchange rate.
The second thing that it is important to understand here, is the fact that as the Canadian population is relatively small in comparison to its land mass, the economy is heavily reliant on exports, which ties the country more closely together with the international economy as a whole. This is particularly true in regards to economy of the United States, as the US is Canada's largest trading partner, and 81% of Canadian Exports flow to the US.
While many people believe that the US relies most heavily on the middle east for its oil imports, it is actually Canada that is the largest supplier of oil to the United States. As the US is the world's largest oil consumer and Canada is one of the largest producers, fluctuations in the price of oil have double the impact. As we learned in our lesson on trade flows, as the US is a net oil importer and Canada is a net oil exporter, then all else being equal, a rise in the price of oil should strengthen the CAD and weaken the USD.
While exports of commodities are still a very important component of the Canadian economy, the country's service sector has experienced massive growth in recent decades, to the point where the service industry now accounts for 2/3rds of the country's economic output. This is important to understand because, as the United States is its largest trading partner, a slowdown in the US Economy can hurt the Canadian economy and its currency, even if commodity prices remain high.
A Trader's Introduction to the Swiss Franc
In today's lesson we are going to look at the fifth most actively traded currency in the world, the Swiss Franc.Switzerland is one of the richest countries in the world, and while its economic policies and practices largely conform with EU standards, the country's population rejected accession negotiations with the EU in March of 2001. So, at least for the foreseeable future, the Swiss Franc is expected to remain one of the world's most actively traded currencies, with two dominating features that are important to us as forex traders.
Although this status has started to wane somewhat in recent years, the Swiss Franc has historically been considered one of the world's primary safe haven currencies, which means that money flows into the Swiss Franc during times of economic or geopolitical uncertainty.
The primary reasons why this is the case are:
The country's ability to remain out of Global Conflicts, a reputation it solidified by remaining neutral during both World Wars.
Its economic stability and relatively low inflation rates.
The fact that up until recently the currency was 40% backed by gold.
Its reputation for high quality financial institutions and banking secrecy.
As you can see from this chart, traders who anticipated the Swiss Franc would strengthen as a result of its safe haven status, could have participated in the 1251 pip move lower in USD/CHF, in the 10 days following the September 11th 2001 attacks.
As another example of the Swiss Franc displaying its safe haven tendencies, traders who anticipated that the Swiss Franc would strengthen as a result of the US Invasion of Iraq, could have participated in another 1200+ pip move in the USD/CHF in the 2 months following the invasion.
In 2005 the Swiss government sold the nations vast gold inventory, and as a result the currency is no longer backed by gold. Some argue that because of this the Swiss Franc has lost much of its safe haven status, something that there will surely be more tests of in the years to come.
The second thing that it is important for traders to understand about the Swiss Franc, is its strong correlation with the Euro. As the Swiss Franc is quoted on the opposing side of the Dollar when compared to the Euro, this means that the USD/CHF currency pair has a strong negative correlation with the EUR/USD currency pair, as you can see from this chart:
As you can see here a chart of the two currency pairs shows the strong negative correlation of over 90% between the two currency pairs, resulting from the strong economic ties between Switzerland and the European Union.
The first reason that it is important for traders to understand this strong negative correlation, is so that they can take it into account when considering trades in both currency pairs. As the two currency pairs have such a high negative correlation, there is a very good possibility that a trader's technical analysis will show a buy signal in the EUR/USD, while at the same time showing a sell signal USD/CHF, or vice versa.
If this trader happened to be blind to the negative correlation we have just outlined, he or she may think that they are putting on two completely different trades. As we have just shown however, what this trader would actually be doing is doubling their exposure to the move they were trying to capture. Conversely, if a trader were to trade these pairs in the same direction, then they would effectively be reducing the potency of both trades, as the negative correlation between the two currency pairs will act to offset the gains or losses that result on each trade.
As the Swiss Franc is no where near as liquid as the Euro, on an intraday basis it is important to be aware that this negative correlation can breakdown some what. Lastly, should the Swiss political and/or economic environment (especially monetary policy) start to substantially diverge from that of the Eurozone, you could see a breakdown of this negative correlation on the longer timeframes as well.
Although this status has started to wane somewhat in recent years, the Swiss Franc has historically been considered one of the world's primary safe haven currencies, which means that money flows into the Swiss Franc during times of economic or geopolitical uncertainty.
The primary reasons why this is the case are:
The country's ability to remain out of Global Conflicts, a reputation it solidified by remaining neutral during both World Wars.
Its economic stability and relatively low inflation rates.
The fact that up until recently the currency was 40% backed by gold.
Its reputation for high quality financial institutions and banking secrecy.
As you can see from this chart, traders who anticipated the Swiss Franc would strengthen as a result of its safe haven status, could have participated in the 1251 pip move lower in USD/CHF, in the 10 days following the September 11th 2001 attacks.
As another example of the Swiss Franc displaying its safe haven tendencies, traders who anticipated that the Swiss Franc would strengthen as a result of the US Invasion of Iraq, could have participated in another 1200+ pip move in the USD/CHF in the 2 months following the invasion.
In 2005 the Swiss government sold the nations vast gold inventory, and as a result the currency is no longer backed by gold. Some argue that because of this the Swiss Franc has lost much of its safe haven status, something that there will surely be more tests of in the years to come.
The second thing that it is important for traders to understand about the Swiss Franc, is its strong correlation with the Euro. As the Swiss Franc is quoted on the opposing side of the Dollar when compared to the Euro, this means that the USD/CHF currency pair has a strong negative correlation with the EUR/USD currency pair, as you can see from this chart:
As you can see here a chart of the two currency pairs shows the strong negative correlation of over 90% between the two currency pairs, resulting from the strong economic ties between Switzerland and the European Union.
The first reason that it is important for traders to understand this strong negative correlation, is so that they can take it into account when considering trades in both currency pairs. As the two currency pairs have such a high negative correlation, there is a very good possibility that a trader's technical analysis will show a buy signal in the EUR/USD, while at the same time showing a sell signal USD/CHF, or vice versa.
If this trader happened to be blind to the negative correlation we have just outlined, he or she may think that they are putting on two completely different trades. As we have just shown however, what this trader would actually be doing is doubling their exposure to the move they were trying to capture. Conversely, if a trader were to trade these pairs in the same direction, then they would effectively be reducing the potency of both trades, as the negative correlation between the two currency pairs will act to offset the gains or losses that result on each trade.
As the Swiss Franc is no where near as liquid as the Euro, on an intraday basis it is important to be aware that this negative correlation can breakdown some what. Lastly, should the Swiss political and/or economic environment (especially monetary policy) start to substantially diverge from that of the Eurozone, you could see a breakdown of this negative correlation on the longer timeframes as well.
A Trader's Introduction to the British Pound
In today's lesson we are going to discuss the 4th most actively traded currency in the world, the British Pound.Although the United Kingdom is a member of the European Union, it has not yet adopted the Euro as its currency, so it is not part of the European Monetary Union. There are a number of reasons for this, but perhaps most famous is the country's forced withdrawal from the Exchange Rate Mechanism, the precursor to the Euro. As we have touched on in previous lessons, before joining the Euro countries were required to meet certain criteria, one of which was to keep the value of their currency within certain "bands". After initially trying to adhere to the qualifications set forth for participation in the European Monetary Union, the value of the pound dropped below the lower band, forcing the country out of what would become the European Monetary Union. Although the Prime Minister as of this lesson, Gordon Brown, has ruled out joining the European Monetary Union for the foreseeable future, many feel that the UK will eventually adopt the Euro, and therefore any such talk can have an affect on the pound.
The former Prime Minister of the United Kingdom laid out 5 broad economic tests that must be passed, before the UK would consider adopting the Euro. These would of course be in addition to the requirements set forth in the Maastricht treaty, which we learned about in our lesson on the Euro.
The five tests according to Wikipedia.org are:
1. Are business cycles and economic structures compatible so that the UK and others could live comfortable with Euro interst rates on a permanent basis?
2. If problems emerge is there sufficient flexibility to deal with them?
3. Would joining the EMU create better conditions for firms making long-term decisions to invest in britain.
4. What impact would entry into the EMU have on the competitive position of the UK's financial services industry, particularly the city's wholesale markets?
5. In summary, will joining the EU promote higher growth, stability, and a lasting increase in jobs?
In addition to these factors, the UK economy is a service based economy, with a heavy emphasis on financial services, and is a net exporter of oil and natrual gas, so energy prices will affect the currency.
As Kathy Lien points out in her book Day Trading the Currency Market, while the GBP/USD is a very active currency, the Pound is also very active in the crosses, and as the EU is their largest trading partner, traders pay particular attention to movements in the EUR/GBP for fundamental ques on the currency. As of this lesson the UK also has the highest interest rates in the G7, causing it to be used as the currency many traders will buy when playing the carry trade we learned about in module 3 of this course. This makes GBP/JPY one of the more active crosses in the market and one which traders who are looking for increased volatility often choose as their favorite.
The former Prime Minister of the United Kingdom laid out 5 broad economic tests that must be passed, before the UK would consider adopting the Euro. These would of course be in addition to the requirements set forth in the Maastricht treaty, which we learned about in our lesson on the Euro.
The five tests according to Wikipedia.org are:
1. Are business cycles and economic structures compatible so that the UK and others could live comfortable with Euro interst rates on a permanent basis?
2. If problems emerge is there sufficient flexibility to deal with them?
3. Would joining the EMU create better conditions for firms making long-term decisions to invest in britain.
4. What impact would entry into the EMU have on the competitive position of the UK's financial services industry, particularly the city's wholesale markets?
5. In summary, will joining the EU promote higher growth, stability, and a lasting increase in jobs?
In addition to these factors, the UK economy is a service based economy, with a heavy emphasis on financial services, and is a net exporter of oil and natrual gas, so energy prices will affect the currency.
As Kathy Lien points out in her book Day Trading the Currency Market, while the GBP/USD is a very active currency, the Pound is also very active in the crosses, and as the EU is their largest trading partner, traders pay particular attention to movements in the EUR/GBP for fundamental ques on the currency. As of this lesson the UK also has the highest interest rates in the G7, causing it to be used as the currency many traders will buy when playing the carry trade we learned about in module 3 of this course. This makes GBP/JPY one of the more active crosses in the market and one which traders who are looking for increased volatility often choose as their favorite.
A Trader's Introduction to the Yen, Part III
As we touched on in our first lesson in this series, Japan has few natural resources of their own, so they are an economy that relies heavily on imports of natural resources such as oil. This is something to keep in mind when trading the currency, because as Japan imports almost 100% of its oil from overseas, increases and decreases in the price of oil will normally have an affect on the value of the Yen.
The second thing that it is important to keep in mind, is that the Japanese economy relies heavily on exports such as cars and electronics to grow their economy. As a result of this, the value of Japan's currency is an even more important factor in their economic growth than for countries which do not rely so heavily on exports to drive domestic growth. As we learned about in our lessons on trade flows, a stronger Yen automatically means that Japanese goods and services become more expensive for overseas consumers, which will hurt Japanese exports.
To keep the Yen from rising to the point where it would hurt the Japanese economy, the Bank of Japan is notorious for intervening in the foreign exchange markets, which can send the value of the yen plummeting.Below is a graph provided by Dailyfx.com which shows some of the history of Japanese intervention, which as you can see tends to take place around the 100 level in the currency. As the BOJ has been so effective with intervention in the past, it has gotten to the point now where all they need to do is talk of intervention (something called verbal intervention) to yen based pairs rocketing higher.
As with all the currency pairs we are studying, there are many economic indicators which affect the value of the yen, that we could spend much time discussing. As we have already covered the major indicators for the US in module 8 of our basics of trading course, and as the indicators in Japan are much the same, in the interest of maximizing our learning time I am going to point you towards two free sites for more information.
The second thing that it is important to keep in mind, is that the Japanese economy relies heavily on exports such as cars and electronics to grow their economy. As a result of this, the value of Japan's currency is an even more important factor in their economic growth than for countries which do not rely so heavily on exports to drive domestic growth. As we learned about in our lessons on trade flows, a stronger Yen automatically means that Japanese goods and services become more expensive for overseas consumers, which will hurt Japanese exports.
To keep the Yen from rising to the point where it would hurt the Japanese economy, the Bank of Japan is notorious for intervening in the foreign exchange markets, which can send the value of the yen plummeting.Below is a graph provided by Dailyfx.com which shows some of the history of Japanese intervention, which as you can see tends to take place around the 100 level in the currency. As the BOJ has been so effective with intervention in the past, it has gotten to the point now where all they need to do is talk of intervention (something called verbal intervention) to yen based pairs rocketing higher.
As with all the currency pairs we are studying, there are many economic indicators which affect the value of the yen, that we could spend much time discussing. As we have already covered the major indicators for the US in module 8 of our basics of trading course, and as the indicators in Japan are much the same, in the interest of maximizing our learning time I am going to point you towards two free sites for more information.
A Trader's Introduction to the Yen, Part II
In 1989 the Bank of Japan (BOJ) began to raise interest rates, and the government instituted limits on total bank lending to the real estate sector, to try and reign in speculation which was driving stock and real estate prices to astronomically high levels. While the central bank was hoping to simply take the foot of the gas and tap the breaks on the economy, unfortunately the markets reaction was drastic, resulting in a stock market and real estate crash starting in 1990.
This was a "perfect storm" so to speak for the Japanese financial system and economy, as the effects of decline in real estate and stock market prices started a chain reaction, which reverberated throughout the economy and whole financial system. The first and perhaps most important thing to understand here, is that the economic slowdown, combined with drastic falls in the stock and real estate markets, caused the financial position of Japanese banks to rapidly deteriorate.
Much of the speculation that was sending real estate prices so high was being driven by loans from Japanese banks, which took the land they were making the loan on as collateral. As the quality of the loan was thus tied to the value of the real estate backing that loan, as real estate prices fell off a cliff so did the quality of the bank's loan portfolio's.
Secondly, large Japanese institutions such as banks cooperate with one another in Japan, and as a result of this Japanese banks hold large quantities of each others stock. Holdings of stock are considered an asset for the banks and were included in the banks capital numbers, which basically define how financially solid a banks balance sheet is. As the value of these stock holdings tumbled lower, so did the bank's capital position, putting further pressure on the stability of the individual banks in Japan, and the Japanese Banking System as a whole.
Thirdly, as the economy slowed as a result of all this, the individuals and corporations who had received loans began to have a harder time making their payments, further deteriorating the quality of the bank's loans, and stability of the banking system.
At least partially as a result of weak corporate governance, most will argue that Japanese banks did little to adjust to the financial difficulties they now faced, instead preferring to wait for stock and real estate prices to move back towards their pre bubble bursting levels. The government also did little to address the problem until 1995, when it became clear that without government intervention massive bank failures would result.
This history is important to us as traders for two reasons:
1. Reforms aimed at returning the stability of the Japanese financial system are still ongoing today, and it is these financial and structural reforms that traders watch closely when determining the fundamental direction of the Japanese Economy.
2. Japanese consumers, many of whom had lost large sums of money in the real estate and stock markets, lowered consumer spending significantly, resulting in prices actually starting to decrease towards the end of the 1990's, something which is known as deflation.
While many argue that the Bank of Japan acted too late they did eventually respond to the economic weakness with interest rate cuts driving interest rates in Japan down from over 8% in 1990, all the way to zero percent in 1999. While the Bank of Japan has increased interest rates in Japan to .5% since then, this is still by far the lowest rate of any of the the major economies of the world. As a result of this it is very cheap to borrow Japanese Yen, making it the primary funding currency for the carry trades, which we learned about in module 3 of this course. One cannot fully understand and anticipate movements in the Japanese Yen, without a full understanding of the carry trade
This was a "perfect storm" so to speak for the Japanese financial system and economy, as the effects of decline in real estate and stock market prices started a chain reaction, which reverberated throughout the economy and whole financial system. The first and perhaps most important thing to understand here, is that the economic slowdown, combined with drastic falls in the stock and real estate markets, caused the financial position of Japanese banks to rapidly deteriorate.
Much of the speculation that was sending real estate prices so high was being driven by loans from Japanese banks, which took the land they were making the loan on as collateral. As the quality of the loan was thus tied to the value of the real estate backing that loan, as real estate prices fell off a cliff so did the quality of the bank's loan portfolio's.
Secondly, large Japanese institutions such as banks cooperate with one another in Japan, and as a result of this Japanese banks hold large quantities of each others stock. Holdings of stock are considered an asset for the banks and were included in the banks capital numbers, which basically define how financially solid a banks balance sheet is. As the value of these stock holdings tumbled lower, so did the bank's capital position, putting further pressure on the stability of the individual banks in Japan, and the Japanese Banking System as a whole.
Thirdly, as the economy slowed as a result of all this, the individuals and corporations who had received loans began to have a harder time making their payments, further deteriorating the quality of the bank's loans, and stability of the banking system.
At least partially as a result of weak corporate governance, most will argue that Japanese banks did little to adjust to the financial difficulties they now faced, instead preferring to wait for stock and real estate prices to move back towards their pre bubble bursting levels. The government also did little to address the problem until 1995, when it became clear that without government intervention massive bank failures would result.
This history is important to us as traders for two reasons:
1. Reforms aimed at returning the stability of the Japanese financial system are still ongoing today, and it is these financial and structural reforms that traders watch closely when determining the fundamental direction of the Japanese Economy.
2. Japanese consumers, many of whom had lost large sums of money in the real estate and stock markets, lowered consumer spending significantly, resulting in prices actually starting to decrease towards the end of the 1990's, something which is known as deflation.
While many argue that the Bank of Japan acted too late they did eventually respond to the economic weakness with interest rate cuts driving interest rates in Japan down from over 8% in 1990, all the way to zero percent in 1999. While the Bank of Japan has increased interest rates in Japan to .5% since then, this is still by far the lowest rate of any of the the major economies of the world. As a result of this it is very cheap to borrow Japanese Yen, making it the primary funding currency for the carry trades, which we learned about in module 3 of this course. One cannot fully understand and anticipate movements in the Japanese Yen, without a full understanding of the carry trade
A Trader's Introduction to the Yen, Part I
Japan has the second largest economy in the world behind the United States, and an economic history that is the starting point for understanding the fundamentals of the Yen. The first thing that it is important to understand from a fundamental standpoint about the Japanese economy, is that unlike the United States, Japan has very few natural resources. As a result of this, prior to World War II, Japan had a large military force, which it used to occupy Korea, Taiwan, and parts of China. The country saw this as necessary, because of the vulnerable position that its lack of natural resources would have otherwise put it into.
Like with Europe however, World War II, set the country back considerably from an economic standpoint, as according to wikipedia.org, 40% of its industrial plants and infrastructure were destroyed. While no one would obviously wish for that type of destruction, there was actually a silver lining in this for the Japanese Economy. As so much of their infrastructure had been destroyed, this gave the Japanese the ability to upgrade it significantly, ultimately giving them an edge over victor states, who now had much older factories.
After World War II the United States occupied Japan, which resulted in the building of a democratic nation, that was dominated by industry, instead of the military. As the Japanese were now putting all of the focus, which had before been put into the military, into rebuilding their industries, they were able to not only match their pre war production levels by 1950, but surpass them. In the decades that followed Japan proved very competitive on the international stage, and its economic growth in the 60's, 70's and 80's has been described as nothing short of astonishing.
If you were around living in the US during the 80's, you can probably remember the envy and fear among the US population, that Japan was quickly going to overcome the United States as the world's economic power house.
While I don't think there is any question that the quality of Japanese products and services has remained very high since the 80's, unfortunately Japan's economy derailed in the early 1990's, culminating in the busting of one of the most famous asset price bubbles in history.
In the decades following World War II the Japanese population had one of the highest savings rates in the world. As more money was being saved, this meant there was more money available for investment, making access to credit much easier than it had been in the past. As Japan's economy was and still is an export oriented economy, the value of the currency also went up dramatically during this time. The combination of a strong economy, easy access to credit, and a strengthening currency made Japanese assets especially attractive.
As its economy seemed unstoppable, and newly wealthy Japanese saved more and more money, much of that capital flowed into the stock and real estate markets. As you can see from this chart the stock market roared through the 1980s, almost quadrupling in value in 5 years. In the most expensive districts, according to wikipedia.org, real estate prices reached as high as $139,000 per square foot.
From the high of the stock and real estate markets in 1990, both markets made a slow and painful decline. It took until 2003 for the stock market to finally bottom, down from a top of around 39,000 to a bottom of around 7600. According to wikipedia.org, prices for the most expensive commercial real estate properties stood at 1/100th of their pre bubble bursting peak, and $20 Trillion in wealth had been wiped out in the stock and real estate markets.
While this may seem like a history lesson that is not relevant to traders, as we will learn in tomorrow's lesson, the affects of Japan's asset price bubble on the Yen are still being felt today, and therefore an understanding is necessary to know how today's market will react to different fundamental events.
Like with Europe however, World War II, set the country back considerably from an economic standpoint, as according to wikipedia.org, 40% of its industrial plants and infrastructure were destroyed. While no one would obviously wish for that type of destruction, there was actually a silver lining in this for the Japanese Economy. As so much of their infrastructure had been destroyed, this gave the Japanese the ability to upgrade it significantly, ultimately giving them an edge over victor states, who now had much older factories.
After World War II the United States occupied Japan, which resulted in the building of a democratic nation, that was dominated by industry, instead of the military. As the Japanese were now putting all of the focus, which had before been put into the military, into rebuilding their industries, they were able to not only match their pre war production levels by 1950, but surpass them. In the decades that followed Japan proved very competitive on the international stage, and its economic growth in the 60's, 70's and 80's has been described as nothing short of astonishing.
If you were around living in the US during the 80's, you can probably remember the envy and fear among the US population, that Japan was quickly going to overcome the United States as the world's economic power house.
While I don't think there is any question that the quality of Japanese products and services has remained very high since the 80's, unfortunately Japan's economy derailed in the early 1990's, culminating in the busting of one of the most famous asset price bubbles in history.
In the decades following World War II the Japanese population had one of the highest savings rates in the world. As more money was being saved, this meant there was more money available for investment, making access to credit much easier than it had been in the past. As Japan's economy was and still is an export oriented economy, the value of the currency also went up dramatically during this time. The combination of a strong economy, easy access to credit, and a strengthening currency made Japanese assets especially attractive.
As its economy seemed unstoppable, and newly wealthy Japanese saved more and more money, much of that capital flowed into the stock and real estate markets. As you can see from this chart the stock market roared through the 1980s, almost quadrupling in value in 5 years. In the most expensive districts, according to wikipedia.org, real estate prices reached as high as $139,000 per square foot.
From the high of the stock and real estate markets in 1990, both markets made a slow and painful decline. It took until 2003 for the stock market to finally bottom, down from a top of around 39,000 to a bottom of around 7600. According to wikipedia.org, prices for the most expensive commercial real estate properties stood at 1/100th of their pre bubble bursting peak, and $20 Trillion in wealth had been wiped out in the stock and real estate markets.
While this may seem like a history lesson that is not relevant to traders, as we will learn in tomorrow's lesson, the affects of Japan's asset price bubble on the Yen are still being felt today, and therefore an understanding is necessary to know how today's market will react to different fundamental events.
A Trader's Introduction to the Euro, Part II
As we discussed in our last lesson, the Euro was launched as an electronic currency on January 1st 1999. As you can see from this chart, the markets initial confidence in the Euro, and really the European Union as a whole, was initially not very high. Over the next year the currency sold off from just above 1.1600 dollars to 1 Euro at its inception, to a low point of around .8200 cents to 1 Euro towards the end of 2000. While the tables have turned now in the Euro's favor, it actually took the European Central Bank intervening in the markets and buying Euros, to keep the currency from sliding further in 2000.
The launch of the Euro was the largest monetary changeover ever, and as you can see, was not guaranteed success. As we touched on in our last lesson, getting a dozen countries, which varied widely in their economic and political clout, to give up control over their own monetary policy and switch to a more centralized monetary system, was no easy task.
As we learned about in module 8 of our basics of trading course, one of the most powerful tools that countries have to try and manage their business cycle is monetary policy, a tool which those adopting the Euro were essentially giving up. Although we have not seen a real test of this yet, you can imagine a situation where the economy of one of the major countries in the EMU such as Germany, goes into recession, but overall growth in the rest of the EMU is steady. If Germany were not part of the EMU, they could cut interest rates to try and bring their economy out of recession. Since they are however, their hands would be tied in this situation from a monetary policy standpoint, which may drive their economy deeper into recession than would otherwise be the case.
As we also learned about in module 8 of our free basics of trading course, countries have a second tool to manage the business cycle, which is Fiscal policy. As the EMU nations are still primarily independent from a fiscal policy standpoint, they do still have this in their toolbox. The issue here however, is that one of the ongoing requirements established in the Massstricht treaty for countries which join the EMU, is that member country's budget deficits must be less than 3% of GDP. So here again member nations are someone limited in what they can do to help their own economies, should it falter.
Of all the things to understand about the Euro from a fundamentals standpoint, it is this that is the most important, as it is here that a true test of the Euro, will eventually come.
So far I think most would agree that the Euro has been a resounding success, and since the original 12 countries replaced their currencies with the Euro as their paper currency in January of 2002, 3 more EU member nations have joined the EMU, and 5 other countries outside the EU have adopted the Euro as their official currency.
As a result of its success and the large combined economies that the currency represent, many feel that the Euro will one day replace the US Dollar as the premiere currency of the world.
The launch of the Euro was the largest monetary changeover ever, and as you can see, was not guaranteed success. As we touched on in our last lesson, getting a dozen countries, which varied widely in their economic and political clout, to give up control over their own monetary policy and switch to a more centralized monetary system, was no easy task.
As we learned about in module 8 of our basics of trading course, one of the most powerful tools that countries have to try and manage their business cycle is monetary policy, a tool which those adopting the Euro were essentially giving up. Although we have not seen a real test of this yet, you can imagine a situation where the economy of one of the major countries in the EMU such as Germany, goes into recession, but overall growth in the rest of the EMU is steady. If Germany were not part of the EMU, they could cut interest rates to try and bring their economy out of recession. Since they are however, their hands would be tied in this situation from a monetary policy standpoint, which may drive their economy deeper into recession than would otherwise be the case.
As we also learned about in module 8 of our free basics of trading course, countries have a second tool to manage the business cycle, which is Fiscal policy. As the EMU nations are still primarily independent from a fiscal policy standpoint, they do still have this in their toolbox. The issue here however, is that one of the ongoing requirements established in the Massstricht treaty for countries which join the EMU, is that member country's budget deficits must be less than 3% of GDP. So here again member nations are someone limited in what they can do to help their own economies, should it falter.
Of all the things to understand about the Euro from a fundamentals standpoint, it is this that is the most important, as it is here that a true test of the Euro, will eventually come.
So far I think most would agree that the Euro has been a resounding success, and since the original 12 countries replaced their currencies with the Euro as their paper currency in January of 2002, 3 more EU member nations have joined the EMU, and 5 other countries outside the EU have adopted the Euro as their official currency.
As a result of its success and the large combined economies that the currency represent, many feel that the Euro will one day replace the US Dollar as the premiere currency of the world.
A Trader's Introduction to the Euro, Part I
The Euro is now the official currency of 15 of the 27 member states in the European Union (EU), which makes it the currency used by over 320 Million people. Like Europe itself, the Euro has an interesting history, which we as traders must understand to have a full understanding of the fundamentals of the currency. There are two major factors which lead to the eventual formation of the European Union, and therefore the Euro, which are important for traders to understand.
1. The major powers in Europe had been battling each other for hundreds of years prior to World War II. Nothing like the decimation that the World Wars brought to Europe had ever been seen before however, so after World War II, there was a realization that a drastic reordering of the political landscape was needed, in order to put nationalistic rivalries to bed once and for all.
2. Also as a result of World War II, the world's power structure had shifted, and the major European countries who were once the superpowers of the world, were replaced by two new superpowers. The United States and The Soviet Union were now the unrivaled superpowers of the world, and as a result there was a keen awareness among the former world powers of Europe, that banding together was the only way for Europe to have comparable clout on the world stage.It was primarily as a result of these two factors that the European Coal and Steel Community (which eventually became the European Economic Community, the predecessor to the European Union) was founded in the 1950's with the general goals of:
1. Lowering trade barriers and facilitating economic cooperation for the benefit of the member nations.
2. Increasing Europe's clout on the world stage
3. Integrating the economies of the major countries in Europe to the point where they were too reliant on one another to go to war again.
During the next several decades many things happened from a diplomatic and trade standpoint that are very interesting, and which can be read about by doing a search on google for the history of the European Union. The next important event for us as traders however, came with the ratification of something which is known as the Maastricht Treaty in the 1990's. Up to this point, the idea of a tie up between nations in Europe was primarily focused on removing trade barriers and promoting economic cooperation. With the Maastricht treaty, member countries moved from a simple economic cooperation, to the much grander ambition of political integration between member nations.
This is important to us as traders as it was here that plans for a single currency to be used among member nations was introduced, and therefore here that the basic fundamentals of the Euro were laid out. There were three steps outlined in the Maastricht treaty that had to be completed before the currency could be released which were:
1. Free circulation of capital among member countries.
2. The second, and most important step for us as traders to understand, was the coordination of economic policies. Once the Euro was introduced, each of the member countries would be bound by the monetary policy as set by the European Central Bank. With this in mind, you could not have countries with extremely different levels of inflation and interest rates, replace their currency with the Euro, without undermining the credibility and fundamentals of the currency. To make the currency credible, and to make its introduction as smooth as possible, member countries were required to keep inflation, interest rates, and debt below certain levels. Lastly, they were also required to maintain an exchange rate that was basically a banded peg, allowing their currency to fluctuate only within a narrow band.
3. In 1999 the European Central Bank was established and the eleven countries listed here began to use the Euro in electronic format only.
Spain, Portugal, Italy, Belgium, the Netherlands, Luxembourg, France, Germany, Austria, Ireland and Finland.
These countries formed what is known as the European Monetary Union, which is comprised of countries who are members of the European Union, and use the Euro as their currency.
Greece, the United Kingdom, Sweden, and Denmark (the other members of the European Union at the time) remained outside the European monetary Union for different reasons.
While this may seem a bit like a history lesson rather than a lesson in trading, it is very important for traders of the Euro to have an understanding of the history we have just gone over. As we will learn in coming lessons, it is because of this history that the Euro is where it is today, and many of the concepts we have just outlined still affect the value of the currency in today's market.
1. The major powers in Europe had been battling each other for hundreds of years prior to World War II. Nothing like the decimation that the World Wars brought to Europe had ever been seen before however, so after World War II, there was a realization that a drastic reordering of the political landscape was needed, in order to put nationalistic rivalries to bed once and for all.
2. Also as a result of World War II, the world's power structure had shifted, and the major European countries who were once the superpowers of the world, were replaced by two new superpowers. The United States and The Soviet Union were now the unrivaled superpowers of the world, and as a result there was a keen awareness among the former world powers of Europe, that banding together was the only way for Europe to have comparable clout on the world stage.It was primarily as a result of these two factors that the European Coal and Steel Community (which eventually became the European Economic Community, the predecessor to the European Union) was founded in the 1950's with the general goals of:
1. Lowering trade barriers and facilitating economic cooperation for the benefit of the member nations.
2. Increasing Europe's clout on the world stage
3. Integrating the economies of the major countries in Europe to the point where they were too reliant on one another to go to war again.
During the next several decades many things happened from a diplomatic and trade standpoint that are very interesting, and which can be read about by doing a search on google for the history of the European Union. The next important event for us as traders however, came with the ratification of something which is known as the Maastricht Treaty in the 1990's. Up to this point, the idea of a tie up between nations in Europe was primarily focused on removing trade barriers and promoting economic cooperation. With the Maastricht treaty, member countries moved from a simple economic cooperation, to the much grander ambition of political integration between member nations.
This is important to us as traders as it was here that plans for a single currency to be used among member nations was introduced, and therefore here that the basic fundamentals of the Euro were laid out. There were three steps outlined in the Maastricht treaty that had to be completed before the currency could be released which were:
1. Free circulation of capital among member countries.
2. The second, and most important step for us as traders to understand, was the coordination of economic policies. Once the Euro was introduced, each of the member countries would be bound by the monetary policy as set by the European Central Bank. With this in mind, you could not have countries with extremely different levels of inflation and interest rates, replace their currency with the Euro, without undermining the credibility and fundamentals of the currency. To make the currency credible, and to make its introduction as smooth as possible, member countries were required to keep inflation, interest rates, and debt below certain levels. Lastly, they were also required to maintain an exchange rate that was basically a banded peg, allowing their currency to fluctuate only within a narrow band.
3. In 1999 the European Central Bank was established and the eleven countries listed here began to use the Euro in electronic format only.
Spain, Portugal, Italy, Belgium, the Netherlands, Luxembourg, France, Germany, Austria, Ireland and Finland.
These countries formed what is known as the European Monetary Union, which is comprised of countries who are members of the European Union, and use the Euro as their currency.
Greece, the United Kingdom, Sweden, and Denmark (the other members of the European Union at the time) remained outside the European monetary Union for different reasons.
While this may seem a bit like a history lesson rather than a lesson in trading, it is very important for traders of the Euro to have an understanding of the history we have just gone over. As we will learn in coming lessons, it is because of this history that the Euro is where it is today, and many of the concepts we have just outlined still affect the value of the currency in today's market.
How to Trade the Euro Fundamentals
As you can see from this graph, member countries Germany, France, Italy, and Spain make up over 75% of the Eurozone's GDP. As a result of this economic data out of these countries has the tendency to move the Euro the most, so traders naturally pay them more attention.
There are literally thousands of economic numbers released in the Eurozone however, like we covered in module 3 of this course, those that affect the current account (trade flows) or interest rates (capital flows) are going to have the greatest potential to move the currency. All of the indicators which we cover in module 8 of our basics of trading course, have a counterpart in the EU. Most of the time they are also named the same, and as they show the same things, traders can expect the market to react accordingly. The only thing to keep in mind here is that the economic climate in the United States vs. the Eurozone will differ at times, so traders and therefore the market may react differently to the same number out of the EU than they do out of the US.The second thing that it is important to understand about EU economic releases, is the different mandate of the European Central Bank, versus the Federal Reserve. Where the Federal Reserve has a dual mandate of maximizing employment and maintaining price stability, the ECB's mandate is solely to maintain price stability. With this in mind, the ECB is normally seen as more hawkish than the federal reserve, meaning they are more likely to hold steady or raise interest rates when economic data show price increases, and less likely to cut interest rates as quickly as the fed when growth in the Eurozone slows.
There are literally thousands of economic numbers released in the Eurozone however, like we covered in module 3 of this course, those that affect the current account (trade flows) or interest rates (capital flows) are going to have the greatest potential to move the currency. All of the indicators which we cover in module 8 of our basics of trading course, have a counterpart in the EU. Most of the time they are also named the same, and as they show the same things, traders can expect the market to react accordingly. The only thing to keep in mind here is that the economic climate in the United States vs. the Eurozone will differ at times, so traders and therefore the market may react differently to the same number out of the EU than they do out of the US.The second thing that it is important to understand about EU economic releases, is the different mandate of the European Central Bank, versus the Federal Reserve. Where the Federal Reserve has a dual mandate of maximizing employment and maintaining price stability, the ECB's mandate is solely to maintain price stability. With this in mind, the ECB is normally seen as more hawkish than the federal reserve, meaning they are more likely to hold steady or raise interest rates when economic data show price increases, and less likely to cut interest rates as quickly as the fed when growth in the Eurozone slows.
Determining the Fate of the US Dollar Part III
If you remember from our first lesson on "Why the US Dollar is Still King of the Currency World", we listed 4 main contributing factors. As we just discussed, the most important factor is its status as the world's reserve currency. Next in line in importance, is the fact that so many foreigners invest in US Assets, and/or hold their savings in US Dollars. According to Kathy Lien's book Day Trading the Currency Market "Foreign direct Investments into the United States are equal to approximately 40% of total global net inflows for the US. On a net basis, the US absorbs 71% of total foreign savings." This is a huge amount of money being held in US Dollars, to the point where foreign individuals and institutions taken together, have enormous control over the fate of the US Dollar.
With this in mind, there are several things that traders watch for when trying to detect any change, which would affect foreigners appetite for US assets, and/or the US Dollar. As individuals and corporations have many of the same concerns that a central bank has in holding US Dollars, we have already covered most of the factors that will affect private individuals and institutions appetite for the dollar. These are things like return on their investments (so basically stock market performance and bond yields), anything they feel may affect those returns (things such as monetary policy and general economic soundness), and the relative value of the dollar itself.
One factor which we have not discussed yet is the general stability of the United States. Before September 11th, the US Dollar was considered a safe haven currency, which would strengthen in times of global uncertainty, as the US was considered one of the safest and most stable places in the world. The events of September 11th diminished the US Dollar's status as a safe haven currency some what, a status which it has struggled to regain ever since.
Next in line of importance is the US Dollar's role in international trade. Many commodities such as gold and oil are quoted in US Dollars in the international markets, and because of this many countries use the US Dollar in international transactions. As we discussed in our lesson on why the US Dollar is Still the King of the Currency world, this creates a lot of demand for the US Dollar, which helps keep foreigner's appetite for the currency strong. As a result, traders are very wary of any talk from countries outside the US, about moving away from the dollar as the de facto currency for international transactions. This is especially true about countries that are a part of OPEC, the oil cartel made up primarily of the oil producing countries in the Middle East.
We should now have a good understanding of each of the factors which traders watch when trying to determine the long term fundamental position of the dollar, which are:
1. Its status as the reserve currency of the world,
2. Countries willingness to use the US Dollar in their currency pegs, and the soundness of those pegs
3. Foreign interest in the US Dollar, and US Dollar denominated assets, from individuals and corporations,
4. The pricing in dollars of commodities in international markets
With this in mind, there are several things that traders watch for when trying to detect any change, which would affect foreigners appetite for US assets, and/or the US Dollar. As individuals and corporations have many of the same concerns that a central bank has in holding US Dollars, we have already covered most of the factors that will affect private individuals and institutions appetite for the dollar. These are things like return on their investments (so basically stock market performance and bond yields), anything they feel may affect those returns (things such as monetary policy and general economic soundness), and the relative value of the dollar itself.
One factor which we have not discussed yet is the general stability of the United States. Before September 11th, the US Dollar was considered a safe haven currency, which would strengthen in times of global uncertainty, as the US was considered one of the safest and most stable places in the world. The events of September 11th diminished the US Dollar's status as a safe haven currency some what, a status which it has struggled to regain ever since.
Next in line of importance is the US Dollar's role in international trade. Many commodities such as gold and oil are quoted in US Dollars in the international markets, and because of this many countries use the US Dollar in international transactions. As we discussed in our lesson on why the US Dollar is Still the King of the Currency world, this creates a lot of demand for the US Dollar, which helps keep foreigner's appetite for the currency strong. As a result, traders are very wary of any talk from countries outside the US, about moving away from the dollar as the de facto currency for international transactions. This is especially true about countries that are a part of OPEC, the oil cartel made up primarily of the oil producing countries in the Middle East.
We should now have a good understanding of each of the factors which traders watch when trying to determine the long term fundamental position of the dollar, which are:
1. Its status as the reserve currency of the world,
2. Countries willingness to use the US Dollar in their currency pegs, and the soundness of those pegs
3. Foreign interest in the US Dollar, and US Dollar denominated assets, from individuals and corporations,
4. The pricing in dollars of commodities in international markets
Determining the Fate of the US Dollar Part II
One of the main reasons why many countries hold so many US Dollars, is so they can use those dollars to fix the value of their currency to the US Dollar. They do this to try and give their currency and economy more credibility, which they hope will lead to a more stable economic environment, and/or to keep the prices of their goods low in comparison to other countries, so their exports will be competitive.
As a quick example lets say that country A pegs their currency at a value of 1 to 1 with the US Dollar. While it is all fine and dandy for country A to say they are pegging their currency to the US Dollar at 1 to 1, it is still the market that sets the true price of Country A's currency in relation to the US Dollar. Because of this, country A has to "defend" its currency peg, by buying its own currency and selling US Dollars when the value of their currency weakens below a 1 to 1 rate, and by selling their currency and buying US Dollars when it strengthens above the 1 to 1 rate.
As some of you who are a little more experienced in the markets probably know, some problems can arise with the above scenario, and there have been many examples in history of countries who were not able to hold their currency pegs. Probably the most famous example of this is referred to as Black Wednesday, when the famous speculator George Soros was credited with forcing the Bank of England to abandon their currency peg, causing the British pound to fall over 25% relative to the US Dollar in a matter of weeks.
So what does all this have to do with the US Dollar's Status as the world's reserve currency? Well, one of the main reasons that countries have in the past chosen to peg their currencies to the US Dollar, is because of the relative stability of the US Dollar in relation to other currencies. It is important to understand that not only do the currencies of countries who peg to the US dollar fluctuate in value along with the US Dollar, but their own monetary policy is basically tied to the monetary policy in the United States.
This is all fine and dandy so long as the monetary policy of the United States is considered sound, and so long as the currency does not fluctuate in a manner that adversely affects the economy of the country pegging to the dollar. Problems arise however when the dollar fluctuates in a way that adversely affects the economy of the country with the peg, and/or the monetary policy of the United States is set in a way that is not beneficial to those same countries.
There is a perfect example of this going on as of this lesson, with oil producing countries in the Middle East. As the price of oil has been high for so long, the economies of countries such as Saudi Arabia are booming, and money is flowing into those countries at a rate never seen before, creating all sorts of demand for the Riyal (Saudi Arabia's Currency). At the same time, the United States, the currency of which Saudi Arabia pegs their currency to, is going through an economic slowdown.
So what you have here is a situation where, if anything, monetary policy should be tightening in Saudi Arabia, and their currency should be strengthening. As their currency is pegged to the US Dollar however, they are affected by the loose monetary policy of the United States, throwing fuel on an already hot economy, and weakening their currency when it really should be strengthening. As we learned in our lessons on monetary policy in module 8 of our basics of trading course, this is a recipe for massive inflation, which it seems they are starting to see signs of now.
Scenarios such as this can cause countries to abandon their currency pegs or switch the currencies that they peg to something which is of major importance to the status of the US Dollar as the World's reserve currency.
There are many different scenarios such as the one above which can arise from countries who peg their currency to another. It is important for us to have a fundamental understanding of how to spot these scenarios, as whether or not countries continue to peg their currencies to the US Dollar, or move to a basket of currencies or another currency all together, will have huge affects on the value of the US Dollar going forward.
As a quick example lets say that country A pegs their currency at a value of 1 to 1 with the US Dollar. While it is all fine and dandy for country A to say they are pegging their currency to the US Dollar at 1 to 1, it is still the market that sets the true price of Country A's currency in relation to the US Dollar. Because of this, country A has to "defend" its currency peg, by buying its own currency and selling US Dollars when the value of their currency weakens below a 1 to 1 rate, and by selling their currency and buying US Dollars when it strengthens above the 1 to 1 rate.
As some of you who are a little more experienced in the markets probably know, some problems can arise with the above scenario, and there have been many examples in history of countries who were not able to hold their currency pegs. Probably the most famous example of this is referred to as Black Wednesday, when the famous speculator George Soros was credited with forcing the Bank of England to abandon their currency peg, causing the British pound to fall over 25% relative to the US Dollar in a matter of weeks.
So what does all this have to do with the US Dollar's Status as the world's reserve currency? Well, one of the main reasons that countries have in the past chosen to peg their currencies to the US Dollar, is because of the relative stability of the US Dollar in relation to other currencies. It is important to understand that not only do the currencies of countries who peg to the US dollar fluctuate in value along with the US Dollar, but their own monetary policy is basically tied to the monetary policy in the United States.
This is all fine and dandy so long as the monetary policy of the United States is considered sound, and so long as the currency does not fluctuate in a manner that adversely affects the economy of the country pegging to the dollar. Problems arise however when the dollar fluctuates in a way that adversely affects the economy of the country with the peg, and/or the monetary policy of the United States is set in a way that is not beneficial to those same countries.
There is a perfect example of this going on as of this lesson, with oil producing countries in the Middle East. As the price of oil has been high for so long, the economies of countries such as Saudi Arabia are booming, and money is flowing into those countries at a rate never seen before, creating all sorts of demand for the Riyal (Saudi Arabia's Currency). At the same time, the United States, the currency of which Saudi Arabia pegs their currency to, is going through an economic slowdown.
So what you have here is a situation where, if anything, monetary policy should be tightening in Saudi Arabia, and their currency should be strengthening. As their currency is pegged to the US Dollar however, they are affected by the loose monetary policy of the United States, throwing fuel on an already hot economy, and weakening their currency when it really should be strengthening. As we learned in our lessons on monetary policy in module 8 of our basics of trading course, this is a recipe for massive inflation, which it seems they are starting to see signs of now.
Scenarios such as this can cause countries to abandon their currency pegs or switch the currencies that they peg to something which is of major importance to the status of the US Dollar as the World's reserve currency.
There are many different scenarios such as the one above which can arise from countries who peg their currency to another. It is important for us to have a fundamental understanding of how to spot these scenarios, as whether or not countries continue to peg their currencies to the US Dollar, or move to a basket of currencies or another currency all together, will have huge affects on the value of the US Dollar going forward.
Factors that Will Determine if the US Dollar Remains King
As we discussed in our last lesson the US Dollar is involved in approximately 89% of all forex transactions, so the fate of the US Dollar has huge implications not only on the US Dollar, but on the forex market as a whole. While currently the US Dollar is still king of the currency world, many argue that the tides are changing, and that the US Dollar is in danger of losing this status. Whether or not this happens, to what extent it happens, and if it does happen how quickly or slowly it happens, is of huge importance to currency traders.
The most important reason why the US Dollar is king of the currency world is the fact that, as we learned about in our last lesson, it is the world's reserve currency. According to Wikipedia.com, as of 2007 there is approximately $7.5 trillion worth of currencies held as reserves by central banks around the world. Of that $7.5 trillion 63% or 4.7 trillion is held in US Dollars. This is an enormous amount of dollars being held by central banks outside of the United States, so forex traders watch closely anything that could show a decrease in the appetite of central banks for US Dollars.Like with individuals and companies, other countries willingness to lend money to the United States (by holding US Dollar Denominated Debt as reserves) is based on the financial soundness of the United States as a whole. As we learned about in module 3 of this course, the US has run a large current account deficit for years. In addition to this, the country's government has also run large budget deficits. Like an individual who runs up large amounts of debt, this makes the debt of the United States less attractive, and has the potential to decrease other countries willingness to fund these activities, by holding US Dollar Denominated debt as reserves.
Secondly, many consider the monetary policy of the United States to be flawed, citing the Federal Reserve's increase of the money supply to hold interest rates low, as a major factor in the dollar's decline. As we learned about in our lessons in module 3 of this course, the lowering of interest rates tends to weaken the value of a currency all else being equal. As the value of the currency falls, countries around the world who hold that currency, see wealth evaporate due to the falling value of their reserves. This obviously has the potential to make the US Dollar less attractive for them to hold as their reserve currency, which means a decrease in demand, and a decrease in the value of the currency all else being equal.As of this lesson the US Dollar has fallen over 35% in the last several years, as measured by the US Dollar Index. As we just discussed, this decreases the wealth of the countries who hold the US Dollar as their reserve currency, and has the potential to reduce their appetite for US Dollars, regardless of the reason for the decline in value. This potentially means a decrease in demand from the central banks to hold US Dollars as their reserve currency, and a decrease in the value of the currency, all else being equal.US Dollar IndexWith these three factors in mind, traders will watch carefully anything they feel will affect the willingness of other countries to continue to accumulate and hold the US Dollar as their reserve currency. Most importantly here are statements from any central bank or government officials in regards to this. While a statement from potentially any country in support of the US Dollar, or that they are diversifying away from the US Dollar has the potential to move markets, traders are especially sensitive to any hints from the largest holders of US Dollars.
The final factor which people point to as a reason why the US Dollar may lose its status as king of the currency world, is because of the rise in prominence of the EURO, and its relative strength in comparison to the dollar. Before the introduction of the EURO, there was not really another currency which had the potential to compete on the same level as the dollar, as the reserve currency of the world. The famous former chairman of the US Federal Reserve Alan Greenspan, has even been quoted as saying: "it is absolutely conceivable that the EURO will replace the dollar as reserve currency, or will be traded as an equally important reserve currency." As you can see from the chart below, while the EURO still comes no where close to the US Dollar's dominance as the world's reserve currency, it is slowly gaining ground on the Dollar, an important point traders will be watching.
The most important reason why the US Dollar is king of the currency world is the fact that, as we learned about in our last lesson, it is the world's reserve currency. According to Wikipedia.com, as of 2007 there is approximately $7.5 trillion worth of currencies held as reserves by central banks around the world. Of that $7.5 trillion 63% or 4.7 trillion is held in US Dollars. This is an enormous amount of dollars being held by central banks outside of the United States, so forex traders watch closely anything that could show a decrease in the appetite of central banks for US Dollars.Like with individuals and companies, other countries willingness to lend money to the United States (by holding US Dollar Denominated Debt as reserves) is based on the financial soundness of the United States as a whole. As we learned about in module 3 of this course, the US has run a large current account deficit for years. In addition to this, the country's government has also run large budget deficits. Like an individual who runs up large amounts of debt, this makes the debt of the United States less attractive, and has the potential to decrease other countries willingness to fund these activities, by holding US Dollar Denominated debt as reserves.
Secondly, many consider the monetary policy of the United States to be flawed, citing the Federal Reserve's increase of the money supply to hold interest rates low, as a major factor in the dollar's decline. As we learned about in our lessons in module 3 of this course, the lowering of interest rates tends to weaken the value of a currency all else being equal. As the value of the currency falls, countries around the world who hold that currency, see wealth evaporate due to the falling value of their reserves. This obviously has the potential to make the US Dollar less attractive for them to hold as their reserve currency, which means a decrease in demand, and a decrease in the value of the currency all else being equal.As of this lesson the US Dollar has fallen over 35% in the last several years, as measured by the US Dollar Index. As we just discussed, this decreases the wealth of the countries who hold the US Dollar as their reserve currency, and has the potential to reduce their appetite for US Dollars, regardless of the reason for the decline in value. This potentially means a decrease in demand from the central banks to hold US Dollars as their reserve currency, and a decrease in the value of the currency, all else being equal.US Dollar IndexWith these three factors in mind, traders will watch carefully anything they feel will affect the willingness of other countries to continue to accumulate and hold the US Dollar as their reserve currency. Most importantly here are statements from any central bank or government officials in regards to this. While a statement from potentially any country in support of the US Dollar, or that they are diversifying away from the US Dollar has the potential to move markets, traders are especially sensitive to any hints from the largest holders of US Dollars.
The final factor which people point to as a reason why the US Dollar may lose its status as king of the currency world, is because of the rise in prominence of the EURO, and its relative strength in comparison to the dollar. Before the introduction of the EURO, there was not really another currency which had the potential to compete on the same level as the dollar, as the reserve currency of the world. The famous former chairman of the US Federal Reserve Alan Greenspan, has even been quoted as saying: "it is absolutely conceivable that the EURO will replace the dollar as reserve currency, or will be traded as an equally important reserve currency." As you can see from the chart below, while the EURO still comes no where close to the US Dollar's dominance as the world's reserve currency, it is slowly gaining ground on the Dollar, an important point traders will be watching.
Why the US Dollar is Still the King of the Currency World
As we discussed briefly in our lesson on the main currencies of the world in module 1 of this course, although there is lots of news lately about the US Dollar losing some of its status, as of this lesson there is no doubt that the US Dollar is still the king of the currency world. There are several primary reasons for this which we will cover in today’s lesson, and which are behind the fact that no matter what currency a trader trades, pretty much everyone in the forex market follows the US Dollar.
The first reason why the US Dollar is the king of the currency world is the fact that it is a part of each of the world’s most actively traded currency pairs. According to the Bank of International Settlements and as outlined here, these currency pairs account for 67% of the daily turnover in the forex market. When you add the US Dollar Swidish Krona currency pair and all of the currencies categorized as “other” traded against the US Dollar, that total rises to 89%
EUR/USD 27%
USD/JPY 13%
USD/GBP 12%
USD/AUD 6%
USD/CHF 5%
USD/CAD 4%
USD/SEK 2%
USD/Other 19%
A second reason why the US Dollar is still the king of the currency world is because it is the world’s primary reserve currency, accounting for over 63% of the world’s currency reserves. A reserve currency is a currency held by the governments/central banks of other countries in large quantities. Countries do this so they can purchase goods which are priced in the reserve currency at a cheaper rate than if they had to convert, and to borrow money at a cheaper rate, since lenders will be more likely to lend knowing they hold large quantities of what is considered a more credible currency. Perhaps most importantly for traders, many countries and especially countries in Asia (the most talked about example being china) maintain large reserves of US Dollars so they can either peg the value of their currency to the US Dollar, or maintain a loose peg. The goal here is to either stabilize their own currencies and therefore their economies and/or to hold the value of their currencies artificially low in order to make their goods more competitive overseas, something which we will examine further in our next lesson.
Thirdly, many private businesses and individuals located outside the United States hold US Dollars for trade reasons, because they consider the currency more stable than their home country’s currency, or for a multitude of other reasons. This, combined with what we just covered on the US Dollar being the world’s primary reserve currency, means that over 2/3rds of all US Dollars in circulation are held outside of the United States.
The last major reason why the US Dollar is still king of the currency world is because many major commodities such as oil, gold, and silver are priced in US Dollars, making access to US Dollars essential for anyone in the world who wants to purchase these products.
The first reason why the US Dollar is the king of the currency world is the fact that it is a part of each of the world’s most actively traded currency pairs. According to the Bank of International Settlements and as outlined here, these currency pairs account for 67% of the daily turnover in the forex market. When you add the US Dollar Swidish Krona currency pair and all of the currencies categorized as “other” traded against the US Dollar, that total rises to 89%
EUR/USD 27%
USD/JPY 13%
USD/GBP 12%
USD/AUD 6%
USD/CHF 5%
USD/CAD 4%
USD/SEK 2%
USD/Other 19%
A second reason why the US Dollar is still the king of the currency world is because it is the world’s primary reserve currency, accounting for over 63% of the world’s currency reserves. A reserve currency is a currency held by the governments/central banks of other countries in large quantities. Countries do this so they can purchase goods which are priced in the reserve currency at a cheaper rate than if they had to convert, and to borrow money at a cheaper rate, since lenders will be more likely to lend knowing they hold large quantities of what is considered a more credible currency. Perhaps most importantly for traders, many countries and especially countries in Asia (the most talked about example being china) maintain large reserves of US Dollars so they can either peg the value of their currency to the US Dollar, or maintain a loose peg. The goal here is to either stabilize their own currencies and therefore their economies and/or to hold the value of their currencies artificially low in order to make their goods more competitive overseas, something which we will examine further in our next lesson.
Thirdly, many private businesses and individuals located outside the United States hold US Dollars for trade reasons, because they consider the currency more stable than their home country’s currency, or for a multitude of other reasons. This, combined with what we just covered on the US Dollar being the world’s primary reserve currency, means that over 2/3rds of all US Dollars in circulation are held outside of the United States.
The last major reason why the US Dollar is still king of the currency world is because many major commodities such as oil, gold, and silver are priced in US Dollars, making access to US Dollars essential for anyone in the world who wants to purchase these products.
JOY OF FOREX TRADING 1508
There are many interesting things that can be pointed out about the foreign exchange market, however there are a few major things that really separate this market from the equities and futures markets.
24 Hour Liquidity
Probably the biggest advantages that traders of the forex market will cite is that the market is by far the largest market in the world, and that main currencies can be traded actively 24 hours a day. The huge amount of volume traded in the world’s main currencies each day, dwarfs the volume traded in the equities and the futures markets many times over. This combined with the 24 hour trading day gives traders the ability to determine their own trading hours instead of having to trade within set hours as they would have to when trading stocks and/or futures. More importantly than this however is that as the market is more liquid than the futures and equities markets, price slippage (the difference between where you click to enter or exit a trade and where you actually get in or out) in the forex market is normally much smaller than in the stock and futures market.The disadvantage here is that real market junkies sometimes cannot pull themselves away from the screen while the market is trading and need the finite trading hours of futures and/or stocks to force them to step away from the market. As my background is in forex I have seen many stock and futures traders burn out when trying to trade forex for this reason.
Leverage
There is more leverage provided to traders by most forex trading firms than any other market in the world. Many firms offer you up to 200 to 1 leverage which if fully used would essentially take a .5% move in the market and turn it into a 100% gain or loss on the value of the account.As the most highly traded currencies rarely move more than a couple of percent in a day, this allows traders to tailor the forex market to their needs, making it a conservative instrument when traded without leverage or the crack cocaine of financial instruments when making full use of the leverage available.While the availability of leverage is normally seen as an advantage in the above sense, it is also one of the places where forex gets its bad name. Many times new traders are lured to the market after seeing the ability to amplify their returns by making use of all that leverage. What these traders do not fully understand however is that leverage is a double edged sword causing greater losses just as quickly as it can cause greater profits. As a result of this lack of understanding and jackpot mentality, many beginning forex traders loose their money very quickly as a result.
Only Macro Events Affect the Forex Market
Unlike stocks where individual company events have a huge affect on price movements the most highly traded currencies are only affected by macro events like the capital flows between countries, and changes in government or central bank policies. This is often pointed to as an advantage by Forex Traders who feel that this brings less uncertainty to their trades than stock trades which can be thrown way off track if a surprise happens such as a CEO quitting or something similar in the micro picture.This combined with the fact that there is so much liquidity in the market also makes it a much harder market for someone to come in and manipulate the price to their advantage and to the detriment of others.The disadvantage here is that this also means less opportunities to gain an informational edge and to profit from that edge as well.
No Upward Bias
Over the long term the US stock market has always gone up giving stocks in the US an upward bias when trading. As currencies are traded in pairs when the value of one currency is falling this automatically means that the value of another currency is rising. This is an advantage from the standpoint of there is equal opportunity for profit from both long and short trades. This is a disadvantage from the standpoint of not having that upward bias working for you when you are in a long trade.
24 Hour Liquidity
Probably the biggest advantages that traders of the forex market will cite is that the market is by far the largest market in the world, and that main currencies can be traded actively 24 hours a day. The huge amount of volume traded in the world’s main currencies each day, dwarfs the volume traded in the equities and the futures markets many times over. This combined with the 24 hour trading day gives traders the ability to determine their own trading hours instead of having to trade within set hours as they would have to when trading stocks and/or futures. More importantly than this however is that as the market is more liquid than the futures and equities markets, price slippage (the difference between where you click to enter or exit a trade and where you actually get in or out) in the forex market is normally much smaller than in the stock and futures market.The disadvantage here is that real market junkies sometimes cannot pull themselves away from the screen while the market is trading and need the finite trading hours of futures and/or stocks to force them to step away from the market. As my background is in forex I have seen many stock and futures traders burn out when trying to trade forex for this reason.
Leverage
There is more leverage provided to traders by most forex trading firms than any other market in the world. Many firms offer you up to 200 to 1 leverage which if fully used would essentially take a .5% move in the market and turn it into a 100% gain or loss on the value of the account.As the most highly traded currencies rarely move more than a couple of percent in a day, this allows traders to tailor the forex market to their needs, making it a conservative instrument when traded without leverage or the crack cocaine of financial instruments when making full use of the leverage available.While the availability of leverage is normally seen as an advantage in the above sense, it is also one of the places where forex gets its bad name. Many times new traders are lured to the market after seeing the ability to amplify their returns by making use of all that leverage. What these traders do not fully understand however is that leverage is a double edged sword causing greater losses just as quickly as it can cause greater profits. As a result of this lack of understanding and jackpot mentality, many beginning forex traders loose their money very quickly as a result.
Only Macro Events Affect the Forex Market
Unlike stocks where individual company events have a huge affect on price movements the most highly traded currencies are only affected by macro events like the capital flows between countries, and changes in government or central bank policies. This is often pointed to as an advantage by Forex Traders who feel that this brings less uncertainty to their trades than stock trades which can be thrown way off track if a surprise happens such as a CEO quitting or something similar in the micro picture.This combined with the fact that there is so much liquidity in the market also makes it a much harder market for someone to come in and manipulate the price to their advantage and to the detriment of others.The disadvantage here is that this also means less opportunities to gain an informational edge and to profit from that edge as well.
No Upward Bias
Over the long term the US stock market has always gone up giving stocks in the US an upward bias when trading. As currencies are traded in pairs when the value of one currency is falling this automatically means that the value of another currency is rising. This is an advantage from the standpoint of there is equal opportunity for profit from both long and short trades. This is a disadvantage from the standpoint of not having that upward bias working for you when you are in a long trade.
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