Forex Or Stocks?

Today's investors and active traders have access to a growing number of trading instruments, from tried-and-true blue chips and industrials, to the fast-paced futures and forex markets. Deciding which of these markets to trade can be complicated, and many factors need to be considered in order to make the best choice.

The most important element may be the trader's or investor's risk tolerance and trading style. For example, buy-and-hold investors are often more suited to participating in the stock market, while short-term traders, including swing, day and scalp traders, may prefer markets where price volatility is more pronounced. In this article, we'll compare investing in the forex market to buying into blue chip stocks, indexes and industrials.


Forex Vs. Blue Chips
The foreign exchange market is the world's largest financial market, accounting for more than $4 trillion in average traded value each day as of 2011. Many traders are attracted to the forex market because of its high liquidity, around-the-clock trading and the amount of leverage that is afforded to participants.

Blue chips, on the other hand, are stocks from well-established and financially sound companies. These stocks are generally able to operate profitably during challenging economic conditions, and have a history of paying dividends. Blue chips are generally considered to be less volatile than many other investments, and are often used to provide steady growth potential to investors' portfolios.

Volatility Volatility is a measure of short-term price fluctuations. While some traders, particularly short-term and day traders, rely on volatility in order to profit from quick price swings in the market, other traders are more comfortable with less volatile and less risky investments. As such, many short-term traders are attracted to the forex markets, while buy-and-hold investors may prefer the stability offered by blue chips.

Leverage Leverage is another consideration. In the United States, investors generally have access to 2:1 leverage for stocks. The forex market offers a substantially higher leverage of up to 50:1, and in parts of the world even higher leverage is available. Is all this leverage a good thing? Not necessarily. While it certainly provides the springboard to build equity with a very small investment - forex accounts can be opened with as little as $100 - leverage can just as easily destroy a trading account.

Trading Hours Another consideration in choosing a trading instrument is the time period that each is traded. Trading sessions for stocks are limited to exchange hours, generally 9:30am to 4pm Eastern Standard Time, Monday through Friday with the exception of market holidays. The forex market, on the other hand, remains active round-the-clock from 5pm EST Sunday, through 5pm EST Friday, opening in Sydney, then traveling around the world to Tokyo, London and New York. The flexibility to trade during U.S. Asian and European markets, with good liquidity virtually any time of day, is an added bonus to traders whose schedules would otherwise limit their trading activity.


Forex Vs. Indexes
Stock market indexes are a combination of similar stocks, which can be used as a benchmark for a particular portfolio or the broad market. In the U.S. financial markets, major indexes include the Dow Jones Industrial Average (DJIA), the Nasdaq Composite Index, the Standard & Poor's 500 Index (S&P 500) and the Russell 2000. The indexes provide traders and investors with an important method of gauging the movement of the overall market.

A range of products provide traders and investors broad market exposure through stock market indexes. Exchange-traded funds (ETFs) based on stock market indexes, such as S&P Depository Receipts (SPY) and the Nasdaq-100 (QQQQ), are widely traded. Stock index futures and e-mini index futures are other popular instruments based on the underlying indexes. The e-minis boast strong liquidity and have become favorites among short-term traders because of favorable average daily price ranges. In addition, the contract size is much more affordable than the full-sized stock index futures contracts. The e-minis, including the e-mini S&P 500, the e-mini Nasdaq 100, the e-mini Russell 2000 and the mini-sized Dow Futures are traded around the clock on all-electronic, transparent networks.

Volatility The volatility and liquidity of the e-mini contracts is enjoyed by the many short-term traders who participate in stock market indexes. The major equity index futures trade at an average daily notional value of $145 billion, exceeding the combined traded dollar volume of the underlying 500 stocks. The average daily range in price movement of the e-mini contracts affords great opportunity for profiting from short-term market moves.

While the average daily traded value pales in comparison to that of the forex markets, the e-minis provide many of the same perks that are available to forex traders, including reliable liquidity, daily average price movement quotes that are conducive to short-term profits, and trading outside of regular U.S. market hours.

Leverage Futures traders can use large amounts of leverage similar to that available to forex traders. With futures, the leverage is referred to as margin, a mandatory deposit that can be used by a broker to cover account losses. Minimum margin requirements are set by the exchanges where the contracts are traded, and can be as little as 5% of the contract's value. Brokers may choose to require higher margin amounts. Like forex, then, futures traders have the ability to trade in large position sizes with a small investment, creating the opportunity to enjoy huge gains - or suffer devastating losses.

Trading hours While trading does exist nearly around the clock for the electronically traded e-minis (trading ceases for about an hour a day to enable institutional investors to value their positions), the volume may be lower than the forex market, and liquidity during off-market hours could be a concern depending on the particular contract and time of day.


Tax Treatment
While outside the scope of this article, it should be noted that various trading instruments are treated differently at tax time. Short-term gains on futures contracts, for example, may be eligible for lower tax rates than short-term gains on stocks. In addition, active traders may be eligible to choose the mark-to-market (MTM) status for IRS purposes, which allows deductions for trading-related expenses, such as platform fees or education. In order to claim MTM status, the IRS expects trading to be the individual's primary business;  IRS Publication 550 and Revenue Procedure 99-17 cover the basic guidelines on how to properly qualify as a trader for tax purposes. It is strongly recommended that traders and investors seek the advice and expertise of a qualified accountant or other tax specialist to most favorably manage investment activities and related tax liabilities.


The Bottom Line
The internet and electronic trading have opened the doors to active traders and investors around the world to participate in a growing variety of markets. The decision to trade stocks, forex or futures contracts is often based on risk tolerance, account size and convenience. If an active trader is not available during regular market hours to enter, exit or properly manage trades, stocks are not the best option. However, if an investor's market strategy is to buy and hold for the long term, generating steady growth and earning dividends, stocks are a practical choice. Regardless of which instrument(s) a trader or investor selects, the decision should be based on which is the best fit.

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The Pros And Cons Of Trading Forex In An Overseas Account

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed on July 15, 2010, and introduced some changes to the way retail investors participate in the foreign exchange market. The majority of these changes went into effect in October 2010. However, as with all sweeping legislation, there are many gray areas within the act that require some interpretation by forex market participants. The way the market interprets the act will impact whether it is beneficial to open a forex account overseas. Here we'll examine what forex traders now need to consider when looking to trade forex from overseas accounts. 

Before the introduction of the internet, retail investors had difficulty participating in the forex market, primarily because foreign currency is not traded on a central exchange like the stock market. Forex trading occurs over the counter in decentralized worldwide markets; as a result, only large institutions were able to participate, because they had the resources to keep traders on-site. However, now that forex is traded electronically via the internet, even the smallest individual is able to trade forex. Despite the access to the market, forex trading carries with it many risks, but it is popular because individuals can also reap quick and pronounced profits.

One of the benefits of trading foreign currencies is that there is constant movement of prices in this 24-hour market, allowing active traders to move in and out of positions swiftly. As a result, funds need not be tied up for long periods of time. However, these constant price fluctuations also lead to a highly volatile market, where sudden losses can be experienced at any time. And since most traders leverage their trades, margin risk is extremely high. Traders benefit from the forex market in other ways as well. Trading currencies is tax-deferred and gains are taxed when withdrawn under the capital gains tax rate.

There are low transaction costs as many brokers offer no-commissions trading, but because this is a decentralized market, the specialist dealer sets the execution price. So, while the dealer may offer no-commission trading, he is not offering a pro-bono service! The dealer sets the execution price such that he makes a spread on the exchange. As such, the pricing offered by forex dealers can vary tremendously. Dealers also encourage traders to use high leverage so that their spread income is magnified.


New Regulations the Under Dodd-Frank Act of 2010
The Commodity Futures Trading Commission (CFTC) is the governing body authorized to regulate futures "look alike" contracts, which are traded over the counter but are settled based on the settlement price of similar, exchange traded contracts. The CFTC established new rules that regulate the forex market in August 2010. One of the main purposes of these new rules was to provide some much-needed investor protection, specifically as it relates to broker/dealers. In the U.S., broker/dealers must register with the CFTC and are subject to certain operational requirements, including recordkeeping and reporting guidelines. These requirements are similar to the requirements placed on the regulated traditional commodity contract dealers.
Secondly, intermediaries of the transactions will need to register and are subject to net capital requirements of $20 million, along with other risk disclosures. In addition, brokers that accept orders need to maintain a net capital requirement or enter guarantee agreements with the broker/dealers and can only have one guarantee agreement at one time. The CFTC has established anti-fraud regulations over all futures "look alike" contracts. Finally, the CFTC imposed leverage restrictions of 50:1 for major currencies and 20:1 for all other currencies.

Does Opening a Forex Account Overseas Make Sense?
There are two main benefits to opening a forex account overseas. Circumventing the new regulations, in particular the leverage restrictions, can be accomplished this way, although it is unclear whether foreign entities will go against the U.S. government and allow higher leverage.

Another benefit to having a foreign account is the potential tax benefit. Although forex trading is tax deferred, gains are taxed at the capital rate when funds are withdrawn. A foreign account essentially removes any tax requirements, although the IRS may require that U.S. citizens repatriate funds at some point.


Overseas Account Risks
The risks of opening a forex account overseas are several. Counterparty risk may increase as the broker/dealer used by these foreign intermediaries may not be of the highest standards. Detecting and preventing fraud by the dealer may be difficult and scams may be more common. Also, competition may not exist in foreign entities, so getting the best pricing may be to the advantage of the dealer and not the trader. In the same vein, the loss of protections established by the new CFTC regulations is perhaps the greatest risk. The CFTC's new regulatory role over the dealers, intermediaries and brokers participating in the forex market was established to provide the retail investor with protection from the prevalent scams and fraudulent practices common in this decentralized market. These protections are only extended to those that engage with and trade with registered entities.


The Bottom Line
Opening a forex account overseas allows retail investors to trade like other foreign market participants - unrestricted by leverage and other requirements. However, in many cases, the risks may outweigh the benefits. A trader needs to determine whether the potential for higher leverage is worth the risks of forgoing the protections established by the CFTC.

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Are Forex Markets Underpricing Volatility?

This question has been raised by several market commentators, including The Wall Street Journal. Its recent analysis, entitled “Currency Investors: What, Me Worry?” wondered whether the forex markets might not have become too complacent about risk and have seriously underestimated the possibility of another shock.First, some basics. There are two principal volatility measurements: implied volatility and realized volatility. The former is so-called because it must be deduced indirectly. In the Black-Scholes model for pricing options, volatility is the only unknown variable and thus is implied by current market prices. It serves as a proxy for investor expectations for volatility over the period for which the option is valid. Realized volatility is of course the actual volatility that is observed in currency markets, calculated based on the size of fluctuations over a given period of time. When fluctuations are greater (whether upward or downward), volatility is said to be high.For short time frames, implied volatility tends to be very close to realized volatility.

For longer time-frames, however, this is not necessarily the case: “The long-dated implied volatilities are often driven to extreme values by one-sided demand or supply – the difference between implied and realised volatilities this causes is particularly large during periods of risk aversion in the market…making implied volatility a particularly poor proxy for realised volatility during periods of market unrest.” In practice, this is reflected by higher prices for long-dated put or call options (depending on the direction of the move that investors are trying to hedge against).

Indeed, most volatility metrics are well below their historical averages and are rapidly closing in on pre-credit crisis levels. This is true for the JP Morgan G7 3-month forex volatility index, the S&P VIX, as well as for specific currencies. Mataf.net (whose content manager I interviewed yesterday) contains replete short-term and long-term data for a few dozen currency pairs, and you can see that almost all of them feature the same downward trend. According to the WSJ, “Investors believe there is a 66% chance each day for the next month that the euro and pound will move no more than 0.6% and 0.5%, respectively—both limited moves.”

In addition, “A gauge of the euro’s ‘realized’ volatility, which measures how much daily changes deviate from their recent average, is only 8.6%, lower than its 11% rolling one-year average.”Of course, some commentators don’t see any problem here. They see it both as a positive indication that the markets have returned to normal following the financial crisis, and as a reflection of the correlation that has developed between stock prices and forex markets. (You can see from the chart below the strong inverse correlation between the S&P and the US dollar). According to Deutsche Bank, “Most news that should have shocked the market this year has not managed to do so for sufficiently long to make volatility rise sustainably. Our analytical models tell us that we are indeed moving to a low volatility environment again.”

On the other side of the debate is a growing consensus of investors that sees a pendulum that has swung too far. “I just don’t see how volatility will not increase quite substantially,” said one money manager. “There is significant potential for shocks to the system that currency volatility levels suggest the market is not prepared for,” added another, citing higher commodities prices and inflation, growing public debt, and the imminent end of the Fed’s QE2 monetary stimulus.To be sure, volatility has started to tick up over the last month. This trend has also been reflected in options prices: “Many investors have avoided buying short-dated currency options this year, instead focusing on longer-dated protection, a phenomenon called a ‘steep volatility curve’…that trend has slowed a bit, with investors moving to hedge against near-term yen, euro and dollar swings.”Currency traders should start to think about making a few adjustments. Those that think that volatility will continue to rise and/or that the markets are currently underpricing risk can employ a volatility strangle strategy, buying way out-of-the-money puts and calls. The options will pay off if there is a big move in either direction, with no downside risk. Those that think that volatility will continue declining or at least remain at current low levels can make use of the carry trade. Those pairs where interest rate differentials are highest and volatility levels are lowest represent the best candidates. BNP Paribas is also reportedly developing a product that will make it easier for traders to make volatility bets without having to rely on indirect means.

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What the Forex Markets Tell Us about Gold and Silver

All investors, regardless of stripe, must now be aware both of the bull market for gold/silver and the bear market in the US dollar. Despite all of the rhetoric, however, it seems that little is actually understood about how these two phenomena are actually connected. Ultimately, this connection (or lack thereof) has serious implications for both markets.

Many gold investors insist they are buying gold as a proxy for shorting the dollar. Commentary on gold prices is full of apocalyptic warnings about the current financial system and criticism of fiat currencies, which are backed by nothing except for good faith. They argue that buying gold is the best (or even the only) hedge against the eventual collapse of the dollar.

Unfortunately, I don’t think this argument holds up to close scrutiny. First of all, gold and silver [I am including silver in this analysis not because of any deep relationship to gold, but only because of the association ascribed by other commentators and an observable market correlation] prices have risen much faster over the last year (and decade, for that matter) than even the strongest currencies. Furthermore, gold is rising faster than the dollar is falling. In terms of the Swiss Franc – which is to forex markets as gold is to commodities markets – gold has risen more than 17% since the start of 2010.

Second, the putative correlation between gold and forex markets asserts itself sparingly (as you can see from the chart below, which plots gold against an index that shows dollar bearishness), and in difficult-to-understand ways. For example, gold stalled during the financial crisis, while the price of silver suffered a veritable collapse. Does it make sense that when financial anxiety was highest, interest in gold and silver ebbed? Along similar lines, the recent rally in the dollar followed the recent correction in gold and silver – NOT the other way around. If anything, this shows that gold investors are taking their cues from the broader commodity markets, and not from forex markets.

Third, the macroeconomic case for gold is flimsy. While I don’t think it’s fair to attack gold on political grounds, I still think it’s reasonable to try to ascertain what forces are supposedly being hedged against. If it is inflation that gold buyers are worried about, why aren’t other all investors equally concerned? Based on futures markets – whose credibility is just as solid as gold markets – inflation expectations are around 2-4% across the G7. If instead it is sovereign debt default that gold investors are concerned about, again, I have to ask why other markets don’t share their concerns. Credit default swap rates are higher for Japanese and European debt than for US Treasury securities, but the yen and euro remain positively buoyant against the dollar. Again, how do gold investors explain this contradiction?

To me, it seems obvious that gold and silver are rising for reasons that have very little to do with fundamentals. Monetary expansion has driven a wave of money into financial markets, and a significant portion of this has no doubt found its way into gold, silver, and other metals. In fact, it seems that last week’s correction was driven partly by higher margin requirements for speculators. Finally, their cause is being helped by low interest rates, since the opportunity cost of holding gold (which doesn’t pay interest) in lieu of dollars (which does) is currently close to zero. When interest rates rise, it will certainly be interesting to see if there is any impact on gold.

In the end, I don’t have a strong understanding of gold and silver markets. For all I know, their rise is genuinely rooted in supply/demand, as it should be. My only wish is that investors will stop pretending that it has anything to do with the dollar.

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Dow Jones Ramps up Forex Coverage

In a nod to the growing importance of forex ($4 Trillion per day and growing!), Dow Jones recently announced the development of a new forex news service. While many of the features may only be available at some expense to professional subscribers, retail traders should still enjoy some benefit.

According to the Financial Times, “Financial institutions spend over $1.7bn for foreign exchange news and information… However, Dow Jones’ estimated $22m forex market data sales last year trailed far behind Thomson Reuters, at $1.28bn, and Bloomberg, at $518m.” The “news and commentary” segment (which includes The Forex Blog…) accounted for about $100 million of such spending, “with two-thirds of the market controlled by Informa, Dow Jones and IFR Markets.”

DJ FX Trader will apparently aim to solidify Dow Jones position in forex news, while enhancing its stature in the forex information space. Towards that end, its news coverage will be backed by a staff of more than 100 – which have already been instructed to “seek out interviews that could move foreign exchange markets,” while its information offerings will be supported by its investments in algorithmic trading technology, the hiring of former currency traders, and use of a comprehensive outside data feed.

Of course, most of the advanced features will be made available only to those that pay a hefty subscription fee, estimated at more than $100,000 per year. (Bloomberg Terminal, by comparison, costs about $20,000 per year.) It’s not clear exactly what that will include, although for that price, you would expect nothing less than real-time quotes for all currencies on all major exchanges at all times. Its software package would presumably be the the best available, with the ability to run multi-variable trading strategies that execute instantaneously and automatically.

You might wonder why I bother to report on a service that will be prohibitively expensive for almost all retail forex traders. As I reported last week, a recent Federal Reserve Bank study showed that the effectiveness of technical analysis has gradually declined over the last few decades. As a result, the only way to consistently profit is through the use of increasingly sophisticated trading strategies and instantaneous and comprehensive access to information and rates. Similarly, the majority of currency traders (sadly in my opinion) rely on leverage and rapid-fire trading to eke out small gains on each trader. Being even one second late and losing to other traders (or scammed by your broker, as the CFTC has alleged) could mean the difference between winning and losing over the long run.

I’m not seriously encouraging anyone to consider plunking down $100K for DJ Forex Trader. Instead, I merely want to illustrate the gap in information that is forming between the “have” traders and the “have-nots.” As trading is increasingly electronic and algorithmic, and all technical analysis is performed by computers, I remain more convinced than ever that quality, fundamental analysis is the key to making money trading currencies over the long run.

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Forex Signals May Be The Answer To Your Inconsistency In Forex Trading

The opportunity to earn an income from forex trading is there for those that are willing to work for it. But before you begin forex trading, there are some items that you first should consider.

• Find a forex broker you can trust. The forex industry is riddled with brokers that are less than honest. Avoid forex brokers that are market makers. Because they take the other side of the trade, their profits are dependent on your losses. Because of that, they may stop hunt or do other things to lean the odds in their favor. 
• Decide how much you want to open your account with. Begin with a small account size. When you are starting, it’s about you achieving a level of consistency rather than making a lot of money. 
• Get properly educated. Free and pay for education is available throughout the net. Read as much as you can and learn as many strategies as you can. Then work on creating a trading plan according to the methods that you now know and use a demo account or if a live account, use very small lot sizing (preferably micro). 
• If success at Forex Trading seems to slip by you no matter what you do, then you may want to consider using a Forex Signals alert service.

If you have not done much forex trading or you are finding it difficult to consistently make money in your trading, subscribing to a Forex Signals services is a good alternative. If you have invested in other markets, you understand the price paid for not having the right skills or advice. Most traders are unable to find the time to trade because their job or hectic schedule don’t allow the time it takes to study the market. Furthermore, the fact that the Forex Market is a 24 hour exchange, Monday through Friday, makes the task even more difficult.

There are quite a few alert services on the internet providing signals in many different forms. They send alerts to you via email, cell phone instant messenger and even online rooms where you log in and mimic their trades. Now these may all be good services but remember, one of the main reasons traders want to use forex trading signals is because they lack the time. Waiting on an SMS or email then having to place the trades immediately requires time and standing by or reacting takes time A majority of alerts that are sent require immediate attention. If you are too busy to receive the trade, how can you enter the trade quick enough. Remember, forex trading is 24/5. The solution is simple. Look for a Forex Trading Signals service that send their alerts straight to your trading account. There should be no reason for you to place a trade. Many providers can directly connect with your Metatrader 4 trading platform, the most popular forex trading platform available. It’s as simple as using an expert advisor which transfers the alerts, which the Forex Signals company will provide you with.

Many new forex traders pay steep fees for forex signals because they think their return will be much more than what they paid. Even though substantial profits can be made, we must still perform due diligence in looking for a low priced service that is relatively consistent, making sure to try their service first via a free trial.
Paying $50 to $200 per month seems to be the norm. It is important to realize that sometimes the Fx Signals you bought do make money and sometimes they lose. As in any type of investment, there are risks. No Forex signals, Forex robots or Forex trading strategies can guarantee that you will make money every day, week or month but they should be profitable over the long haul.

When you are ready to buy forex signals, be certain you do business with firms that provide a free trial. Otherwise look elsewhere. Any reputable company should be willing to let potential users test their forex trading signals before paying full fees or at least offer a money back guarantee policy. If their services are any good, they should be happy to offer a free trial so that you can determine for yourself the quality of their service. There is no reason for you to risk your capital on forex signals from firms that don’t provide a free trial.


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Interview with Boris Schlossberg: “Risk control is EVERYTHING”

Today, we bring you an interview with Boris Schlossberg, director of currency research at GFT Forex, co-founder of BK Forex Advisors, and co-contributor to FX360. He is also a weekly contributor to CNBC’s Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted and appears in numerous newspapers worldwide. He is the author of Technical Analysis of the Currency Market (2006) and Millionaire Traders (2007). Below, Mr. Schlossberg shares his thoughts on risk management, leverage, currency wars, and other assorted topics.

Forex Blog: Can you briefly explain your approach to analyzing the forex markets. Do you prefer technical or fundamental analysis, or a combination of both?

I am primarily a fundamentally driven trader but I use price action to inform my trades as well, Specifically I focus on price action around the 00 levels to see if there is support/resistance there.

Forex Blog: How is your experiment to ignore real-time P&L going? Have you found that it has confirmed your belief in the Heisenberg principle and led to increased success in trading?

I have not had much of a chance to pursue that yet given the holidays, but I think just writing about the phenomena helped me to feel less pressured about the intra-day swing in my P&L.

Forex Blog: I was intrigued by your assertion that over the long-term, the tortoise may beat the hare in forex trading. What are the practical implications of this notion? Do you think it supports using fundamental analysis and adopting a more long-term approach to trading?

No the key is that risk control is EVERYTHING. As long as you can contain your losses, if you hang around the market long enough you will be able to catch positive swings regardless of whether you trade fundamentally or technically.

Forex Blog: When the Euro rallied in the beginning of the summer, a number of forex commentators (myself included) declared a paradigm shift, whereby investors would stop worrying about risk and instead focus on the fundamentals. Ultimately, this shift never materialized, and the Euro appears to have resumed its decline. What is your assessment of the Euro’s recent performance, and what can we expect for the immediate future?

Everybody hates the euro and there are certainly many reasons to do so, but I think that China will no allow the EZ to fracture and if that’s the case then euro may have a chance to bounce in 2011. My favorite way to play that is long EURGBP.

Forex Blog: You blogged recently about an encounter with an aspiring forex trader, in which you advised him to “There is only one way [to succeed in forex trading]. You open an account and just trade.” That being said, are there any practical tips that you can offer to novice forex traders?

There is no substitute for experience. They say you need 10,000 hours of practice to master a skill and I think that’s a fair metric to use.

Forex Blog:  It has been said that the Fed is caught in a lose-lose situation, whereby its QE2 will fail and the US economy will drift back into recession or it will succeed in invigorating the economy and stoking inflation. Do you share this interpretation?

No. There is deflation in US – not inflation. The Fed is doing is the only thing it can and so far it appears to have helped the economy.

Forex Blog: I agree with your assessment that high levels of dangerous leverage (~50:1) are a recipe for disaster. Do you support the recent regulatory changes that effectively cap the maximum amount of leverage on forex trades? Is there a general level of leverage that you think is acceptable, or is it specific to each trade?

Yes I agree with regulation. I myself trade with 3:1 leverage and never exceed 10:1.

Forex Blog: As you pointed out, “The Psychology of Round Numbers” is a phenomenon that is observable on all aspects of life in which numbers are involved. As far as forex is concerned, have you observed that round numbers are almost always a source of either support or resistance? How can traders predict whether a currency pair will stop at a given (round number) level or surge through?

If we could predict that with certainty we would never have to work again . That having been said I watch those levels very carefully and I see them at play every single day both as magnets for stop runs and as targets for turn trades against the trend.

Forex Blog: A discussion of the major themes in forex markets wouldn’t be complete without mentioning the ongoing currency wars. First of all, do you think that the label “currency war” is fair? Do you think that most countries’ Central Banks will continue to intervene on behalf of their respective currencies, and do you think they will succeed in  preventing them from rising further?

I think intervention is much more ingrained in Asia where export driven economies depend on low exchange rates. In the long run its a horrible strategy because it will inevitably lead to anti-competitive behavior. (Look how well Germany, Switzerland and Netherlands perform despite high exchange rates).

Forex Blog: What is your advice for (forex) investors that want to beat the market during these uncertain times?

Focus on one strategy that you are comfortable with and refine it continuously.

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IPOs Raise Questions about the Future of Retail Forex

It has been said before, but now I think it’s official: retail forex has entered the mainstream. In the month of December, two retail forex brokerages – Forex Capital Markets (FXCM) and Gain Capital Holdings (GCAP) – went public on the New York stock exchange. Combined with some juicy information revealed in their regulatory filings, I think this event raises some interesting questions about the future of forex.

Some background: both FXCM and Gain Capital operate trading platforms and news/analysis websites (DailyFX.com and Forex.com, respectively). FXCM has a current market capitalization of $850 million, compared to $250 million for Gain Capital. The former earned net income of $98 million last year on revenue of $339 million, and it has 135,000 active clients. The latter earned $36 million net income on $188 million revenue, and its client base totals 52,000. (For the sake of comparison, consider that ETrade has more  than $4 million and its ttm revenues exceeded $2.5 Billion).

If you do some simple arithmetic, you will discover that revenue per account is substantially higher for forex brokers than for stock brokers: $2,500/account for  FXCM versus $100-200 that I’ve been told is standard for retail stock brokers. Of course, some of that disparity is natural, given that the average forex account-holder trades at a higher frequency and higher volume than the average stock investor, who apparently only makes one round-trip trade per month, on average. However, the bulk of that discrepancy is probably due to a lack of transparency/competition.

Although information on average account size was not released, it nonetheless stands to reason that a significant portion of forex account-holder equity is being “transferred” to brokers every year. (Interestingly, FXCM loses money on the majority of its accounts.  Accounts worth more than $10K – which presumably do the most trading – generate the most revenue, and yet more than half of them are still unprofitable for FXCM).

I think this raises some serious questions about transparency in forex commissions. While other brokers make money from the bid/ask spread (which also suffers from a lack of transparency) and by taking offsetting positions, FXCM boasts that it “makes an identical amount of money in the form of pip markups (which are really commissions) regardless of whether the customer made or lost money on the account.” Basically, FXCM matches up buyers/sellers with banks and financial institutions, and takes a cut for facilitating the transaction. While this is somewhat less opaque than filling orders directly for customers, the fact that it doesn’t disclose its commissions should be cause for concern. For the sake of comparison, consider that when you buy/sell stock, the commission that you pay the broker is clearly disclosed.

Someone recently asked me if trading commissions (i.e. spreads) in forex were fair/stable, and in the context of this data, I think it shows that there are is still room for commissions to fall. As the number of retail forex traders grows, you would expect spreads to tighten further, and profit/account to decline from the current level of $700+ per year.

Since both FXCM and Gain Capital are now public companies, they will be subject to increased scrutiny and regulatory oversight, and will henceforth be required to make frequent disclosures. If Oanda and other top-tier brokers accede to competitive pressures and also go public, the result should be increased transparency for the industry and better pricing for traders. In short, daily volume figures ($4 Trillion/day) notwithstanding, retail forex trading still has a ways to go before it can really be compared to retail stock trading.
IPOs Raise Questions about the Future of Retail Forex

It has been said before, but now I think it’s official: retail forex has entered the mainstream. In the month of December, two retail forex brokerages – Forex Capital Markets (FXCM) and Gain Capital Holdings (GCAP) – went public on the New York stock exchange. Combined with some juicy information revealed in their regulatory filings, I think this raises interesting questions about the future of forex.

Some background: both FXCM and Gain Capital operate trading platforms and news/analysis websites (DailyFX.com and Forex.com, respectively). FXCM has a current market capitalization of $850 million, compared to $250 million for Gain Capital. The former earned net income of $98 million last year on revenue of $339 million, and it has 135,000 active clients. The latter earned $36 million net income on $188 million revenue, and its client base totals 52,000. (For the sake of comparison, consider that ETrade has more  than $4 million and its ttm revenues exceeded $2.5 Billion).

If you do some simple arithmetic, you quickly discover that revenue per account is substantially higher for forex brokers than for stock brokers: $2,500 in the case of FXCM compared to $100-200 that I’ve been told is standard for retail stock brokers. Of course, some of that is to be expected, given that the average forex account-holder trades at a higher frequency and higher volume than stock investors, which apparently only make one round-trip trade per month, on average. While information on average account size was
not released, it nonetheless stands to reason that a significant portion of forex account-holder equity is being “transferred” to brokers every year. (Interestingly, FXCM loses money on the majority of its accounts.  Accounts worth more than $10K – which presumably do the most trading – generate the most revenue, and yet more than half of them are still unprofitable for FXCM).

I think this raises some serious questions about transparency in forex commissions. While other brokers make money from the bid/ask spread (which also suffers from a lack of transparency) and by taking offsetting positions, “FXCM makes an identical amount of money in the form of pip markups (which are really commissions) regardless of whether the customer made or lost money on the account.” Basically, FXCM matches up buyers/sellers with banks and financial institutions, and takes a cut for facilitating the transaction. While this is somewhat less opaque than filling orders directly for customers, the fact that it doesn’t disclose its commissions should be cause for concern. For the sake of comparison, consider that when you buy/sell stock, the commission that you pay the broker is clearly disclosed.

Someone recently asked me if trading commissions (i.e. spreads) in forex were fair/stable, and in the context of this data, I think it shows that there are is still room for commissions to fall further. As the number of retail forex traders grows, you would expect spreads to tighten further, and profit/account to decline from the current level of $700+ per year.

Since both FXCM and Gain Capital are now public companies, they will be subject to increased scrutiny and regulatory oversight, and will henceforth be required to make frequent disclosures. If Oanda and other top-tier brokers accede to competitive pressures and also go public, the result should be increased transparency for the industry. As of yet, I think that daily volume figures ($4 Trillion/day) notwithstanding, retail forex trading still has a ways to go before it can really be compared to retail stock trading.IPOs Raise Questions about the Future of Retail Forex

It has been said before, but now I think it’s official: retail forex has entered the mainstream. In the month of December, two retail forex brokerages – Forex Capital Markets (FXCM) and Gain Capital Holdings (GCAP) – went public on the New York stock exchange. Combined with some juicy information revealed in their regulatory filings, I think this raises interesting questions about the future of forex.

Some background: both FXCM and Gain Capital operate trading platforms and news/analysis websites (DailyFX.com and Forex.com, respectively). FXCM has a current market capitalization of $850 million, compared to $250 million for Gain Capital. The former earned net income of $98 million last year on revenue of $339 million, and it has 135,000 active clients. The latter earned $36 million net income on $188 million revenue, and its client base totals 52,000. (For the sake of comparison, consider that ETrade has more  than $4 million and its ttm revenues exceeded $2.5 Billion).

If you do some simple arithmetic, you quickly discover that revenue per account is substantially higher for forex brokers than for stock brokers: $2,500 in the case of FXCM compared to $100-200 that I’ve been told is standard for retail stock brokers. Of course, some of that is to be expected, given that the average forex account-holder trades at a higher frequency and higher volume than stock investors, which apparently only make one round-trip trade per month, on average. While information on average account size was
not released, it nonetheless stands to reason that a significant portion of forex account-holder equity is being “transferred” to brokers every year. (Interestingly, FXCM loses money on the majority of its accounts.  Accounts worth more than $10K – which presumably do the most trading – generate the most revenue, and yet more than half of them are still unprofitable for FXCM).

I think this raises some serious questions about transparency in forex commissions. While other brokers make money from the bid/ask spread (which also suffers from a lack of transparency) and by taking offsetting positions, “FXCM makes an identical amount of money in the form of pip markups (which are really commissions) regardless of whether the customer made or lost money on the account.” Basically, FXCM matches up buyers/sellers with banks and financial institutions, and takes a cut for facilitating the transaction. While this is somewhat less opaque than filling orders directly for customers, the fact that it doesn’t disclose its commissions should be cause for concern. For the sake of comparison, consider that when you buy/sell stock, the commission that you pay the broker is clearly disclosed.

Someone recently asked me if trading commissions (i.e. spreads) in forex were fair/stable, and in the context of this data, I think it shows that there are is still room for commissions to fall further. As the number of retail forex traders grows, you would expect spreads to tighten further, and profit/account to decline from the current level of $700+ per year.

Since both FXCM and Gain Capital are now public companies, they will be subject to increased scrutiny and regulatory oversight, and will henceforth be required to make frequent disclosures. If Oanda and other top-tier brokers accede to competitive pressures and also go public, the result should be increased transparency for the industry. As of yet, I think that daily volume figures ($4 Trillion/day) notwithstanding, retail forex trading still has a ways to go before it can really be compared to retail stock trading.

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Interview with Kathy Lien: “Trade Defensively and Use a Stop”

Today, we bring you an interview with Kathy Lien, the internationally published author, Director of Currency Research of FX360.com and GFT, and co-author of BKForex Advisor, one of the few investment advisory letters focusing strictly on the FX market. She is one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. Below, Kathy shares her thoughts on fundamental analysis versus technical analysis, rate hikes in China, forex intervention, and other subjects.

Forex Blog: Can you briefly explain your approach to analyzing the forex markets. Do you prefer technical or fundamental analysis, or a combination of both?

I always use a combination of both fundamentals and technicals because I believe that the story drives the price.  Fundamentals usually set the tone for trading and set the trends that lasts for weeks, days and in some cases, even years.

Forex Blog: As head of currency research for GFT Forex, it looks like you cover most of the major currencies, as well as a handful of emerging/exotic currencies. What do you think about the macroeconomic gulf that is forming between the “G4? economies (US, UK, Eurozone, Japan) and the emerging market economies (along the lines of debt, GDP growth, etc.)? Do you think that this division is reflected in forex markets?

I believe that the gap between the pace of growth in the G4 and the emerging markets will start to close as growth in the U.S. picks up and growth in China slows in reponse to rate hikes.

Forex Blog: You blogged recently about interest rate hikes in China and the possibility that the Chinese economy could slow down. What do you think are the implications for the forex markets?

Slower chinese growth is bearish for the commodity currencies because it means Chinese demand could slow.

Forex Blog: In a recent post entitled, “Dollar: 3 reasons Behind the Rally,” you suggested that the Fed is skeptical that its QE2 program will succeed in stimulating the economy. Can you elaborate on why you think this will benefit the Dollar?

Speculation about QE was the main driver behind the dollar’s weakness in September.  If the Fed is skeptical about the effectiveness of QE, they are more likely to pare back the program prematurely which would be dollar positive because it is one step closer to a rate hike.

Forex Blog: It has been said that the Fed is caught in a lose-lose situation, whereby its QE2 will fail and the US economy will drift back into recession or it will succeed in invigorating the economy and stoking inflation. Do you share this interpretation?

I don’t think I agree.  The Fed doesn’t have much of a choice right now and options for stimulating the economy are limited. Core Producer prices declined in October which shows that deflation is just as much of a risk as inflation.  The dollar will stabilize when the U.S. economy and U.S. data improves which is the Fed’s top priority.

Forex Blog: In a comparison of the Australian and Canadian Dollars, you asserted that while both countries’ economies are based around commodities, “At the end of the day however it is important to remember that Canada is not Australia.” With this in mind, can you  elaborate on why the Aussie has a better chance of trading above parity (with the US Dollar) than the Loonie?

Because Australia benefits from Chinese demand and global growth while Canada is mostly sensitive to U.S. growth.  The RBA is still considering more rate hikes while the BoC has made it clear that they have intentions of tightening monetary policy in the near term.

Forex Blog: A discussion of the major themes in forex markets wouldn’t be complete without mentioning the ongoing currency wars. First of all, do you think that the label “currency war” is fair? Do you think that most countries’ Central Banks will continue to intervene on behalf of their respective currencies, and do you think they will succeed in  preventing them from rising further?

I think if the dollar continues to fall, they will have no choice but to defend their currencies.

Forex Blog: What is your advice for (forex) investors that want to beat the market during these uncertain times?

Trade defensively and use a stop.

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Be Familiar With The Basics Of Forex Trading

Learning and being familiar with the foreign exchange basics is one of the most important things you need to consider if you wanted to dig in to the world of currency trading. At its most general sense, it is necessary to get into Forex with the right mindset and skills. Having a natural mentality for conducting this kind of business because once you have this it will be a lot easier for you to know how you will play the game.

To get yourself familiar with the Forex Trading, let me discuss the basic things you need to know.
1. Discover how to maximize your profits – Do not be too confident with knowing just one method of trading. It would be best to try various forex trading methods so you will also become more familiar with how other traders run their business. Check the market for other possible trades. Don’t focus on the individuals but you must also try to get the market share of big businesses because these financial institutions are the ones which need a continuous flow of currencies.
2. Be a smart trader – No matter how much you know the all the technicalities that come with trading currencies, this will not be enough once you start dealing with different personalities in the market. You should also aware of proper timing of when it is okay to take a risk and when would it be best to just let it pass you by. In the Forex market values and rates are constantly changing and in a matter of minutes, prices may fluctuate so you need to keep your instincts on alert.
3. Impart discipline in trading – You must have a system which you follow throughout the whole period of your trading. Using a system can help you figure out your strength and weaknesses so you can address them accordingly. You should also budget a specific time for trading. You have to make sure that when you trade you give full attention and you doing anything that is unrelated to it because you will need a lot of focus. Always trade according to the set rules and regulations. Most importantly, you have to keep your word should you opt to do business with other traders on a set date or on pre-agreed rates.
4. Don’t stop learning! – The Forex trading basics still develops and gets furnished through time. So trader must be open minded and should consider the fact that you will need to educate yourself through constant learning regarding the trade. Keep yourself updated of the latest technologies and methods being used. Allot some time to do research about foreign currency trading and read some related news on this industry. Take advantage of the free learning materials that you can conveniently obtain online.

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Forex – The Real Score

Forex is an exceptional kind of the world’s financial market. Through the action of the demand and supply alteration, the exchange rates of all currencies in the market are permanently changing. Trader’s intention on the Forex market is to get profit as the conclusion of foreign currencies sale and purchased. Supply alteration is a substantial subject to the command of any important society event in the class of economy, politics and nature. According to the modern prices of foreign currencies as evaluated, for instance in the US dollars swing towards it’s higher and lower connotation. By using these fluctuations in conformance with the “buy cheaper – sell higher” principle, traders will definitely obtain profits.

Compared to all other sectors of the world financial system Fores is different. Because of the towering sensibility to a huge and continuously regenerated number of factors, the convenience of reaching all the individual and corporative traders, particularly high trade turnover which creates assurance of liquidity of traded currencies and the 24/7 business hours which enable traders to deal after normal hours or during national holidays in their country finding markets abroad open.

Just like any other market, the trading on Forex along with completely very promising profitability is essentially dangerous. There is a great chance to gain success on it only after a positive training which includes familiarization with the structure and kinds of Forex. The principles of the factors affecting prices alterations, currencies price evolution, trading risks levels and sources of the important information to account all those factors, techniques of the prediction and analysis of the market movements as well as with the tools and rules of trading. One important role in the method of the preparation for the trading belongs to the demo trading; defined as an account funded by fake money to place artificial trades. This can be very helpful because it gives potential traders the opportunity to try out a broker‘s trading platform before using their own money to trade.

Most online brokers offer this while some even slated contests with rewards for the most profitable traders. Indeed demo trading is a great way to test the forex trading brokers, and one of the best way to experience the thrill of the real market and to learn more about the market. However, it is not a real substitute for the real trading, and no amount of favorable outcome or confidence in demo trading can be assumed to have a one-to-one correspondence with results in actual market status.
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Forex 101: Fundamentals of Trading

LiteForex is a business unit which is part of Straighthold Investment Ltd group of companies. Providing brokerage facilities such as fiscal assets on the forex market, globe stock markets, are the major it business direction. This new technology allows Forex beginners to understand Forex in a REAL life situation with minimal investment! But how can you convince a typical person to invest their capital in Forex Trading?
The idea of this kind of investment might be strange to some of us. Normally we used our capital to buy goods and services and make sure that the return will be twice or thrice of what we invested. But since we are now living in a much advance world, Forex Trading was introduced to us by whom we called brokers. They are the one responsible in foreseeing a coming shift in the exchange rate. In other words, he sees possible opportunity to make a profit and take hold of it. If he knows what he’s doing, the profits can be both big and consistent.

It is very important that you have a grasp of all the strategies you’ll need in doing this kind business. You may consider doing a research in the internet and search for websites and software that can give you updates on market term, rates and other important details. You can also consult a Forex adviser or expert. You may visit blog sites and the likes to get feedback from other people of how they do their business.

Sooner or later, Forex Trading can be an exciting way to make cash but too expensive if done in a wrong way. Consider yourself as a genius gambler to succeed.
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The London Open Checklist, An Important Component of Forex Education

What is Forex?
Foreign Exchange or Forex is a globally trusted market used for the trading or exchange of currencies of different countries. It is the world’s largest financial market. Millions of people from different walks of life are an active part of Forex or foreign exchange market. With the passage of every year, the Forex market is growing in size and becoming more accessible to common people. It is the market of 21st century and million of people from all over the world are relaying on it to achieve their financial goals. With the advancement in the technology and communication science, Forex has become a huge market but still it has more potential of growth and rise. In the years to come, it may become the trade of choice for many traders. The new generation of traders and investors is seeking exciting opportunities in Forex trade.
Forex or Foreign Exchange Education
Forex or foreign exchange trading is a very tricky and risky task. Without having proper training and education, one has very limited chances of success. The most important cause for the failure of Forex traders is their lack of Forex training. A quality Forex Education or Training helps the Forex traders to improve their trading abilities and skills. Only a well educated or trained Forex trader understands the complexities and subtleties of Forex trade. Proper Forex training teaches the trader a sound trading strategy and an effective approach to currency trading. A qualified Forex trader can explore the opportunities much easily and extensively.
What should be done before London open?
A quality Forex training focuses on the market timing effect on trading and liquidity. The time when London market starts its proceedings is the busiest time of the market. The London market’s startup time has a great effect on Forex market. No education or training system can neglect the importance of analyzing the effect of London’s Forex market’s opening and closing. There are some key points which are very handy to analyze the effect of London market on Forex market. These should be checked, half an hour before the startup of the London market. They are given as below:
Key Points before London open
• if the MACD (Moving Average Convergence / Divergence) indicators are not on the 4 hour and 1 hour then a careful or cautious approach is the better strategy.
• Divergence of the security price from the MACD is a clue that current market trend is going to over.
• A Fibonacci calculation on the last up and down trend help to know if price is going backwards to its initial position or it is heading towards an extended level.
• It is necessary to have knowledge about expected economic reports as they greatly influence the market.
• if the candle nears on the fifteen minute chart at London startup, try to observe the tweezers or doji’s patterns or hammers which indicates the fall of price
• Risk analysis and defining a proper stop is also essential to check
Conclusion:
Before a few minute of London startup, the above factors can help to make decision of trading or holding back. Performing a daily analysis on London open is a handy way to improve the Forex trading skills. There is no hard and fast rule for Forex education. Success with Forex trading comes with experience, practice and learning new skills. With getting experienced, a trader get more disciplined and controlled in his emotions which is a must trait for Forex trader.
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Using Technical Analysis In Forex Training

Technical analysis is Forex trading terms that can be defined as a way to predict the price based on math computation rather than basing it on economic reports. This process is thought about for the purpose of gaining income forex trading whether stock or currency. When you start with technical analysis, this is divided in different techniques but only a portion of this is united using approaches that are integral nature plus other factors like psychology, axioms and ruling principles. Technical analysis can be away to know the future movement of the price that is based on market movement charts. It also considers fluctuations.
When using technical analysis, price formation can be a factor. There also other things to be considered like economical, political and psychological. These are actually reflected on the chart being used. The market prices can be moved in order to reflect the information given. Remember that price movement has direction. This is a basis of all technical analysis techniques. The main purpose is to actually define the trends and acquire some knowledge when trading. One definition that is given by Dow is that a not so good trend is followed by a peak that higher. This is actually the main thing about technical analysis. There three types of trends. One is the bullish – upside movement. Another is the bearish which is the opposite and sideway where the price is unchanged. Actually these types can’t be seen in its pure form because straight prices don’t happen all the time. There are trends that exist even if the market is erratic. It is actually not so easy to determine if a reversal is some new or temporary. There are tools that you can use but there are people who may interpret this differently.
Technical analysis can say that if a rule worked in the past, it can be applied in the future. This is a main idea of this process. Remember that rates are considered in every stage so you need to master price charts. The main goal is find trends and recognize them. Use your knowledge in order to make the right decision. If this trend works on the past, it would probably work in the future.
In Dow’s theory, there are different movement like “main movement”, the “medium swing” and the “short swing”. The main movement can actually last for years. The medium swing is actually is the refined version of the main movement. This can actually last for ten days to three months. The short swing is actually minor changes in the market that last for three weeks. There is a theory that says that markets are moving on the average. It must be confirmed each other. The trend is actually confirmed by volume. Dow assumed that volume is confirmed by price trend. Dow Theory’s definition is treated by technical analysts’ experts as the basics of modern technical analysis. It is best to consider using technical analyst when it comes to forex trading. This would help you a lot in the long run.
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Setting Objectives For Forex Trades

When talking about trading financial markets, including currencies, "system" is almost always taking central stage. By "system" I mean set of rules that dictate when trader gets into the market, irrespective whether it is short or long position.  A lot of energy is devoted to finding perfect strategy, in most cases focusing on entry rules. Unfortunately, no trading method consists only of getting into the market. There are other elements that must be carefully incorporated into a system, such as money management, stop/loss and target, objective, setting rules. It is really amazing how many people overlook one or more of these variables, creating incomplete trading plans.
Everybody knows why stop/losses are important, even though a lot of us ignore this "obvious" knowledge in real life trading. But why targets, why are they important, if not instrumental to trading success? Well, we can't be profitable unless we actually bank profits on our trades. This means we have to close them at price better that we got in( short or long). Since markets are in constant movement, we should know how far we expect them to move our way and try to take profit at predetermined point. Not that it will always happen the way we want, but we must have a plan in place, rather than getting into position and hoping to close the trade sometime in the future.
How exactly do we go about setting targets for our trades? There is no one simple answer, since many methods of choosing objectives are in existence, but in almost all cases exit strategies are directly dependent on entry systems. Among them:
- fixed number of pips, always trying to get same number of pips, like 20, 50, 100 or so;
- time based exits, closing trades at predetermined time, like end of a session, end of day, week or some variation;
- using previous resistance/support as targets;
- staying in trades for as long as trailing stops keep positions active. One such technique was described in Price action Forex trading. Using technical tool like Parabolic Stop and Reverse also suits this purpose;
- employing technical indicators to determine oversold/overbought levels at which to close trades;
- when using crossover strategies for trading, such as Moving Averages, or MACD, waiting for next one to happen. In cases like these backtesting provides some evidence of what can be expected;
Most of the trades I cover in this blog are discretionary in nature, but are largely what I call Swing trading. This is nothing more than analysis of most recent price swings. In very simple terms, "swing" is a distance price covers between high and low (or low and high, depending on point of view). Those highs and lows are also "pivot points" for price movements. Most recent swings are used as a tool to set targets for next moves.
 Here is a simplified example of a price swing. Movement from point "A" to "B" is a "swing" with either one being a "pivot point" when price moves to the other side. In this example I will be discussing price reversal. After a down trend I think that move is running out of steam and will be changing direction. Going above most recent high (A) creates buy situation with "A" becoming a pivot point.
According to simplified swing trading theory, once pivot point is established, in this case it is minor high "A", price should move on to its other side by by the same distance as it  reached before the reversal happened.
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