Here I repost from other forum.
If You want to open an account or already open an account, always check your broker status.
The news about the NFA shaking up the forex industry by dramatically raising capital requirements has kicked off a lot of speculation. So I gathered everything I have learned about this new NFA proposal and am posting here for your review. As someone who has been burned by a bankrupted forex broker I can tell you it is not a pleasant feeling to watch your funds get sucked into some black hole. So my advice is to stay away from any firm that is not currently meeting the coming $5 million capital requirement. And if you already have money at such a firm, get it out, now. If you don't, you could end up like the poor souls at United Global Markets (UGMFX) who can't get their money out due to an NFA account freeze: http://www.forexfactory.com/showthread.php?t=35197
Who has the Money & Who Doesn't
To find out how much money your broker has goto this link:
http://www.cftc.gov/files/tm/fcm/tmfcmdata0704.pdf
Healthy Forex Firms
Oanda ($44,000,000)
FX Solutions ($20,000,000)
Gain Capital ($20,000,000)
FXCM ($51,000,000)
GFT ($48,000,000)
CMS ($10,000,000)
Dead Firms Walking
One World Capital ($1,105,000)
Velocity4X ($1,587,000)
Direct Forex LLC ($1,523,000)
FiniFX ($1,464,000)
Forex Club ($3,304,000)
GFS Futures & Forex ($3,074,000)
Nations Investments ($1,699,000)
Royal Forex Trading ($1,102,000)
SNC Investments ($1,565,000)
FXDD ($781,000)
I Trade FX (-$3,039,000!!!!! Close to Bankruptcy!!!!)
MB Futures ($3,080,000)
Money Garden ($3,399,844)
United Global Markets (Bankrupt)
Here is the actual NFA proposal to raise capital requirements (below that is the sad email from the CEO of UGMFX stating the firm is going under.) The CFTC is expected to sign off on it this summer. I'll comment further on the proposal in a future posting as it will actually require most firms to have upwards of $10 million in capital when you take into consideration such things as open customer positions and margin levels. In any case, this should be sober reading to anyone who is currently trading at one of the "Dead Firms Walking."
NFA Proposal
The proposals pertain to the minimum adjusted net capital requirement and the concentration charge and set certain requirements for FDMs' internal financial controls.
Minimum Adjusted Net Capital and Concentration Charges
In the past twenty years, there have been nine FCM insolvencies. Since 1990, there have been only two insolvencies by traditional FCMs trading on U.S. exchanges, and no funds in segregated customer accounts were lost in either of those two instances. This is from a population that averages around 250 (over the last 20 years). Even in the Refco matter, the FCM filed for bankruptcy not because customer funds were at risk but, rather, to facilitate the sale of its assets and the transfer of its accounts in connection with the parent company’s insolvency.
The FCM insolvency rate becomes more troubling when FDMs are added to the mix. Of the three bankruptcy or receivership proceedings for insolvency occurring in the last four years, two have involved FDMs (Refco was the third), and they are drawn from the smaller FDM population (averaging around 40). Specifically, in late 2003, an FDM misappropriated almost $2 million of customer funds, which depleted the amount of assets necessary to meet the amounts owed to customers. The Commodity Futures Trading Commission ("CFTC") is still working to try to get back some of the customers’ funds. More recently, NFA took a Member Responsibility Action ("MRA") against an FDM whose liabilities exceeded its assets by over $1 million. The CFTC also brought an emergency action in U.S. District Court, and the Court immediately appointed a receiver who was subsequently able to sell the FDM’s customer accounts. Due to this sale, it appears that the customers were made whole.
This discrepancy between FDMs and FCMs involved in on-exchange transactions is even greater when looking at the number of financial MRAs NFA has issued in the last ten years. During that period, NFA issued twelve MRAs to FCMs for failing to demonstrate compliance with NFA’s financial requirements. Three of these firms were traditional FCMs with an on-exchange business, one was a forex dealer registered as an FCM prior to the advent of the FDM category, and the remaining eight were FDMs.
NFA's concern that one day an FDM might be unable to meet its financial obligations to its customers has heightened as the amount of retail customer funds held by FDMs has increased to over $1 billion. The above described FDM insolvencies have done nothing to abate this concern, particularly with the most recent occurring just months after the $1 million capital requirement became effective. If the receiver had not sold the FDM's accounts, then twice within less than four years customers of FDMs would have lost funds due to an FCM insolvency. Additionally, since March, eight different FDMs have fallen under the early warning requirement of $1.5 million.
One of the reasons for the 2006 increase to the FDM capital requirements was that an FDM’s dealer activities create greater financial risks than the agency transactions involved in traditional exchange-traded futures and options. A second reason is that the need for adequate capital is particularly acute for FDMs since customers trading off-exchange forex have not received a priority under the Bankruptcy Code in the event of a firm’s insolvency. Both of these reasons still exist.
NFA is not alone in recognizing the increased financial risk of acting as a dealer. Congress recognized that acting as a dealer increases financial risk and requires substantially higher capital on the part of the dealer. Pursuant to Section 4c(d)(2)(A) of the Commodity Exchange Act (the "Act") the grantor of a dealer option must maintain at all times a net worth of $5 million. The Commission has likewise recognized the increased financial risk resulting from being a dealer, imposing an adjusted net capital requirement of $2.5 million on leverage transaction merchants ("LTMs").[1]
When the Commission adopted the financial requirements for LTMs in 1984, it noted that the leverage market is "essentially a principals' market" and that the "purchaser of a leverage contract is solely dependent on the LTM for performance on the contract."[2] This is the exact same situation that customers are in when they purchase or sell currencies with an FDM. Further, as with an LTM, an FDM "takes the other side of every [contract] entered into by a [customer]" and the FDM "is the sole guarantor of performance on the [contract]." When trading with an FDM "there is no clearing organization to take the other side of every trade, no FCM guaranty of variation margin to the clearing organization and no clearing organization guaranty fund and assessment power."[3] Due to these factors, the financial requirements for FDMs, like LTMs, must be substantially higher than those for FCMs engaging in agency transactions.
As noted above, the Commission imposed the $2.5 million capital requirement for LTMs in 1984. Based upon the Consumer Price Index, $2.5 million in 1984 dollars would be worth approximately $5 million today. Accordingly, NFA is proposing to raise the minimum adjusted net capital for FDMs to $5 million. An increased capital requirement would result in an FDM having a larger buffer to meet its obligations to its customers. Additionally, an increase in capital requirements for FDMs would ensure that FDMs have a larger financial stake in their forex business.
Mr. Stephen Leahy
Chief Financial Officer
United Global Markets, LLC
20 Park Plaza, Suite 1000
Boston, MA 02116
Tel # (617) 357-5122
sleahy@ugmfx.com
Dear Valued Client:
United Global Markets (UGMFX) has been notified that we are in violation of CFTC Regulation 1.17(a)(4) by our regulatory body, the National Futures Association. We have been notified that we fall below the minimum Adjusted Net Capital requirements of $1,000,000 and therefore may not allow clients to open new positions until we increase our own capital.
To be clear, United Global Markets has more than enough cash assets as compared to our liabilities to our clients. But we do not have $1,000,000 of our own liquid assets which is the NFA’s required minimum.
We are speaking to an institutional partner that has both more than the capital requirements AND shares our philosophy of treating clients fairly. However as with most large financial institutions, they have not been able to due their due diligence on United Global Markets in the short time period since the NFA’s proposed changes to Financial Requirements.
Therefore, in compliance with the NFA-issued notice of violation of CFTC Regulation 1-17(a)(4), our clients may only close open positions and not initiate new positions until further notice. Additionally we may not accept new client accounts or further funds from existing clients.
For those who wish to withdraw funds, please fax or e-mail a Withdrawal Request Form and we will process quickly.
http://www.ugmfx.com/downloads/Withdrawal_funds.pdf
MORE INFORMATION
Tuesday, 31 July 2007
DEATH BROKER
TRADING PLAN
WHAT IS TRADING PLAN??
As onces You choose the Forex Market, You should have a trading plan.
What is Trading Plan??
A trading plan is a complete set of rules that covers every aspect of your trading life. Many experts refer to the need to have an ‘edge’ which will tip the balance of probabilities of success in your favour. In itself, a plan is not an edge but, over time, the trader with a plan will fair a lot better than the trader without one. Many amateur traders do not have any sort of plan to trade by, and enter the markets with scant regard to their risk and profit objectives. Suffice to say, comprehensive risk and money management strategies lie at the heart of all good trading plans.
Traders with a plan have the ability to monitor their performance. They can evaluate their progress continually, day-by-day, in a way that is objective and comprehensive. This enables them to trade without emotion and with minimal stress. The trader without a plan is not able to do this and their trading tends to rely upon gut feeling, hunches and tips etc. Trading for them is a nail biting, emotional roller coaster ride of stress that, inevitably, results in financial loss.
Why we must have a trading plan??
Who needs a trading plan? Well, unless you have been a consistently profitable trader over a sufficient length of time to encompass a number of different market conditions,then YOU need a trading plan! If you have achieved this, then this document may not tell you anything you do not already know. However it may still prove useful as a “refresher” course or indeed open your eyes to new aspects of trading that can improve your profitability.
What will a trading plan do??
A trading plan will make the act of trading simpler than it would be if you traded without one. It will limit your opportunity to make bad trades and it will prevent many psychological issues from taking root. It will help you to achieve these things because wherever you are on your trading journey, it will not only act as a roadmap, but also locate your position as well. Most importantly, if your trading is going badly, you will know it is down to one of only two possibilities: either something in the plan is not working or you are not adhering to the plan. If the plan is a good one and it is back tested and paper traded, (or forward tested with a very small amount of money) then the fault is likely to be found in the latter of the two options. But, what if you are losing money whilst trading without a plan? It is virtually impossible to distinguish what you are doing right from what you are doing wrong. You have no way to evaluate your results, therefore the likelihood of being able to diagnose the fault and correct it is small and could take forever. A trading plan is your personal GPS device to locate your position and, if you have made a wrong turn, it provides the means to identify where you went wrong and how to get back on track. You are able to evaluate continually your results and, more importantly - your discipline - in a manner that is objective and comprehensive. This is extremely difficult to do if you do not have a plan.
for more detail read this: TRADING PLAN
Close SELL GBP
Open Buy at 2.0306 and close all sell position.
Result:
1. Sell 2.0607 300 pip
2. Sell 2.0538 230 pip
3. Sell 2.0490 180 pip
4. Sell 2.0267 -45 pip
Total: 665 pip
So far so good.. let see the next result.
Close All Position
Today GBP recover from JPY after fall almost 1200 pip last week.
Based on Prince System, Open Buy at 241.02 and close all sell position at this moment.
Result:
Sell:
1. 249.31 830 pip
2. 247.87 680 pip
3. 247.52 650 pip
4. 244.01 298 pip
5. 241.08 -5 pip
Total: 2450 pip
So Far So Good and what next??? Let see....
British Pound Punished
British Pound Punished on Risk Aversion, Potential for Bounce?
The British Pound saw an extraordinarily volatile week of trade, setting fresh 26-year highs before matching its worst single-week decline since September of 2006. A remarkable carry trade unwind forced traders to liquidate overextended GBP longs across the board, sparking especially noteworthy moves against the oversold Japanese Yen. Economic data was relatively sparse on the week, but fears of global credit tightening led a flight to safety in virtually all global asset classes. Such a dynamic has undoubtedly hurt outlook for the British currency, but it remains to be seen that this unwind will continue through the short term. According to our Technical Currency Analyst Jamie Saettele, the Sterling is due for further decline against the Swiss Franc through coming trade. Outlook for Cable’s performance against the US dollar is similarly pessimistic; the GBPUSD may not see significant support until a test of a year-long trendline near the psychologically significant 2.0000 mark. From a more fundamental standpoint, the British currency will see little boost from economic data through the coming week. A pending Bank of England interest rate decision is highly unlikely to show a rate increase, and the central bank does not release commentary on unchanged policy.
The early going will see little foreseeable event risk on the second-tier GfK and Nationwide Consumer Confidence surveys, but continued volatility across financial markets may nonetheless make for choppy trading. This will almost entirely depend on the performance of risky assets across the world, with Sunday night’s Asian market open to prove especially important for the outlook on the week ahead. Given that the carry trade is inextricably linked to Japan and other regional markets, speculators will likely show their true colors and outlook for high-yielding currencies as soon as they hit their desks at the open. Late tumbles in North American equity markets suggest that the Japanese Nikkei index may open trade substantively lower, but this does not rule out a later rebound on improved appetite for risk. Pending such a turnaround, we could see the British Pound catch some relief against the Japanese Yen and other lower-yielding currencies.Yen Rises
Yen Rises as Risk Appetite Falls
On Friday we wrote, “Yen has been the key beneficiary of the this move to risk aversion gaining more than 200 points since yesterday. However, the unit lost some momentum in late Asia trade as USDJPY once again traded above 119.00 figure. Despite the power of the carry trade unwind, the yen is unable to gather even a modicum of support from the fundamentals. Overnight Japanese data was horrid with Retail Trade slipping to -0.4% and CPI continuing to contract. Japanese retail traders have been one of the staunchest sellers of their own currency and they stepped in to buy the dips in USDJPY tonight helping to stabilize the fall.”
Next week the tug of war should persist as the forces of risk aversion will continue to cover their yen shorts and the still potent demand of carry traders who see nothing on the economic horizon to expedite the BOJ glacial pace of monetary tightening will try to buy every dip in the yen crosses . Indeed after last weeks lackluster data chances of an August rate hike have decreased. The market will now focus on the Overall Household spending figures which will be critical to determining the health of the consumer. Expectations are for 0.7% rise. If the number prints in line, the yen may get a boost ob speculation that an August rate may yet take place, but a miss would almost certainly take that scenario off the table. None of this however will assure further yen weakness if the turmoil in global equity markets continues. In a battle between carry trades and risk aversion, the latter has the upper hand. – BS
Dollar Rebound
Dollar Rebounds As Risk Liquidated Across the Board
It didn’t matter that Existing Homes Sales in US plunged another –3.8% or Durable Good came up short of expectations at 1.4% or that New Homes fared even worse than the existing stock of housing. The theme last week for speculators the world over was liquefy, liquefy, liquefy. As equity markets plunged and commodities corrected, capital came flocking back into the greenback. As we explained on Friday, “The greenback rally appears to be driven by technical factors as many speculative trades from equities to commodities to the carry trade are unwound and those assets are parked in dollars for the time being.”
The fears over the sub-prime problem have finally been realized after last week commentary by County Wide Finance chief executive Angelo Mozilo. He noted that he doesn't expect the U.S. housing market to rebound this year or next. With massive resets of Adjustable Rate mortgages still facing the market and a very pronounced tightening of credit conditions over the past several months, the housing recession is likely to persist and weigh on the overall economy. Therefore while the dollar may continue to benefit from the technical unwind its rally may be short lived if the economy falters further. Fed fund rates have already plunged handicapping a rate cut by December to 5% from the current 5.25%. Should US rates be lower, the dollar could resume its decline as capital will resume its search for higher returns.
The question of whether the Fed will cut or not will depends largely on the state of the growth in the economy. That’s why next weeks data is likely to be scrutinized even more closely than usual as traders look for any clues of a significant slowdown. After two consecutive months of negative spreads between consumer income and spending the market is looking for an improvement. However, should the number print negative again it could put further pressure on the buck, indicating further deterioration of consumer balance sheets. Nevertheless, the true test of the strength of the US economy will come later in the week as all eyes will focus on ISM and NFP data. If that news prints in line showing slow but steady expansion it may pacify the markets for the time being-BS
Weak Housing Numbers Weight on British Pound
Like the Euro, the British pound has sold off significantly today on the back of liquidation of high yielding assets as well as a broad dollar recovery. House price growth continues to be soft which could be concerning going into next week’s heavy economic calendar. We are expecting more housing market reports as well as money supply, consumer confidence, distributive trades, manufacturing and service sector PMI. Overall the UK economy still remains healthy and the Bank of England could raise rates to 6 percent by the end of the year. The global markets just need to stabilize before these factors come into play once again.
Monday, 30 July 2007
Carry Trade Unwinding Continues, More Losses in Store
High yielding carry trades continued to perform horribly today with AUD/JPY and NZD/JPY falling another 300 points. The Chicago Board of Trade’s Volatility Index continued to rise and is less than a point shy of its 52 week high. Carry trades only perform well in low volatility environments. The fact that volatility shot up so much so rapidly makes carry trades or basically the desire for yield far less attractive for the risk. Even though USD/JPY and CAD/JPY are stronger, they have hardly put a dent into Thursday’s losses. Japanese data released overnight was mixed with consumer prices falling, but retail spending increasing on an annualized basis. The Nikkei was also down 418 points or 2.3 percent overnight. This seems to matter little for yen traders because they are solely focused on the market’s aversion for risk. If stocks continue to collapse, carry trades will continue to fall. Meanwhile in the week ahead, there is a lot of data on the Japanese calendar including industrial production, the trade balance, household spending, labor cash earnings, and the jobless rate. The market has gone from pricing in a 64 percent chance of an August rate hike to a 45 percent chance.
AMAZING PIP
LOOK AT THE PIC ABOVE!!!!!
WHAT AMAZING SETUP
There are four setup.
1. Sell at 249.31
2. Sell at 247.87
3. Sell at 247.52
4. Sell at 244.01
now runing price at 239.70, so there is 2900 pip made
What AMAZING PIP!!!!!!!
Feel Free To Contact me for more detail.
Have a good trade.
Prince
Sunday, 29 July 2007
Prince Trading System
Prince Trading System
My Trading strategy is based on Exponential Moving Average.
I used 5,6,8,10,21 Exponential Moving Average. Exp.
RULE:
Buy
1. Buy if all that moving crosses up ( 5,6,8,10 croses 21)
2. Buy again in next day when price near the 21 Exponential Moving Average
Sell
1. Sell if all that moving crosses down ( 5,6,8,10 croses 21)
2. Sell again in next day when price near the long moving
Closed buy or sell when the other signal occur.
in some cases, there will be any position because of the price move still go up or down.
Look at the images above, there are 3 entry setup. All position are short still hold and no close yet.
Exp. Moving Average (EMA)
Now I want to share one of my favorite trading system.
But before that, the basic of this technique is using exponential Moving Average. Here the explain of EMA.
Exp. Moving Average (EMA)
A buy signal occurs when the short and intermediate term averages cross from below to above the longer term average. Conversely, a sell signal is issued when the short and intermediate term averages cross from above to below the longer term average. You can use the same signals with two moving averages, but most market technicians suggest using longer term averages when trading only two exponential moving averages in a crossover system.
Another trading approach is to use the current price concept. If the current commodity price is above the exponential moving averages, you buy. Liquidate that position when the current commodity price crosses below either moving average. For a short position, sell when the current commodity price is below the exponential moving average. Liquidate that position when current commodity price rises above the exponential moving averages.
As you use exponential moving averages, do not confuse them with simple moving averages. An exponential moving average behaves quite differently than a simple moving average. It is a function of the weighting factor or length of the average.
- Period1 (4) - the number of bars, or period, used to calculate the first moving average.
- Period2 (9) - the number of bars, or period, used to calculate the second moving average.
- Period3 (18) - the number of bars, or period, used to calculate the third moving average.
EMAt = EMAt-1 + (k * (Pt - EMAt-1))FutureSource does not ask you to specify the smoothing constants. It asks you to specify the length of the moving average. You can then determine the smoothing constant from the formula listed below.
- EMAt is the exponential moving average for the current period.
- EMAt-1 is the exponential moving average for the previous period.
- Pt is the price for the current period.
- k is the exponential smoothing constant.
If you specify an exponential moving average length of 10, the smoothing constant is 0.18. The formula to determine the smoothing constant is:
k = 2 / (n + 1)Now, substitute the above values in the formula.
- k is the smoothing constant
- n is the length of the moving average.
k = 2 / (10 + 1) = 2 / 11 =.1818Conversely, if you know the smoothing constant, you must derive the length of the moving average. In this example, use a smoothing constant of .125 You can solve the above equation for the value of n, which produces the following formula:
n = (2 / k) - 1Now, substitute the above values for the equation.
n = (2 /.125) - 1 = 16 - 1 = 15Please remember that FutureSource always asks for the length of the moving average, not the smoothing constant. If you know the smoothing constant, you use the above formula to determine the length of the moving average. If you set the length of the moving average and want to know the smoothing constant, use the formula to solve for the smoothing constant or k.
Note: There are several variations to the above formula.
Why Forex??
why is FOREX so popular?
FOREX involves trading currencies of one country for another. FOREX is the largest and most significant business and financial market in the world!
FOREX trading is attractive because it offers unparalleled freedoms. A FOREX trader can live almost anywhere as long as he/she is within reach of the internet.
A FOREX trader can work from home or office, and in some cases, even trade while traveling!
A FOREX trader can usually choose his/her own hours to work since the global foreign exchange market is open 24 hours a day.
A FOREX trader avoids many common headaches associated with running a business because there is NO inventory, NO shipping, NO billing, NO collections, NO employees, NO commuting and NO dress code.
And finally, since FOREX traders can potentially earn a very high income, they enjoy the possibility of never working for someone else again!
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Retain 100% of your trading profits
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Benefit from superior liquidity
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Profit in both rising and falling markets
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Trade on your schedule, respond to market changes immediately
FOREX vs. Equities
If you are interested in trading currencies online, you will find that the FOREX market offers several advantages over equities trading.
Lower Transaction Costs
It is much more cost-efficient to trade FOREX in terms of both commissions and transaction fees. FOREX.com charges NO commissions* or fees whatsoever, while still offering traders access to all relevant market information and trading tools. In contrast, commissions for stock trades range from $7.95-$29.95 per trade with online discount brokers up to $100 or more per trade with full service brokers.
Another important point to consider is the width of the bid/ask spread. Regardless of deal size, FOREX dealing spreads are normally 3-4 pips (a pip is .0001 US cents) in the major currencies. In general, the width of the spread in a FOREX transaction is less than 1/10 that of a stock transaction, which could include a .125 (1/8) wide spread.
Trade on Your Schedule
FOREX is a true 24-hour market, which offers a major advantage over equities trading. Whether it's 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading foreign currencies. Traders can always respond to breaking news immediately, and P&L is not affected by after hours earning reports or analyst conference calls.
After hours trading for U.S. equities brings with it several limitations. ECN's (Electronic Communication Networks), also called matching systems, exist to bring together buyers and sellers - when possible. However, there is no guarantee that every trade will be executed, nor at a fair market price. Quite frequently, traders must wait until the market opens the following day in order to receive a tighter spread.
Superior Liquidity
With a daily trading volume that is 50x larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Traders can almost always open or close a position at a fair market price.
Because of the lower trade volume, investors in the stock market are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.
100:1 Leverage
100:1 leverage is commonly available from online FX dealers, which substantially exceeds the common 2:1 margin offered by equity brokers. At 100:1, traders post $1000 margin for a $100,000 position, or 1%.
While certainly not for everyone, the substantial leverage available from online currency trading firms is a powerful, moneymaking tool. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in the FOREX market. This is because the average daily percentage move of a major currency is less than 1%, whereas a stock can easily have a 10% price move on any given day.
The most effective way to manage the risk associated with margined trading is to diligently follow a disciplined trading style that consistently utilizes stop and limit orders. Devise and adhere to a system where your controls kick in when emotion might otherwise take over.
Profit Potential In Both Rising And Falling Markets
In every open FX position, an investor is long in one currency and short the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means that potential exists in a rising as well as a falling market.
The ability to sell currencies without any limitations is another distinct advantage over equity trading. In the US equity markets, it is much more difficult to establish a short position due to the Zero Uptick rule, which prevents investors from shorting a stock unless the immediately preceding trade was equal to or lower than the price of the short sale.
FOREX vs. Futures
The global foreign exchange market is the largest, most active market in the world. Trading in the FOREX markets takes place nearly round the clock with $1.9 trillion changing hands every day. It is the main event.
The benefits of FOREX over currency futures trading are considerable. The dissimilarities between the two instruments range from philosophical realities such as the history of each, their target audience, and their relevance in the modern FOREX markets, to more tangible issues such as transactions fees, margin requirements, access to liquidity, ease of use and the technical and educational support offered by providers of each service. These differences are outlined below:
- More Volume = Better Liquidity. Daily currency futures volume on the CME is just over 2% of the volume seen every day in the FOREX markets. Incomparable liquidity is one of many advantages that FOREX markets hold over currency futures. Truth be told, this is old news. Any currency professional can tell you that cash has been king since the dawn of the modern currency markets in the early 1970's. The real news is that individual traders from every risk profile now have full access to the opportunities available in the FOREX markets.
- FOREX markets offer tighter bid to offer spreads than currency futures markets. By inverting the futures price to compare it to cash, you can readily see that in the USD/CHF example above, inverting the futures dealing price of .5894 - .5897 results in a cash price of 1.6958 - 1.6966, 8 pips vs. the 5-pip spread available in the cash markets.
- FOREX markets offer higher leverage and lower margin rates than those found in currency futures trading. When trading currency futures, traders have one margin rate for "day" trades and another for "overnight" positions. These margin rates can vary depending on transaction size. When trading cash markets, you have access to the same margin rates day and night. Of course, trading on margin magnifies both your profits AND your losses.
- FOREX markets utilize easily understood and universally used terms and price quotes. Currency futures quotes are inversions of the cash price. For example, if the cash price for USD/CHF is 1.7100/1.7105, the futures equivalent is .5894/ .5897; a methodology followed only in the confines of futures trading.
Currency futures prices have the added complication of including a forward FOREX component that takes into account a time factor, interest rates and the interest differentials between various currencies. The FOREX markets require no such adjustments, mathematical manipulation or consideration for the interest rate component of futures contracts. - FOREX trades executed through FOREX.com are commission free*. Currency futures have the added baggage of trading commissions, exchange fees and clearing fees. These fees can add up quickly and seriously eat into a trader's profits.
In contrast, currency futures are a small part of a much larger market; one that has undergone historical changes over the last decade.
- Currency futures contracts (called IMM contracts or international monetary market futures) were created at the Chicago Mercantile Exchange in 1972.
- These contracts were created for the market professionals, who at that time, accounted for 99% of the volume generated in the currency markets.
- While some intrepid individuals did speculate in currency futures, highly trained specialists dominated the pits.
- Rather than becoming a hub for global currency transactions, currency futures became more of a sideshow (relative to the cash markets) for hedgers and arbitragers on the prowl for small, momentary anomalies between cash and futures currency prices.
- In what appears to be a permanent rather than cyclical change, fewer and fewer of these arbitrage windows are opening these days. And, when they do, they are immediately slammed shut by a swarm of professional dealers.
These changes have significantly reduced the number of currency futures professionals, closed the window further on FOREX vs. futures arbitrage opportunities and so far, have paved the way to more orderly markets. And while a more level playing field is poison to the P&L of a currency futures trader, it's been the pathway out of the maze for individuals trading in the FOREX markets.
The Benefits of FOREX Trading
No Short Selling Restrictions
FOREX trading always involves buying one currency and selling another, so traders can easily trade in a rising or falling market. There is no Zero Uptick rule or any other restriction against shorting a currency.
At $1.9 Trillion Per Day, FOREX is the Largest, Most Liquid Market in the World
The sheer volume of FOREX facilitates price stability, with less slippage. What's more, almost 90% of all currency transactions involve the 7 major currency pairs. As a result, these currencies exhibit smooth trends and enjoy the tightest dealing spreads and highest level of liquidity.
Trade on Your Schedule; Respond to Changes in the Market Immediately
FOREX is a true 24-hour market, open continuously from 5:00pm ET on Sunday to 4:30 pm on Friday. With three distinct trading sessions in the US, Europe and Asia, you can trade on your own schedule and respond to breaking news immediately.
Keep 100% of Your Trading Profits
FOREX.com charges NO commissions or fees*, while still offering free access to real-time quotes, news, charts, research, and more. Also, dealing spreads as low as 3 pips (.0003) are available in currency trading. Even at a penny ($.01), the bid/ask on a stock trade is 30x wider, in addition to the brokerage commission.
| Control Up to 200:1 Leverage |
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Introduction to the FOREX Market
The Foreign Exchange market, also referred to as the "FOREX" or "FX" market is the largest financial market in the world, with a daily average turnover of US$1.9 trillion — 30 times larger than the combined volume of all U.S. equity markets.
"Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).
There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation.
For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.
A true 24-hour market, FOREX trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.
The FX market is considered an Over The Counter (OTC) or 'interbank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets.
What is Forex
In the last hundred years, the foreign exchange market has undergone some dramatic transformations. In 1944, the postwar foreign exchange system was established as a result of a multinational conference held at Bretton Woods, New Hampshire. That system remained intact until the early 1970’s.
At this conference, representatives from 45 nations met together to discuss the future exchange system. The conference resulted in the formation of the International Monetary Fund (IMF). It also produced an agreement that fixed currencies in an exchange-rate system would tolerate one percent currency fluctuations to gold values, or to the U.S. Dollar, which was established previously as the “gold standard.” The system of connecting the currency’s value to gold or the U.S. Dollar was called pegging.
In 1967, a Chicago bank refused a college professor by the name of Milton Friedman a loan in pound sterling because he had intended to use the funds to short the British currency. Friedman, who had perceived sterling to be priced too high against the dollar, wanted to sell the currency, then later buy it back to repay the bank after the currency declined, thus pocketing a quick profit. The bank's refusal to grant the loan was due to the Bretton Woods Agreement, established twenty years earlier, which fixed national currencies against the dollar, and set the dollar at a rate of $35 per ounce of gold.
The history of the FOREX Market as it exists today begins before 1971 when the FOREX market departed from The Bretton Woods Accord to reflect a radical change in Universal fixed exchange rates. After World War Two, the Bretton Woods Accord was introduced to the FOREX market to stabilize the devastated world economy.
The Agreement was finally abandoned in 1971 and the US dollar would no longer be convertible into gold.
After the Bretton Woods Accord came the Smithsonian agreement in December of 1971. This agreement was similar to the Bretton Woods Accord but allowed for greater fluctuation band for the currencies. In 1972, the European community tried to move away from their dependency on the dollar. The European Joint Float was established by West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. This agreement was similar to the Bretton Woods Accord, but allowed a greater range of fluctuation in the currency values.
Both agreements made mistakes similar to the Bretton Woods Accord and, by 1973, collapsed. The collapse of the Smithsonian agreement and the European Joint Float in 1973 signified the official switch to the free-floating system. This occurred by default as there were no new agreements to take their place. Governments were now free to peg their currencies, semi-peg or allow them to freely float. In 1978, the free-floating system was officially mandated.
Europe tried, in a final effort to gain independence from the dollar, by creating the European Monetary System in July of 1978. This, like all of the earlier agreements, failed in 1993.
Important milestones in the history of Forex
The Gold Standard
Money was invented when barter was no longer an adequate means of trade, seeing that actual goods could quickly lose value, were subject to value discrepancies, and could many times not easily be divided (Morris, 4). Money, on the other hand, could function as a medium of exchange, a unit of accounting, and a store of value (Ethier, 402). The original form of money was typically something that had value in itself, such a precious metal. The metal itself, usually gold or silver (Eichengreen, 9), was valuable, both because of its scarcity and its inherent usefulness.
By the nineteenth century, both coins and paper money were in popular use. Under the famous "Gold Standard," currencies were not directly valued in terms of each other. Instead, each currency had a certain, the rate at which the currency could be exchanged for gold. This in turn produced an effective exchange rate between any two currencies.
In 1900, for example, the mint parity for the U.S. dollar was $20.67, while that of the British pound was 3 pounds, 17 shillings, 10½ pence. To exchange U.S. dollars for British pounds, one would divide $20.67 by 3.17.10½, which produces $4.86 per pound after adjusting for the fact that U.S. gold coins had a somewhat greater gold content than did British coins (Aliber, 34).
Paper money could then be used in place of the precious metal. A citizen could carry paper money while the central bank would, in which more money left the country than came in, there would be less U.S. dollars in circulation.
Because central banks have large control over the interest rates, the rates at which banks borrow and lend money, they soon found that they did not have to passively wait for gold flows to be restored. In a trade deficit scenario, with gold supplies leaving the country, a central bank could raise interest rates which would make domestic savings more attractive.
Floating Exchanges Systems
Under a floating exchange system, on the other hand, currencies are not valued in terms of gold - they are valued in terms of other currencies.
In the early 20th century, two world wars brought about social upheavals, rapid inflation, and the destruction of the setting which made the gold standard operable. Between the wars, many countries elected to temporarily abandon the gold standard and opt for floating exchange systems until their economies returned to the point at which in light of the fact that, if a currency drifted too far outside its band and could not be contained by central bank intervention, the country was allowed to adjust its peg by setting a new exchange price.
There were three aspects of the system that were in conflict: constant exchange rates, autonomous domestic economic policies, and increasing international capital mobility. The existence of Bretton Woods did not stop states from using domestic economic policy (manipulating interest rates, for example, as under the gold standard) for domestic reasons, whatever their long-term effects on the exchange rate. Capital mobility simply makes the effects of domestic economic policies on the exchange rate happen sooner than they otherwise would.
With the instability brought about by the Vietnam War, central banks finally began to convert their dollars to gold. To halt the loss of gold, in 1971 Nixon "closed the gold window" by refusing to provide gold to foreign dollar holders (Eichengreen, 133). In 1974 the Bretton Woods System of adjustable pegs was officially abandoned and the Jamaica Agreement basically allowed the presence of any exchange system a country chooses (Aliber, 52).
Exchange Systems Today
There are several exchange systems a country can currently choose from. A free floating exchange system, as mentioned earlier, would simply allow the market to determine the price of a currency. Trade surpluses and deficits, domestic investments versus foreign investments, and domestic taxation policies, to name a few factors affecting the exchange rate, would all be allowed to occur whatever their effects on the currency.
A pegged exchange rate, on the other hand, would function exactly as the gold standard did a century beforehand, except that a country would its currency to the price of another currency, usually the U.S. dollar. If there is a balance of payments deficit, for example the central bank will buy the appropriate amount of the domestic currency in exchange for its foreign currency reserves, thereby returning the price of the currency to its peg but at the same time depleting the size of its reserves.
Some countries practice by, while remaining officially free-floating, sometimes intervening in their currency rates in order to suite domestic interests - increasing (revaluing) their exchange rate before an oil shipment, for example (Luca, 17). Other countries, for example Brazil before its turn to a free floating system, peg their currencies to the U.S. dollar or some other currency but allow the rate to float within a certain band similar to the Bretton Woods adjustable peg system.
The FOREX Market, often considered to be the playground of governmental institutions operating under the agency of central banks, expanded its horizons in recent years to include corporations, hedge funds, and speculators and most recently with the dot com boom and the expansion of the world wide web, now the private investors have been afforded the lucrative opportunity to be a part of the action.
The appeal of The FOREX Market is one of non-stop, twenty four hour a day trading for the five business days of the week. The first tentative steps towards a global economy have created a fast moving liquid market facilitating a wide variety of transaction options. Combine this with the ability to make money in both winning and losing markets and you will see why The FOREX Market is considered by some to be the fastest developing most lucrative business opportunity open to the savvy investor who has the skill, intelligence, acumen and backing to create substantial profits.
The FOREX Market provides a number of ways for investors to get in on the global high stakes action. From the spot market to spread betting, options, contracts for difference and futures, these are just some of the ways FOREX can turn a modest portfolio with moderate potential, into a heavy hitting enterprise totaling far in excess of what it once was. The BIS or Bank of International Settlements estimated in a recent survey that over $1,200,000,000.00 is exchanged everyday on The FOREX Market. Currently industry analysts think the market is not living up to its 1978 potential of $1,490,000,000.00 and still view this as an attainable goal for the FOREX Market of the future.