Issue 8
Forex Trader Magazine is run by traders for traders. We are not professionally qualified Financial Advisors and do not give any form of investment advice or tips on what to invest in or when to invest. What we do is purely for educational purposes. Accordingly, we are very happy to display the following risk warning which we urge you to read and take careful notice of. If you do not understand or accept its contents then please do not proceed to use this material.
RISK DISCLAIMER No part of this document is intended as investment advice. This is an educational work intended to demonstrate a trading system that properly qualified and or professionally advised investors may be interested to see described. No responsibility for any loss incurred through its use or misuse by any person or persons is accepted by the author, publisher or any other party, agent, franchisee or employee of Forex Trader Magazine or The Executive Director Ltd. Traders, Speculators and Spread Betters, whether professional or otherwise, should accept responsibility for any and all trades and bets that they place or are otherwise involved in. Forex trading and spread betting involve significant risk and are not suitable for everyone. If you decide to participate in such activities please ensure that you fully understand the risk involved and never risk more than you can afford to lose under any circumstances.
Contents – click on a title to move directly to the article being referenced Contents
Page
From The Editor
4
Learning 2015 Forex Course Basic Chart Reading Hedge Your Trades Three Trading strategies Demo Accounts
7 9 12 16 17
News FX Traders Face Law Bank of Dave Goodbye To Gold Money Engine update
20 22 25 29
Other Business Book Review FAQ’s Economic Calendar News Trading Glossary
32 34 36 37
Hello everyone and welcome to issue no 8 of Forex Trader Magazine and thanks for joining us. The magazine is now a whole one year old, in fact this edition is the first of year two. Thanks to your support we have gone from strength to strength. It is now time to review things and to begin to reflect your views by including more of what is very popular and less of what is less popular. The correspondence that I get has spoken loudly and clearly telling me that most readers want more on learning and techniques and a little less on news and world events.
This edition reflects that view with an increased amount of learning material. It includes a major first that I thought may never actually happen. We have given details of how we hedge our trades instead of using stop loss orders. Normally, only those who purchase our training get hold of “secrets� like this one. Hopefully, you will be impressed and may even decide to go on and buy our training course to find out what other great secrets we have! The live trading experiment, which you can follow at: http://forextradermagazine.co.uk is really hotting up. We are coming towards the end of its one year life. We are able to report a profit of over 200% from 25 trades and still have no losses. However, for the first time since it started, we have to defend a losing trade which is perfect for seeing how we actually do that. Our other news is that we are now preparing to launch an additional title which is Stocks and Options Magazine. This will cover what it says on the tin! It should be available within the next few weeks and it is going to be a free publication. Jeff Fitzpatrick Managing Editor
Jeff@Forextradermagazine.co.uk
A typical bi-monthly edition of the magazine has around 15 to 20 articles with each normally having over 1,000 words and appropriate illustrations. I hope you enjoy this material and are inspired to develop your trading through the training and ongoing development that a subscription provides.
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Back issues still available in the iTunes & Google Play Newsstands, from your MT4/5 trading platform or you may purchase them in web format at: http://Forextradermagazine.co.uk Issue #7
Learning 2015 Forex Course Basic Chart Reading Hedge Your Trades Three Strategies
Demo Accounts?
The 2015 Forex Course
Like all traders we at FTM are constantly learning. In addition the dynamics of trading are constantly changing. These were the reasons why we launched this publication in the first place. The course has previously been available, in older versions, on disk, as special magazine editions and through live seminars. This much improved version now comes as a members’ only website. This is great news indeed for our learners as it means we can provide even more content; we can also update it quickly and easily and can take and respond to feedback more easily and quickly. For example; the 2015 edition includes two TV quality one hour documentaries. It allows direct downloads of the Rule of Thirds and Jeff’s Lines trading tools and it includes a substantially updated course manual as a great reference tool. This puts an end to having to spool through lots of video material to check out points that you want to look up quickly in a trading situation. Check our new course out now right here: http://forextradermagazine.co.uk
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We have now built our latest thinking and learning into a new version of our very own forex trading course. The course is a must for all forex traders because it: • Takes beginners through a comprehensive programme quickly, easily and at low cost • Allows traders let down by other training courses to get back on track • Clearly shows how to remove almost all risk from trading • Allows traders to spend as little as ten minutes trading on their chosen trading days To find out Merkel more check out our free training brochure (shown below) which is available Angela from:-
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Web
The Basics of Chart Reading
Learning the basic skills in forex, such as how to read forex charts’ is really important. This is because once you have this vital skill under your belt, it will be a lot easier and quicker when the time comes for you to learn and practice an actual forex trading system.
By the time you finish this article, you will have learned how to read forex charts, as well as know the pitfalls that can occur when reading them, especially if you haven't traded forex before. Firstly, let's revise the basics of forex trading as this relates directly to how to read forex charts. Each currency pair is always quoted in the same way. For example, the EURUSD currency pair is always as EURUSD, with the EUR being the base currency, and the USD being the terms currency, not the other way round with the USD first. Therefore if the chart of the EURUSD shows that the current price is fluctuating around 1.2155, this means that 1 EURO will buy around 1.2155 US dollars. The trade size (face value) is the amount of base currency that you're trading. In this example, if you want to buy 100 000 EURUSD, you're buying 100 000 EUROs. Now let's have a look at the 5 important steps on how to read a forex chart:
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1. Chart Direction. If you buy the currency pair, that is, take a “long� position, realise that you are looking for the chart of that currency pair to go up, to make a profit on the trade. That is, you want the base currency to strengthen against the terms currency. On the other hand if you sell the currency pair to short the position, then you're looking for the chart of that currency pair to go down, to make a profit. That is, you want the base currency to weaken against the terms currency. 2. Time Period: Always check the time frame displayed. Many trading systems will use multiple time frames to determine the entry of a trade. For example, a system may use a four hour and 30 minute chart to determine the overall trend of the currency pair by usingAngela indicators such as MACD, momentum, or support and resistance lines, and then a Merkel five minute chart to look for a rise from a temporary dip to determine the actual entry. So ensure that the chart you're looking at has the correct time frame for your analysis. The best way to do this is to set up your charts with the correct time frames and indicators on them for the system you're trading, and to save and reuse this layout. 3. Price Displayed: On most forex charts, it is the BID price rather than the ask price that's displayed on the chart. Remember that a price is always quoted with a bid and an ask (or offer price). For example, the current price of EURUSD may be 1.2055 bid and 1.2058 ask (or offer). When buying we do so at the ask price, which is the higher of the two prices in the spread, and when we sell, it is at the bid price, which is the lower of the two prices. If you use the chart price to determine an entry or exit, realise that when you place an order to sell when the chart price is say 1.330, then this is the price that you'll sell at assuming no slippage. If on the other hand, you place an order to buy when the chart price is the same price, then you'll actually buy at 1.3333. A forex system will often determine whether your orders will be placed simply according to the chart price or whether you need to add a buffer when buying or selling. Also note that on many platforms, when you're placing stop orders (to buy if the price rises above a certain price, or sell when the price falls below a certain price) you can select either "stop if bid" or "stop if offered". 4. Time Zone: Realise that the times shown on the bottom of forex charts are set to the particular time zone that the forex provider's charts are set to, be it GMT, New York time, or other time zones.
It's handy to have a world clock available on your computer desktop in order to convert the different time zones. This is important when you're trading major economic announcements. You'll need to convert the time of an announcement to your local time, and the chart time, so you'll know when the announcement is going to happen, and therefore when you need to trade. 5. Candle Time: Finally, check whether the times on your forex charts correspond to when the candle opens or when the candle closes. Your charting software may be different to someone else's in this way. Angela Merkel The reason I mention this, is that you need to either trade major economic announcements by entering a trade based on the movements that happen after the announcement, or to exit a trade before the announcement in avoid getting stopped out during it. Then you need to be precise (to the minute!). These trades are performed according to what happens in the one minute immediately after the announcement, not the candle afterwards! So there you have it. You now have the five essential keys to how to properly read forex charts, which will help you to avoid the common mistakes which many forex beginners make when looking at charts, and which will speed up your progress when you're looking at forex charting packages, and forex trading systems that you want to trade! Now that you know this, practice looking at forex charts with each of these five points in mind.
https://www.youtube.c om/watch?v=T_mNnW B9O2c
And for a video lesson in reading charts watch this 34 minute video!
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Hedge your Trades Using Equal and Opposite Trades to Hedge your Forex Trades This is the first time that this technique has been published outside of a paid for course. It comes from the How to Trade Forex Course and is PURE GOLD! The technique uses an equal but opposite trade to defend failing trades and works like this:If the original trade was a buy we would place a defensive sell trade and vice versa. The defensive trade should be equal in volume (bet size) to the original order. Such orders can be set using pending order instructions. It is our practice to always set a pending defensive order while we are not watching the screen closely – just in case a major news item or event moves the market dramatically against us while we are diverted. Once placed the pair of trades need to be managed. Placing & Moving Defensive Trades If a trade starts to lose, before too long, action should be taken to prevent losses building to an unacceptable level. Most books, seminars and websites advocate using a stop loss order to achieve this.
While there are circumstances when this may be appropriate we generally prefer to use the technique of placing an equal and opposite order. This “locks” the loss in and prevents it getting any worse and provides time during which the situation can be managed and the loss recovered. The term equal and opposite order refers to one which has an equal volume (the “stake” money spread bet per pip of price movement) but becomes profitable when the price moves in the opposite direction to the original order. So, if the original order was a buy trade of volume three (that is a bet of £3 per pip of price movement) the equal and opposite trade would be a sell order of volume three. If the original order was a sell trade of volume four then the equal and opposite order would be a buy trade also of volume Angela four. It Merkel is also possible to use an equal and opposite trade to protect a number of buy trades or a number of sell trades by placing equal and opposite orders with a volume equal to that of the collective volume of the trades being protected. Once a protective equal and opposite order has been placed the loss that was showing on the original order will remain unchanged irrespective of whether the current price moves up, or down though the loss may have changed because of the spread cost when the protective order was placed and one or both orders may be subject to swap charges going forward. Having placed a protective order our objective becomes one of reducing and eliminating the loss that has been locked in by moving either the protective trade or the original trade. To achieve this, buy trades need to be moved down to lower prices and or sell trades needs to be moved to higher price levels. The logic of this fits well with the idea of buying anything in life at a lower price and selling anything at a higher price. When the gap between the original trade and the protective trade is eliminated or when it has actually been reversed so the trades are collectively in profit, the defensive move can be removed by closing both trades. Hopefully the examples and diagrams below will clarify the process. Example: protecting a failing buy trade Although there are a couple of methods of reducing the loss involved in a pair of equal and opposite trades, that have a loss “locked” in, probably the easiest is to wait until the price moves close to one of the trades that is in profit and then to close that trade. Then, as the price moves closer to the remaining trade, to place a new protective equal and opposite trade before repeating the closing and replacing actions as many times as is needed to eliminate the loss involved before permanently closing both trades.
Fig 1 – Things start to go wrong. A buy trade has been placed but the price has gone against it taking it into a loss and the price trend looks as though things may get worse.
Angela Merkel
Fig 2 – The decision is made to place an equal and opposite sell trade to stem any further loss. Where the sell order is placed is a matter of judgement and individual risk profile. Typically, this may be between 25 and 50 pips below the buy trade.
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The loss on the original buy trade would continue to increase if the current price fell further but the new protective sell trade would increase in profit by the same amount keeping the overall loss at the same level. If the price trend reversed and began to increase the loss on the buy trade would fall until it became a profit and the profit on the protective sell trade would reduce until it became a loss. The loss that stood when the sell order was placed will therefore remain constant. For the purpose of this example I have made the locked in loss £50. However, this value will depend on the number of pips that the sell trade is placed below the buy trade and the volume of the trades. Fig 3 – Now an opportunity to move either the sell trade to a higher price, or Angela Merkel the buy trade to a lower price is required to manage the position. In terms of moving the sell trade, this occurs when the price stops falling and returns towards the sell trade. While the sell trade is still in a small profit it is closed and then a new sell trade is placed to replace it at a higher price. The locked in loss is thereby reduced and a small profit has been taken on the sell trade that was closed.
In this example the buy trade loss of £50 has now been reduced to £30 and a small profit, let us say of £5, was made on the closure of the original equal and opposite sell trade and the on-going loss has now been locked to a level of £30. Taking into account the £5 profit on the closed sell trade the actual overall locked in losing position is £25 or just half of what we started with. Hereafter, we would simply wait for either another opportunity to replace the new protective sell trade or using the same technique to move the original buy trade towards the new sell trade.
Three Simple Trading Strategies
Our thanks go to FXCM for the supply of these three simple trading strategies. They are a good representative sample of what is out there. News fade - The first example is a news trade and it demonstrates how to trade a news event that causes the market price to spike upwards or downward before retracing. In side Day Breakout – The second example is of a candlestick pattern based trade. Two Hour MACD Cross – to complete the trio the third example of a trading strategy is an indicator based one the uses the MACD.
https://www.youtube.com/watc h?v=Fbvqg77ZXSU
Are Demo Accounts A Good Thing?
Free Forex practice accounts are a service that is loved by some yet hated by others, why is this so? Surely a free practice account can be nothing but a good thing? Not exactly so, it does have its benefits but also has its pitfalls, in this article we will examine the pros and cons of such an account. Let`s start off by looking at the practice account. For those who may not be aware, the free practice account does exactly what it says on the tin, it lets you practice Forex trading for free, sounds great for a newbie trader and in many ways it is. The brokers who offer a free forex practice account do so to help get people interested in Forex, nothing wrong with that since they exist to expand the number of traders in the market and on their platform. It's also a great way for the new trader to begin to learn Forex trading. Currency trading is no simple “click and go� experience. Several brokers have introduced no frills platforms with low minimum deposits to get the virgin trader started and one or two have taken it a step further and allowed people to open a free practice account where you can begin trading with make-believe money until you have the confidence and knowledge to risk your own hard-earned cash. That's were the main pro of the practice account lies, in being able to learn the Forex market and key functions of trading without risking a penny! However, this is not always good news.
When trading with 'virtual' money suddenly the risk becomes less: in fact risk is non-existent as you have an endless stream of make-believe money. This means you may be more likely to risk on trades you know you shouldn't and wouldn't make in the real world. This can lull you into a false sense of security. Let`s say you make an extravagant risk with practice money and it comes off, so you make another big risk and that comes off too, all of a sudden your confidence is up and you feel you can start playing with your own money and taking uncalculated risks. The Forex market has suddenly become very appealing. If you can make this much money Merkel in the practice area imagine how well off you would be if you were using Angela real money. This is where things go wrong, you then you go ahead and open a real Forex account and deposit your real cash. Your confidence is up and you feel like you know what you are doing. You make a risky trade with your own cash and it fails, suddenly your Forex career is over and you are sat looking at a significant loss. It seems when it’s your own 'real' money the practice you got with virtual cash counted for nothing. Of course if you take things slowly and carefully you can avoid this and become a successful trader, but you have to have that self-control. Practice accounts are very useful, but only if you carry out trades exactly as you would if it was real money. Never make a trade in a practice account that you wouldn't make with your own cash! To help get around this several brokers now offer mini-accounts with deposits as low as $25. This is virtually a practice account anyway with such low deposits, however, it’s still your own cash so you are more likely to make realistic trades and not risk big time trades. We feel this is the best option for some people. Use a free practice account for a week or two while you learn the basics of Forex trading, but then open an account and start with low funds, never jump both feet first into currency trading. Success comes from patience, awareness, and discipline.
News FX Traders Face law The Bank of Dave Goodbye to Gold Money Machine
Trading techniques
Criminal Charges for FX traders?
It looks like the pain of the banks misbehaviour in terms of market manipulation has some way to run. It seems that the U.S. authorities may be getting close to bringing criminal charges against individual bank traders. Here at FTM we see this as a good move for us home based traders and probably the only one that is going to have enough of an effect on the sharks! It has been reported that U.S. Department of Justice officials are to interview current and former employees at HSBC and other banks.
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At this stage there is no confirmation, only rumours, that criminal charges will be made. It could turn out to be only witness interviews but that is not what is currently expected. Neither HSBC nor any of the other banks involved has been prepared to comment so far – no surprises there then! In preparation for the interviews the banks involved (rumoured to include JPMorgan Chase, Citigroup, UBS and AG have been given until the middle of December to supply information and documents. This development is being kept quiet as neither the Justice Department nor the banks are prepared to comment but we are waiting and watching them carefully. These interviews follow the $4.3 billion fines imposed by U.S., Swiss, and British civil authorities on these banks and others for failing to stop traders from trying to manipulate the $5-trillion-a-day foreign exchange market. No stranger to fines with over $10 billion having been levied over the last couple of years, the banks appear to see them as just part of the cost of doing business. Perhaps criminal cases against individuals will give them the required wake up call. The main thrust of the Justice Department’s investigation is into whether the banks have been colluding to shift currency rates in their favour to increase their trading profits. This potentially breaks both fraud and anti-trust laws. They are also looking at whether traders misled clients. The Justice Department is expected to charge both individuals and the banks. However, it is highly likely that the banks institutions are likely to use, as they usually do, deferred prosecution agreements and or guilty pleas instead of litigation.
The foreign exchange benchmarks under investigation are used by asset managers and corporate treasurers to value their holdings, which run into the trillions of dollars. In fairness, the banks have previously acknowledged wrongdoing, condemned the actions of the employees involved and said they were working to fix the problems. In addition, they have suspended or fired at least 30 traders. They have also clamped down on the infamous chat rooms too.
The Bank of Dave!
How One Man Took On The Banks & Won! Dave Fishwick, made millions as the biggest minibus supplier in Britain. As he drives round his home town of Burnley, he sees are the relics of an industrial past, boardedup shops and a proliferation of “To Let” signs. But unlike most of us, he decided to do something about it. In his unique model, he links savers earning paltry interest on their deposits with local businesses in desperate need of cash; Fishwick has opened the "Bank of Dave". It's already got hundreds of happy local customers and many more on the waiting list. Savers earn 5% on their money – better than any best-buy deal on offer from the high street banks – while small business borrowers pay 8.9% to 14.9% a year interest, or less than the rates often charged by conventional banks. All profits go to charity. "This is not about adding more zeroes to my net wealth. After all, you can only drive one car at a time or go on one holiday at a time. Sometimes you just have to stand up and make a difference.“ It's not really called Bank of Dave, despite his best efforts. It's actually called Burnley Savings and Loans and it will stay that way until City regulators, who have approved only one new bank in the last 100 years, grant the maverick 42-year-old a banking licence. One City expert after another battered and blunted Fishwick's ambition. "They told me that if I use the word deposit or say I'm a bank then I will go to prison. Yet not one single banker in the City, the people who have pocketed millions in bonuses and let us all down so badly, has ended up in prison. God forbid that I should try to offer pensioners 5% interest."
David Buik of City brokers BGC Partners, swiftly dismissed the idea of Bank of Dave obtaining a licence, saying: "You don't have a chance.“ The idea for the "bank" was sparked by the sudden withdrawal of bank loans to his customers in 2009 that almost wrecked Fishwick's minibus firm. His own firm's balance sheet was fine, but the small businesses who make up the bulk of his buyers found they could no longer obtain finance. "All of a sudden it just stopped. The banks kept declining my customers. The customers weren't doing anything differently and were still able to repay. It was the banks who were having problems, and lowering the bar." So Fishwick started lending his own cash to minibus buyers, on his own terms. After six months, and with not a single customer defaulting on their payments, it struck him that running a bank couldn't really be that difficult. But, in reality, the hurdles are enormous. Obtaining a consumer credit licence to lend is relatively straightforward – after all, it's the lender who is putting their money at risk. But obtaining a deposit-taking licence is an altogether different matter. Regulators are understandably concerned that any business seeking to take deposits from the public meets strict criteria, above all the ability to repay on demand. In Fishwick's case, he was told he needed to keep a minimum of £10m in reserve. "They said I needed that amount in reserve but that I could never, ever use it. How come? Surely it should be pro-rata to the size of what you're doing?“ Yet he managed to open for business in September 2011. "The world and his wife were telling me I couldn't be a bank if I didn't have a banking licence, that preserve of the stinking rich and the banking elite. I was determined to show that I could," he said in a book he has written on his experiences. So how did he do it? He rented a vacant shop in Keirby Walk in the town centre for under £100 a week, determined not to have the huge overheads that traditional banks pass on to customers. He gave his time for free, as did local enthusiasts who helped paint, decorate and fit out the branch. Above the entrance it says Bank on Dave! but it's an advertising slogan, not the firm's legal name. He could have opted to open a credit union, but he feels they remain hamstrung by rules and regulations about who, where and how they can lend. Instead, Fishwick adopted a peer-to-peer crowdfunding model. As his website explains: "You lend your savings to a borrower, and that borrower then becomes responsible for the paying of the loans. Burnley Savings and Loans does the administration around this and is responsible for vetting applicants for loans." So, legally speaking, savers are not actually putting down a deposit in BS&L, they are just being channelled by it to someone who needs the money as a loan.
Dave Fishwick and the book that tells his story
Savers are allowed to lend from £50 to £1,000 on 30-day notice, or up to £15,000 with one year's notice. Every £1 put in, is personally guaranteed by Fishwick.. In other words, he puts down £1 of his own cash for every £1 brought in by a customer. Borrowers are credit checked in the usual way through credit scoring agencies. His borrowers are not, he insists, the more desperate types who would otherwise resort to payday loan merchants. "We're all about helping real businesses. I had an accountant who came to us needing to borrow £10,000, as he was buying his partner out. Yet, even though it meant his income would rise and his record was impeccable, the banks wouldn't lend him the money. So we did. If a local accountant in Nelson (Lancashire) can't borrow from a bank, what hope does Mark the builder or Gary the plumber have?“ "This is not about trying to be bigger than the banks or about lining my pockets. Someone, somewhere has to take the first step and take them on," said Fishwick. He dreams of many more independent savings and loans across the UK. "Other people up and down the country can do the same as me. We could have something like Burnley Savings and Loans in every community. You just need like-minded individuals to come together.“ But if you're dreaming of 5% interest, guaranteed pound-for-pound by Fishwick, dream on. The Burnley Savings and Loans is open for business, but having reached its £25,000-a-week target, is only accepting new customers on to a waiting list. Unlike Northern Rock, people are queuing to put money in, rather than take it out.
Goodbye to Gold
SEVENTY years ago, 730 delegates gathered in Bretton Woods, New Hampshire to reopen an old debate. Global commerce has long faced a fundamental tension: the more certainty countries create around exchange rates, the less room they have to manage domestic economic affairs. Thirty years before Bretton Woods a war wrecked the world’s first stab at the problem—the gold standard—and the attempt to rebuild it in the 1920s led to depression and another war. The exchange-rate system agreed at Bretton Woods lasted only a generation. After 150 years of experimentation the world has yet to solve its monetary problem. Most monetary systems have been the product of accident rather than design. The classical gold standard developed in industrialising Britain. Its economic success encouraged others to transact on its terms. Germany’s adoption of gold in 1871 put Europe’s two leading economies on one standard; others quickly followed suit.
The gold standard’s priority was the lubrication of global trade. Exchange rates were fixed across economies and capital flowed without any regulatory hindrance. Though the free flow of capital left currencies vulnerable, the system survived for decades thanks to governments’ iron commitment to gold. That, in turn, was built on the relatively feeble political influence of working people and the relative strength of creditors. Central banks refrained from destabilising actions and lent to each other in times of crisis. The First World War changed all this. Belligerent countries instituted capital controls and printed money to pay for the war. Europe tried to patch up the system after the war but it no longer worked well. Gold reserves grew increasingly unbalanced; France and America built growing hoards, while Britain and Germany ran short. Central bank solidarity was also in short supply. America, which at times controlled 46% of the world’s gold, could have rebalanced the system by expanding its money supply and allowing prices to rise. Yet it refused to do so thanks to domestic worries, chiefly a desire to limit a Wall Street boom.
The revived system broke under the strain of depression. Struggling economies were forced to choose between saving domestic banks and defending their currencies’ pegs to gold. Central bankers met repeatedly to discuss ways to contain the crisis, but failed to recapture the cooperative spirit that prevailed before 1914. Austria and Germany dropped out of the system in 1931. By 1936 the gold standard was dead.
At Bretton Woods, the world took another crack at a universal system. Yet the compromises of the 1944 conference yielded a patchwork of policies. Countries fixed their currencies’ values relative to the dollar, which was in turn pegged to Advertisement gold. But pegs could be adjusted in extraordinary circumstances. The IMF was created to help manage crises; the World Bank was designed to lend money to poor countries. The conference also paved the way for the General Agreement on Tariffs and Trade: a forum for trade talks and forerunner of the World Trade Organisation. In their first years the Bretton Woods institutions flirted with irrelevancy. The World Bank’s lending to Europe between 1947 and 1953 amounted to just 5% of American aid under the Marshall Plan. As controls on capital and trade were lifted, tensions became apparent. When governments splashed out on welfare states and military adventures, trade imbalances and inflation ballooned, reducing confidence in currency pegs. By the late 1960s these strains became unmanageable. In 1967 Britain was forced to devalue, shaking confidence in the system. And in 1971 President Richard Nixon opted to drop the gold peg and devalue rather than make swingeing cuts to balance budgets and control inflation. Most big countries dropped out of the system and floated their currencies. The repeated collapse of fixed exchange-rate regimes did little to shake faith in the idea. In Europe, leaders introduced the European Monetary System in 1979—the ancestor of today’s euro zone. Yet markets repeatedly found reason to question peripheral economies’ willingness to subordinate domestic policy to the demands of the system. A bout of scepticism fuelled attacks on British and Italian pegs, driving them out of the system in 1992. Italy nonetheless signed up for deeper monetary integration in the euro zone. The euro’s recent crisis is a variation on an old theme. Developing countries also found pegs hard to resist. Fixed exchange rates can encourage monetary discipline and tame inflation, a common emerging-world problem, while reducing borrowing costs. Yet too often pegs ended painfully, as over-indebted economies found it impossible to maintain the discipline needed to protect them. Markets pounced, initiating crises and forcing devaluations, most dramatically in the Asian financial crisis of 1997-8. Despite this history, floating exchange rates remain unpopular. Emerging economies have instead shifted toward managed rates maintained through market intervention. China, the world’s second-largest economy, is a particularly energetic manipulator of its currency, and has at times used an outright dollar peg.
As a result over half of global economic activity is concentrated within two massive single-currency blocs. Less than a tenth of emerging markets allow the market to set their exchange rate. Advertisement
The aversion to floating is a puzzle. Fixed rates can reduce borrowing costs, but the result is often a debt-binge and crisis. Modern technology reduces currency transaction costs. IMF research finds that flexible exchange rates reduce vulnerability to both macroeconomic and financial crises. And Joseph Gagnon of the Peterson Institute for International Economics, a think tank, finds that economies with floating currencies did better in the global financial crisis and its aftermath. History suggests that monetary arrangements last only as long as the political economy that supports them. Given the dramatic changes in the global economy marked by the rise of the emerging world, it is hard to imagine that prevailing currency alignments can survive. Indeed, China claims to be gradually freeing its capital account and encouraging trade denominated in yuan. That may finally bring down the curtain on the dollar era initiated by Bretton Woods. Yet in practice China is reluctant to give up the perceived safety of a managed exchange rate. Gold habits are hard to break.
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Building a Money Machine!
On 21 November, the end of week 46 of the live trading experiment we opened a new buy trade and closed it for a gross profit (before the spread) of 56.2 Pips giving a profit of £108.40 and taking our profit to date up to £2,194.22 or 219.4%. On this account we only trade the GBPUSD currency pair. We started with £1,000 in January 2014 and over the course of 25 trades have increased the value of our pot to £3,194.22. No trades have been closed at a loss and we have two open trades. The first of these is a buy trade which is now in a loss position. The second is a protective sell trade which is of equal value in volume terms. The sell trade is preventing the loss from getting any worse. The idea is that the protective, profitable, sell trade has created a holding position until the price moves up to put the losing buy trade into profit. It is our intention to manage these trades so that both end up being closed in profit. However, we may be running out of time. It was always envisaged that the experiment would run for a straight year before the account is cleared and we start again. With this in mind we are now trying to ensure that we have enough profit in the account to be able to close it down with a clear profit of 200%+. To achieve this we probably need two or three more profitable trades taking us to a total of around 28 trades in the year.
With around 5 x 52 = 260 trading days available in a year it can be seen that we have been very sparing in our use of trades, opening new trades on only 10.7% of the available trading days. I estimate that we have spent an average of around one hour per week working on the account. Much of this took the form of watching the screen for a couple of minutes a few times on some days. There must certainly have been at least 100 days, so far, on which we did not even open the trading screen. Had we traded more vigorously then I am certain that we could have made a lot more money. However, that was not the purpose of the experiment. The idea was to demonstrate how trades could use our techniques to spend very little money and very little time trading and that the trading did not have to be a huge risk. With around five weeks to run, at the time of writing, I think we have clearly shown these things to be true.
You can follow the live trading experiment at http://forextradermagazine.co.uk where we update a commentary on all trades as they occur – unless we are using limit orders which we also tell readers about in advance. You can also learn our trading techniques through what we consider to be the best forex trading course available. This can also be accessed through the same link. The next edition of Forex Trader Magazine will include an end of experiment report and analysis as well as the start of our 2015 experiment.
Other Business Book Review FAQ’s Economic Calendar News Trading Glossary
Book Review
7 Winning Strategies for Trading Forex – Grace Cheng Download a sample from the book here: http://www.harrimanhouse.com/samples/9780857190246_sample.pdf
Contents Grace Cheng opens her work with a very good, thorough introduction and background to forex trading before going on to describe her seven strategies which are based on: Strategy 1 - Market Sentiment Strategy 2 - Trend Riding Strategy 3 - Breakout Fading Strategy 4 - Breakout Trading Strategy 5 - Decreased Volatility Breakout Strategy 6 - Carry Trade Strategy 7 - News Straddling
Review Having examined around a dozen reviews I did not come across a single negative comment about this work. Similarly, the press reviews are positive and the example below is typical: "A well-written, interesting and easy read, with some excellent trade examples. Those new to or considering the forex market will find 7 Winning Strategies for Trading Forex a useful place to start." - YTE UK Magazine I agree whole heartedly with this review, it sums up my thoughts exactly. The Author Grace Cheng is an investor and FOREX trader, and is the co-founder and chief editor of DailyMarkets.com - a financial community weblog dedicated to 24/7 breaking news and market opinions from traders, money managers and investors. Inspired by veteran investor Jim Rogers' adventurous spirit of traveling around the world, in 2007 and 2008, she fulfilled her dream of travelling around the globe from the US, South America, Europe to Africa to Asia for a year, without missing a day of work, proving that in this day and age, one can achieve financial independence without being tied to an office chair. Grace is a contributor to major print, radio and television media including Technical Analysis of Stocks & Commodities, Your Trading Edge and Investopedia. She has also been featured in the media in the US, UK and Asia and quoted on Reuters and Dow Jones. Detail Format(s): Paperback - eBook ISBN(s): 9780857190901 - 9780857190246 Published: 19th Apr 2010 Edition: 1st No. of pages: 260 Price from around ÂŁ10.20 (eBook)
http://www.harrimanhouse.com/basket/addtobasket/20 3/p/
http://www.harrimanhouse.com/basket/addtobasket /203/e/
Forex Frequently asked Questions
Q: What is Forex? A: Forex is a shortened term used for ‘Foreign Exchange.’ It is the process of buying and selling currencies. The Forex Market is the largest financial market in the world. Just to compare, the New York Stock Exchange makes about $74 billion a day in volume and the Forex Market makes over $4 trillion a day in volume. Q: How does Forex trading work? A: Forex is traded in currency pairs. Common currency pairs are the Euro/US Dollar, US Dollar/Japanese Yen, Great British Pound/US Dollar, and Canadian Dollar/US Dollar. You can buy and sell each currency. Q: What tools do I need to trade Forex? A: You only need a computer with internet connections and a funded Forex account to begin trading. However, you should be equipped with Forex education and tools to minimise risks in the Forex market. Q: How old do you need to be to trade Forex? A: You must be over the age of 18 to trade Forex. Q: What are the Forex Market trading hours? A: Market activity hours may vary periodically due to public holidays, seasonal time adjustments, and unusual liquidity conditions arising from exceptional global events. Weekly activity begins on Sunday at 21:00 Greenwich Mean Time (GMT) continuously until Friday, 20:00 GMT. Most of the instruments are traded on a 24 hour basis without interruption. Q: What is a Pip? A: Pip stands for percentage in point. This is the smallest price change that a given exchange rate can make. It is the movement of the last number on the price: 1.3200.
Q: What is a Spread? A: The spread is the difference between the BUY and the SELL price of two currencies. For example, if the EUR/USD was trading at 1.4300 (buy) and 1.4297 (sell), then the spread would be three pips. Some brokers have fixed spreads while others have moving or “floating” spreads. Q: What does going “long” and “short” mean? A: Going “long” is when a trader buys a currency expecting the value to rise. This is also called opening a long position. Going “short,” or opening a short position, is when a trader sells a currency, expecting the price to decline so it can be bought back in the future, generating a profit. Q: What is the validity of a transaction and what is an Automatic Rollover? A: The option of automatic rollover allows investors to leave positions opened for a length of self-determined time. When a new position (spot or forward) is opened, it has a default expiration (value) date. At the end of the value date (server time), an automatic process will rollover all relevant open positions to the next spot value date (2 additional business days). All rollovers will be performed at competitive rollover rates, depending on the currency pairs involved. During the rollover process, the traders will either earn or pay away points, depending on the interest rate differential between the two currencies. Q: How are currency prices determined? A: There are various way currency prices can change. Economic and political conditions usually affect the value of a currency, along with interest rates and inflation. Q: What are Binary Options? A: Binary Options are a simple and exciting method of trading the financial markets, based on the determination of whether the price of an asset (such as a currency pair, commodity or stock index) will close ABOVE or BELOW the current price within a set time period. Binary options are easy to execute, fun to trade and highly profitable. Q: Does the Forex market have a central location? A: Unlike stock markets, the Forex market does not have a central location. Transactions take place over the internet or phone which is why the market is available 24 hours a day. Do you have a question which does not appear in this page? Kindly send it to us by E-mail to editor@Forextradermagazine.co.uk and we will be glad to answer it.
Economic News Calendar
The Economic Calendar for this edition is provided by Forexlive.com. It uses data supplied by investing.com but has a good clear layout and some very nice features. Be sure to check it out for yourself at: http://www.Forexlive.com/economic-calendar/
The home page of the site has a good real time commentary on news announcements that is also worth looking at.
News Trading Glossary
Asset Purchase Facility (GBP)
– Issued by the Bank of England, this figure is the total value of money that the BOE intends to create and then use to purchase assets (normally bonds) in the open market. A figure below the forecast strengthens the GBP. This programme is also known as quantitative easing.
Claimant Count Change (GBP)
– From the office of National Statistics this is a measure of the number of individuals claiming unemployment related benefits during the previous month. Accordingly, an outcome below forecast is seen as favourable to the currency. This figure is issued around a month earlier than the unemployment percentage figure and is a good early indicator of what is happening to employment levels.
Construction PMI (USD)
– The full title of this news item is Construction Purchasing Managers Index. It is derived from a monthly survey of around 170 purchasing managers in the construction industry within the USA. This index is seen as one of the main indicators of the economic health of the country and announcements of better than forecast outcomes usually strengthen the USD. Generally announcements of index rates above 50 are taken as signs of the economy expanding and outcomes below 50 are seen as signs of contraction.
Core CPI m/m (USD)
– US Government measure of inflation in the price of goods and services bought by consumers, excluding food and energy. Food and energy prices represent about a quarter of consumer spending but are seen as distorting the trend because of high volatility. For this reason the central bankers and traders tend to take more notice of this “core” figure.
CPI y/y (GBP)
– This is the Consumer Price Index produced by the Office of National Statistics and representing the change in the price of goods and services bought by consumers year on year. A higher than forecast tends to strengthen the GBP. This figure is seen as very important as a measure of inflation and it is the basis of the target aimed for by the BOE. It is derived by pricing a sample “basket” of goods and comparing the prices to those in play a year earlier.
ECB Press conference (EUR) – The European Central Bank press conference is usually delivered by the President of the Bank and his Vice President. Traders see the speech as being hawkish, neutral or dovish. A more hawkish speech than expected can strengthen the EUR. The event takes the form of a prepared statement followed by questions. The unscripted answers to questions can cause considerable volatility. The press conference usually overshadows the announcement of the Minimum Bid Rate which is announced 45 minutes earlier and which is the interest rate of the main refinancing operations that provide most of the liquidity for the wider banking system.
FOMC Minutes (USD)
– These are the minutes of an eight times per year meeting of the Federal Open Market Committee, effectively a US version of GB’s Monetary Policy Committee. The minutes give an in-depth view of the thinking behind interest rate changes. A hawkish view within the minutes strengthens the currency.
French Flash Manufacturing PMI (EUR)
– This is a Purchasing Managers Index resulting from a monthly survey of around 400 French Purchasing Managers. An actual outcome that is higher than forecast is seen as strengthening the EUR. An outcome of 50 or higher indicates an expanding economy while an outcome of less than 50 indicates a contracting economy. Being published just 30 minutes before the German Flash Manufacturing PMI this indicator has added strength.
German Flash Manufacturing PMI (EUR)
– This is a Purchasing Managers Index resulting from a monthly survey of German Purchasing Managers. An actual outcome that is higher than forecast is seen as strengthening the EUR. An outcome of 50 or higher indicates an expanding economy while an outcome of less than 50 indicates a contracting economy. Being published just 30 minutes after the French Flash Manufacturing PMI this indicator has added strength. German Ifo (Information and Forschung) Business Climate (EUR) – This is a figure from the German Ifo Institute of Economic Research. It is basically a large sample business survey covering manufacturers, wholesalers and retailers. A higher than forecast outcome strengthens the EUR and this can be quite marked.
Manufacturing m/m (GBP)
– Figure comes from the Office of National Statistics and is a measure of the month on month change in the value of output produced by manufacturers after an adjustment for inflation. A higher than forecast figure strengthens the GBP. As manufacturing makes up around 80% of industrial production this is an important figure that can move the market.
MPC (Monetary Policy Committee) Asset Purchase Facility Votes (GBP)
– Bank of England provided indication of voting by its MPC. This takes the form of “X-X-X” (for increase, for decrease, no change). A more hawkish outcome is seen as good for the GBP. Even if the outcome of the vote is for no change an alteration in the voting pattern is seen as giving an indication of direction of travel in voting behaviour.
MPC (Monetary Policy Committee) Official Bank Rate Votes (GBP) – Bank of England provided indication of voting by its MPC. This takes the form of “X-X-X” (for increase in interest rate, decrease interest rate, no change). A more hawkish than forecast outcome is expected to strengthen the GBP. Even if the outcome of the vote is for no change an alteration in the voting pattern is seen as giving an indication of direction of travel in voting behaviour.
Non-Farm Payroll (USD)
– This is a US government statistic reflecting the number of people moving into employment in the previous month other than in the farming sector. A rate which is better than forecast is good for the USD and this can be a particularly powerful market mover. Of course, the figure can be negative if employment levels are falling but even a negative figure which is better than a worse negative forecast is very positive.
Official Bank Rate (GBP)
– This is the interest rate charged by UK banks when lending balances, held by the BOE, to other banks. A higher than forecast rate is seen as strengthening the GBP. The announcement is often overshadowed by the accompanying statement.
Preliminary Gross Domestic Product (GDP) q/q (GBP)
– The Office of National Statistics provides this figure as its first (of 3) estimates of the total value of all goods and services produced in the UK economy in the last 3 months compared to the previous three months. An actual figure that is higher than forecast is seen as strengthening the GBP. This is probably the most important measure of the UK economies health.
Retail Sales m/m (GBP)
– Another figure from the Office of National Statistics, this figure represents a month on month change in the value of retail purchases made by consumers after being adjusted for inflation. A higher than forecast outcome can strengthen the GBP. Retail spending is the largest section of economic activity in the UK and in many other economies.
Trade Balance (USD)
– US government figure representing the difference between imported exported goods and services for the month of the report. A greater than forecast outcome is seen as good for the economy and for the USD. Also, often to buy US goods and services US Dollars are usually bought for the purpose increasing volumes. Of course there is a negative impact when imports are bought.
Unemployment claims (USD)
– This US government release is a measure of the number of people registering for unemployment benefit for the first time. An outcome below forecast is seen as good for the USD. This is seen of something of a lagging indicator but is important as it is a strong indicator of general economic conditions.
Unemployment rate (USD)
– Government figure representing the percentage of the total US workforce that was unemployed and seeking work actively in the previous month. This is another powerful indicator which is capable of moving the market if significantly different from forecast.
To be continued. This glossary will grow over the coming months into a comprehensive guide to trading the news.