Forex Recipe

Technical and fundamental – these are the two methods of forex analysis. A good forex broker or investor always develops a strategy mixing both the methods to formulate a perfect one.

In forex technical analysis the price movements and market trends are predicted by studying and analyzing charts of past market action that take into account price of instruments, volume of trading, and, if applicable, the open interest of instruments.

On the other hand, in forex fundamental analysis the prediction of future price movements of any financial instrument is made on the basis of economic, political, environmental, or other relevant factors and statistics that may affect the basic supply and demand of the financial instrument.

One major advantage of technical analysis is that an experienced analyst can follow many markets and market instruments simultaneously. But in fundamental analyst one has to know a particular market intimately to predict its future actions.

Fundamental analysis focuses on what ought to happen in a market and technical analysis focuses on what actually happens in the market. In fundamental analysis the factors that affect price analysis are supply and demand, seasonal cycles and weather, and specific government policies. In technical analysis charts are prepared on the basis of market action involving price, volume, and open interest (for futures only). Fundamental analysis is for studying the cause of market movement, while the technical analysis is for studying the effect.

Few weeks back I discussed few basic advantages Forex has over other instruments of investment like Stock or Real estate. Here are few more points, which establish the superiority of Forex over others.

When you have invested quite a big amount in any instruments, you would always like to have the knowledge of their performance. You do not receive feedbacks on position trading on stocks until weeks, and in some cases, even months after you made the investment. Many a times it comes out to be in the form of losses. This makes the chances for control and recovery of losses almost impossible. For real estate, the feedback is immediate but as the liquidity is very low, quick exits are never possible. You as an investor have a minimum control to makeup for your losses. But for Forex, you have a real-time connection and communication with the market and therefore can protect against losses while the position is open in the market. You have a full control of your risk in Forex.

If you consider service charges, it ranges from more than 3% of your investment in case of stock market. For real estate the commissions can be as high as 6%. Additional costs often may include escrow, advertising/marketing, and meeting legal code requirements. Forex, on the contrary, presents commission-free operation if you are a self-trader. However, you pay a small amount, which is the difference between bid and ask price, which is the spread.

If you consider recession, you can only gain in one direction in Stocks when the prices go up. But if it remains stagnant or goes down due to economic factors, you will incur losses. Profit in real estate is not possible during recession and you may be forced to shoulder a large floating loss. But with foreign currency trading, you generate profit through fluctuating economic factors where the relative direction of the fluctuations is irrelevant. If the price goes up or down, you make a profit.

The criteria for selecting a broker for your forex trading are many. Competitive execution is one of them, and, quite important one. These days, you will find brokers who offer a spread of as low as 1 pip. Less spread means less cost and more profit for you.

In auto forex trading, ESP dealing or Executable Streaming Price feed is extremely important for a substantial profit. If a broker can bypass the step of request for quote, it results in better and faster execution. Most of the investors do not realize how much they lose using request for quote system. Brokers however directly benefit from this method of execution.

In the request for quote method, the client clicks on ‘bid’ or ‘ask’ to inquire for a quote and makes his or her intention clear to the broker. Once the broker realizes the investor’s intention, he or she may quote a bad quote. The investor accepts it as the difference remains minimal in his eyes. But once this continues for few trades, it adds up to quite a big amount.

But if you have the executable streaming price with you, you just click once to trade. With ESP, the investor clicks on ‘bid’ or ‘ask’ to execute immediately and the transaction is done. This is undoubtedly the most competitive way of trading forex. With prompt execution, you get the quote you clicked. A good forex dealer with ESP can ensure that your orders like limit, stop, or trailing stop are executed in all market conditions, without any slippage.

HYIP or High Yield Investment Programs generally involve investments and trading in different financial instruments like shares, gold, real estate, futures, or forex.

Some claimed ‘HYIPs’ are scam and you should keep yourself out of them. Whenever you receive some unauthorized mail that claims a return “to good to believe” fair chances of there of being it a scam. In many types of schemes they involve names of an offshore bank or investment consortium. They usually claim that the scheme is perfectly legal and utilizes secret banking rules that are approved by government authorities. There are no such ‘secret rules’.

But HYIP with forex is a legitimate way of earning 1% to 10% a day and it may go up to 100% per month. Experienced day traders can make anywhere from 1% to 20%.

The money you pay in a HYIP program is pooled together and invested by an experienced day or technical trader. With a 90% margin, the trader can pay each one of his or her investors 1% or so each day. That means 1% gain on the trade is actually a 10% gain of the initial investment. A good trader can make the profit up to 80% per day. The returns are higher, but the risks are higher as well. Forex HYIPs of this nature is completely legitimate but risk percentage is considerably high. Moreover, in many cases, you do not have any chance of knowing whether they are invested in a legitimate HYIP program or in some scam scheme.

If a forex HYIP claims a 15% to 20% interest rate a day this cannot be considered as a best forex HYIP. The best program is the one that offers you a variable interest rates per day. You must invest in a HYIP for a longer duration to reap the benefit of the program.

Forex scalping is a method of “quick trading.” In this method, the forex trader usually allows the positions to last only for a matter of seconds, sometimes to a full minute, and very rarely longer than a minute. So ideally, if a trader holds a position for more than a minute, it is no longer considered a scalping but a regular trading.

With forex scalping the trader makes small profits by exposing his or her trading account to a very limited risk exposure, as the position is open for very brief moment. A scalping method can earn good profits for you only if the leverage is high. With a high leverage, a small 2-3 pip move on a big investment can promise good profit.

For example, you open a trading position of 100000 units with EUR/USD. For each pip you will now earn $10. And, if you close in with only a 3 pip, it makes a profit of $30, within a minute. But now, you should consider the method from the broker’s perspective. If a scalper wins all the positions, the broker would sustain losses.

Obviously, the dealing desk brokers would not approve of the scalpers’ trading style. But, on the other hand, the broker can slow the trader’s performance by setting a delay between the initiation of the order and its actual filling. This would ensure that with counter trade a trader could prevent his or her losses and close in profit.

But if the automated trading platform of the broker is an efficient one, there is no intervention between the trader and a broker or market maker and the software takes care of the whole business process. Therefore, in this case, a broker with a rather slow business processing platform would only object to the scalper’s trading style.

If you want to succeed as a scalper, you must have a strict exit strategy, because one big loss can eliminate the small gains you collectively earned. It is also important to have a fast acting trading platform, live feed, and a direct-access broker.

There are quite a few advantages of investing in Forex as compared with other instruments of investment like, stocks, bonds, mutual funds, or real estate. The first is the volume and the second is the liquidity. The Forex Exchange was established in 1971. Although the market grew steadily during 70s, it reached $1.5 trillion daily from $70 billion per day in 1980s. This has now reached to a $2.5-$3 trillion per day mark.

There are many huge players like large financial banks in Forex, but the market is also open to individual traders as well. Each lot traded is worth approximately $100,000. By using leverage of say 100:1, any individual with $1000 can invest in the forex trade. No other financial market offers this amount of leverage.

Forex is also an extremely liquid market. You can practically buy or sell within seconds with a mouse click. With auto trading you can also preset an automatic close for your position.

If you compare market exposure, in stock market investment the total invested capital is exposed to the market always. For real-estate, you need quite a high investment for entering the market. But for forex, only 10 to 30% of your investment capital is exposed depending on your investment objectives.

Likewise, if you compare liquidity, stock market has either average or lower than average liquidity that results in price movements beyond control. Real-estate has lowest liquidity and if the market turns against investment, the investor has to wait patiently to get it recovered over time. But Forex offers high liquidity allowing the investors to pull out the moment the market turns against their position.

With respect to maximized equity, in a bullish market condition, you can expect profit from stock market only in the long run. For real-estate, profit potentials are theoretically quite high but extremely dependent on economic health. But, in forex, you can make a profit in both a bullish or bearish market and even at the times of recession.

Forex forecast is to help in taking informed decision. For investing in a market like forex, which is liquid as well as voluminous, you need a tool like forex forecasting for making big profit. A forex forecast involves indications on future trends and trend reversal points or support and resistance levels. Forex forecast can be obtained to get an idea on expected weekly highs and lows, momentum and volatility levels, and commentaries. A typical forex forecast service sends forecasts twice or thrice during the day.

A forex forecast can say which currencies to buy or sell. It can also guide you in exact profit position and stop-losing position. These profit and loss positions are exclusive according to each currency characteristic. In most of the cases, the forecasts are true if not intervened with over reaction or surprised data.

Forex forecast are issued on the basis of technical analysis and fundamental analysis. The technical expert studies the effect while the fundamentalist studies the cause of market movement. A combination of both the techniques work satisfactorily for most of the traders.

In technical analysis, the past market actions are analyzed for predicting future price movements and market trends. Charts and graphs are created as the primary tool on the basis of the analysis. With technical analysis forex forecasts can be issued for many markets and market instruments, simultaneously.

Technical analysis is based on three basic principles. The first one says market action discounts everything, which means the actual price of a currency reflects the exact market situation that may affect it. These factors can be supply and demand, political factors, or market sentiment. The second principle says prices move in trends. Technical analysis can identify significant patterns in market behavior, which reflects high probability of producing the expected results as the past situation. The thirds one says that history repeats itself. Forex chart and graphs categorized over 100 years of data and therefore can lead to the same conclusion.

Forex charts present very important forecast options with five categories. These are Indicators, Number theory, Waves, Gaps, and Trends.

Risk involved in forex trading can be defined as the risk of changing the value of an investment due to change in currency exchange rates. An adverse situation in foreign exchange market that results in change in currency exchange rate may force an investor to close out a long or short position with incurring a loss.

Forex risk affects businesses engaged in export or import and also the individual investors. If one currency must be exchanged with another currency to make an investment, then any change in the currency exchange rate will cause the value of the investment either to decrease or increase.

Every financial investment carries a risk with them and with forex it can be huge. As in forex you are dealing with big sums, a trade against you may cause great loss. You should know how to use the tools of risk management to protect your investment. You should always invest the fund that you can afford to risk.

Risk in forex investment also involves fraud and scams by malpractices of forex brokers. Before signing agreement with your broker, check out if he or she is registered with some regulatory authority and enquire about their past history and performance.

The concept of leverage in one way is extremely advantageous for you as investor as it gives the much needed purchasing power even if your initial investment is less. It lets you invest much more than your investment. But if a trade goes against you, high leverage can bring large losses for you. In this way, a small move against your position results in large loss, sometime much more than your entire deposit.

If there is a time lag between the time you placed your order and the time the order gets executed, it influences the currency exchange rate you get. As the forex dealer determines the execution price, the dealer’s honesty and integrity is to be verified.

Breakdown of the trading system can lead you in to losses. With an Internet-based system failure, you may not be able to enter new orders or execute running orders. Keep yourself updated with news and authentic information that may affect the forex market. Political and economic factors affect the exchange price and therefore keep an eye on them.

Always employ stop-loss orders to limit losses during your forex transaction. A stop-loss order is set of instructions on how to exit your position if the price reaches a definite point. When you take a long position expecting the price to go up, you put a stop-loss order below the current exchange price. When you take a short position expecting the price to go down, you put a stop-loss order over the current market price. With stop-loss orders you can definitely lower the risk.

There are different types of transactions in the forex market like spot transactions, forward transaction, futures, options, and Swap. The spot foreign exchange is the largest with over two trillion U.S. dollars traded per day. Forex futures market, which is a derivative of the spot market, is 1/100th in the size.
 
In forex futures, a contract is purchased to buy or sell a particular amount of an asset at a specific price on a predetermined date. As opposed to conventional futures, forex futures are not traded on any centralized exchange and the deal flows through several different exchanges in the U.S. and abroad. The majority of the forex futures are traded through the Chicago Mercantile Exchange and its partners. All currency futures quotes are always made against the U.S. dollar unlike the spot forex market.

For any futures contract, your broker will provide you with the specifications, like the size of the contract, pricing limits, time increments, trading hours, etc. A typical specification sheet will mention the type of forex derivatives, either hedging or speculating, to be used. In hedging, the hedger will use forex futures to eliminate risk by protecting themselves against any future price movements. The speculators, however, prefer taking risk to make a profit.

There are several advantages of trading in the futures market. They are lower spreads, mostly 2 to 3, lower transaction costs, and more leverage. But, disadvantages are it requires higher capital, transactions are limited to the exchange’s sessions, and may apply National Futures Association fees.

Foreign exchange market, which is also known as FX or Forex is the largest financial market in the world, with over $2.5 trillion transaction taking place everyday. It has been observed that the exchange rate for few currencies fluctuate quite often, while on the other hand, the rate of other currencies remain comparatively stable.

Now, let’s look at the point what exchange rate is.

Exchange rate is the rate at which one currency can be exchanged for the other. There are two ways a currency price can be determined against another. The first is known as fixed or pegged, which is set by the government’s central bank. It is usually determined against a major world currency, which is, in most of the cases, the U.S. dollar. However, it can also be other major currencies like euro, yen, or Swiss franc. The central bank buys and sells the currency of the country against the specific currency in the foreign exchange market to maintain this local exchange rate.

For maintaining the rate, the central bank must have a high level of foreign reserves. This reserved amount of foreign currency is either released or absorbed by the central bank to ensure proper supply and to maintain appropriate fluctuations to counterbalance inflation or deflation. The central bank can adjust the official currency exchange rate as and when required.

A fixed currency rate is self-correcting in nature as it is adjusted against the demand and supply automatically.

Floating currency rates, as opposed to fixed rates are governed solely by the demand and supply of the currency and determined by the private market. In simplest term, if demand for a specific currency is low, its exchange rate will decrease. This in turn makes the price of imported goods to go up and stimulates demand for local goods and services. A floating exchange rate keeps on changing constantly. In actual transaction, no currency can be termed as completely fixed or floating.