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INTRODUCTION

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So you’re thinking about trading futures. Good for you!
In terms of sheer scope of opportunity to effectively pursue your financial
objectives, it’s hard to beat futures trading. The diversity of instruments
and markets included provides just about any trader everything they could
possibly need to employ all kinds of speculative and/or hedging activities.
In short, the futures market provides opportunities to trade markets in
which one would not otherwise easily be able to take part.

Gold is a great example.

To put things in perspective, gold started 2006 at around $520/oz. As of
this writing it is around $650/oz. That’s a gain of $13,000 per futures
contract, which is a return of nearly 350% on the $3750 margin needed to
initiate the position (about a $4300 gain on the mini gold contract which
has a margin requirement of about $1250).
Another excellent example is Crude Oil.

In this case, a buyer at the start of 2006, when prices were around $61 per
barrel, would be up about $10,000 at the approximately $71/barrel price
as of this writing. That is on a $4725 margin deposit, which means a gain
of over 200% (gain would be $5000 on a $2350 margin for the mini).
Of course the situation works both ways. One can just as easily lose money
in futures trading.

The point being made here, though, is that if it were
not for the futures market it would be very hard for the average trader to

take part in markets like gold and crude oil (along with many others).
Once upon a time, the futures market was the realm of large institutions
and big time speculators. The increased availability of “mini” contracts,
with their lower margin requirements and smaller per tick values, though,
has made futures trading much more accessible to the average trader.

This guide will provide you a basic introduction to the futures market. It is
by no means a comprehensive discussion of everything futures related, but
the pages that follow do lay the ground work and do make suggestions as
to where one can go to learn more.

That said, let’s get going!

Definitions

First things first. We need to de-
fine just exactly what we’re talking
about here. To do that we need to
first talk about forward contracts.
A forward contract—or simply a
forward– is an agreement between
two parties to make a transaction
at some point in the future, gener-
ally with pre-defined specifica-
tions. For example, if you and I
agree that next week you will buy
my car from me for $5000, that
would be a forward contract. We

have a specified time, price, and asset being exchanged.
Now imagine instead that I am a farmer and you are in the flour business.
You need wheat to make your flour, so you get it from me. Of course my
crop won’t be ready until harvest time, so you and I make an agreement
that in three months you will buy 5,000 bushels of my wheat at $5 each.
That too is considered a forward contract. Simple enough, right?

Now that we have forwards sorted out, defining futures is pretty easy.
A futures contract is simply a standardized forward contract. That means
all of the contract terms are predefined. This is done by a futures ex-
change (of which there are many) to help facilitate easier trading.

Let’s use wheat as an example again. If it is just you and I making an ar-
rangement for you to buy my wheat, then it would be simple enough just to
agree on forward contract terms. In the massive global markets, though, it
isn’t always so easy for buyers and sellers to come together like that. So we
have the Chicago Board of Trade (CBOT) come in to act as a marketplace.
The CBOT, though, cannot have everyone trading on different forward
contract terms, though. It would make for a very inefficient operation. So
they standardize the contract terms.

In terms of wheat, the CBOT has decided that transactions will be done in
5,000 bushel lots. That means each contract is for the exchange of 5,000
bushels of wheat. The exchange has also defined the acceptable grades of
wheat (I won’t get in to that) and the months which the delivery of the
wheat can take place (March, May, July, September, December), and even
the days during which delivery must happen.

This might all seem quite complicated. It really isn’t. In fact, the contract
specifications are designed to make trading possible. Without them there
simply would not be a market. The fact of the matter is that speculators do
not really have to concern themselves with much beyond the contract size
and the price. We’ll get more in to that later.

Why Forwards and Futures?

At this stage you may be wondering why there are forward contracts and
futures markets—what purpose they serve. It’s a fair question.

We can assume that forward contracts go back millennia—for as long as
there have been farmers and those who needed their produce. The miller
needs wheat to produce flour and has to get it from the farmer. There is a
lot of uncertainty, though. Supply and demand considerations create price
fluctuations. The farmer and the miller cannot necessarily be sure of what
the price is going to be for wheat when the crop is ready. They both need
to be able to budget their income (farmer) and expenses (miller) so they
enter in to a forward contract which locks a price in. The farmer knows
how much he is going to receive for his wheat and that he’s got a locked-in
customer. At the same time the miller knows that he’s got a guaranteed
supply of wheat and what it’s going to cost him.

This sort of arrangement still goes on today. You may even be doing some-
thing like it yourself. Many companies which provide heating oil or natu-
ral gas offer customers the opportunity to lock in prices at a certain rate.
The idea is that you are protected against price increases. This is a forward
contract at its simplest level.

As long as there is price uncertainty, there will be the need for forward

contracts. The futures market is just a kind of wholesale operation to fa-
cilitate their arrangements.
Having said that, though, the futures markets of the modern day go way
beyond just putting producers of raw materials together with manufactur-
ers of end or intermediate products.

Actually, most of the trading done in futures these days is not done with
delivery of the actual product in mind. There are, of course, a great many
speculators. They are a necessity to help provide liquidity—despite what
some folks might otherwise think.
The futures markets also provide a hedging mechanism. They allow a wide
array of participants the opportunity to protect themselves against adverse
price action.

For example, imagine you are a multinational company doing trade in Ja-
pan. When you sell product to customers there you receive Yen, which you
will eventually want to convert in to Dollars. The exchange rate between
the Yen and the Dollar fluctuates constantly. In order to protect yourself
against the Yen weakening against the Dollar (thereby making the value of
your Yen profits lower) you can hedge yourself. That can be done in the
futures market.

There are all kinds of businesses and whatnot who have some kind of price
exposure in their operations. Many use the futures market to help protect
themselves. They don’t expect to deliver or take delivery of the product
they are hedging. They just use them to offset their price risk and secure
their business. This applies to mutual and hedge funds as well. Both use
futures to hedge their portfolios.

FUTURES TRADING

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By now it has been established that futures trade on exchanges, much in
the same way that stocks do. These exchanges are located throughout the
world and represent both pit and electronic trading.

Pit, or floor, trading is done on-site at the exchange. This is what most
people think of when they picture the futures market. The traders who op-
erate in these sometimes frantic arenas are the folks who actually execute
the transactions as the buyers and sellers. In the case of those who work
for brokers or other institutions, they trade based on the flow of orders
coming from their employer. There are also pit traders who are just there
trading for their own account. As noted before, they help the process by
providing liquidity.

Pit trading is the traditional operation, but it is one which is becoming in-
creasingly phased out in favor of electronic trading. This newer method
involves no human interaction, but rather is a system of order matching.
Incoming orders are matched up by computer. This speeds up the process
and provides a high degree of transparency.

As an individual trader you take positions via a broker. Your orders get
routed to the exchange where they are actually executed. Whether that is
through the pit or electronically depends on the market you are trading,
and possibly the time of day. Some markets feature floor trading during
the normal daytime market hours with electronic trading taking over in
the “after hours” timeframe. Other markets are either completely pit
traded or totally electronic.

Opening and Closing Futures Positions

Because trading futures does not result in the actual exchange of anything
(for most traders anyway), it has to be thought of a bit differently than
would be the case with stocks, for example. You aren’t actually buying or
selling anything. You are entering in to an agreement. As such, it is more
correct to say you are going long or going short rather than buying or sell-
ing, though in practice buy and sell are frequently used.

Going long means entering in to a futures contract position whereby you
would be the purchaser. Using our wheat example, the person who is long
that contract is the one who will be buying the wheat at the contract’s end.
Going short, naturally, is the other side of the equation. The short is the
one who is to be the seller at contract conclusion.

You can think of it this way. You are long if an increase in price benefits
you. If a decrease in price is to your benefit then you are short.
So when you initiate a long or short position you are entering into a fu-
tures contract. Now let’s take a look at exiting a position.
Since taking a futures position means entering in to a contract, it’s not as
each as just breaking the contract. What we actually do is enter in to an
offsetting contract.

Bringing Wheat back in to the picture, imagine that we’ve gone long a fu-
tures contract. Now we want to get out of that position. To do so, we enter
into a new futures position in which we are short. Those two positions ne-
gate each other, so you end up with no net positions.

You might be thinking “Yeah, but I have two contracts now.” No need to
worry. The exchange handles that. Because you offset your positions, you
have no more commitment. The exchange keeps track of all the open long
and short positions to make sure they match up those who are looking to
actually take delivery with those who are actually looking to provide it.
Profits and Losses

We make profits in futures positions by closing them out with an offset at a
better price than at which we entered the initial contract. If we are long,
that means at a higher price, while if we are short it’s a lower price. This is
where the value of the futures contract comes in.

Imagine that we have gone long a Wheat contract at the price of $5/bushel
Keep in mind that a futures contract is 5,000 bushels, so the value of this
contract is $25,000. Let’s say the price moves up to $6/bushel. Now the
value of a contract is $30,000. If we offset our long position by taking a
short futures position at the current price, we make $5,000.

To understand how this works, let’s take a look at what the mechanics of
the situation would be if there were no exchange.

First we have the long position. If we went all the way through the process
to delivery we would have to pay $25,000 to receive 5,000 bushels of
Wheat. Now in the case of the short position we would actually receive
$30,000 to deliver 5,000 bushels of Wheat. So the net result is that we
would buy the wheat from one person and sell it to another, making a
$5,000 profit because of the difference in the prices of the two contracts.
Can you imagine what a hassle it would be to take delivery on one side and
provide the product on the other side? That’s why we can be thankful for
the futures exchange. It eliminates that whole delivery flip-flop process,
and actually gets us our money right away rather than having to wait for
the end of the contract.

Now consider that if we had to put up 3% margin on our long position it
would have been $750 as compared to our profit of $5,000. That’s a very
nice return, isn’t it. Right there is why so many people eagerly trade the
futures market. It provides one with enormous leverage and the potential
for very high rates of return. Just keep in mind that the leverage works
both ways, though. The losses can happen just as quickly and dramatically
as the gains if you aren’t careful about your risk management.

Margin

One of the things which confuses many who first start looking at futures
trading is the concept of margin and how it works. It really is not all that
complicated, though. I’ll explain by first providing a general idea of mar-
gin and leverage.

Leverage is the use of borrowed money (generally from one’s broker/
dealer) to take on a position which is larger than one would be able to do
with strictly one’s own funds. The money the trader is required to deposit
as surety for those borrowed funds is referred to as margin.

Using a real-world example, think in terms of buying a house. Home buy-
ers generally do not pay 100% of the price in cash. In most cases the buyer
can pay a certain percentage, which is referred to as the down payment,
but must borrow the remainder. This is the application of leverage and the
down payment can be thought of as margin.

In the markets, leverage and margin
are used in one of two fashions. One
can put up margin and apply lever-
age to take control of a collection of
assets larger than they would have
been able to do so otherwise, as in
buying a house. Alternately, one de-
posit’s margin is applied as surety
for the future fulfillment of an agree-
ment to exchange assets (futures
contract).

An example of how this works in the
first fashion can be seen the stock
market. As you may know, you can
purchase 100 shares of a $50 stock
by putting down only $2500 on de-
posit – 50% margin. Your broker
loans you the rest of the funds re-
quired to make the purchase, so you
are leveraging your $2500 to control
twice that much in assets. This is
similar to putting down 20% to pur-
chase a house with the bank loaning
you the rest.

In futures, however, you aren’t actu-
ally buying or selling anything right
away. You are entering in to an

agreement to do so later on. Therefore, there is no money changing hands
immediately.

In the futures market, however, you are required to put up margin as
surety against your failure to fulfill your end of the contract agreement.
This is where the idea of counter-party risk comes in—the counter-party
being the person on the other side of the contract.

At least that is how it would be in theory. In practical reality, as an indi-
vidual trader you are required to post margin as a protection against
changes in the value of the contract(s) you hold. It is partly your protec-
tion, but mostly it is to keep the system safe because in futures it is the ex-
change which is the counter-party on all contracts. In that way margin
serves the exact same purpose as it does in the stock market (as it does
when you buy a house).

Unlike in stocks, though, most of the time futures margin requirements
are 5% or less of the contracts’ value. What is that value? That’s pretty
easy to determine. Simply take the size of the contract and multiply it by
the contract price. Using our Wheat example from earlier, the contract
size is 5,000 bushels. If the contract price is $5/bushel, then the value of
the contract is $25,000 ($5 x 5,000). If the applicable margin rate is 3%,

you would be required to put up $750 as margin for each contract
( $25,000 x 0.03 ). This is where the leverage can really be seen. [Note:
The actual margin you are required to post for each contract is determined
by your broker based on certain exchange requirements.]

There’s another difference between futures margin and stock margin. In
the stock market, when you trade on margin you are borrowing from your
broker to do so. You get charged interest for that. In futures you don’t ac-
tually borrow any money because you don’t actually buy anything.

What’s more, in the stock market you take possession of shares and cash
leaves your account to do that. In futures, the money stays in your account
the whole time. That’s actually the requirement. The margin money must
be in your account. The result is that you can actually earn interest on that
money. Some brokers will pay interest on margin deposits.

Marked-to-Market

Something which differentiates futures from stocks is how accounts are
marked-to-market. In the stock market one’s account value with move up
and down with changes in the price of the stock(s) held therein. Any prof-
its made, however, cannot be withdrawn until the gains are realized by
selling the shares. This is not the case in futures.

The holder of a futures contract sees their account credited or debited each
day based on changes in futures prices. That is just like stocks, but unlike
in equities, these gains are considered realized and one could withdraw the
profits if so desired. This might seem a trivial point, but it isn’t.

Think about this example. You have $10,000 in your stock account. You
use that to buy $10,000 worth of XZY shares. If the price of that stock
doubles, your account value goes to $20,000. If you don’t sell the stock,
though, you can’t use that extra $10,000 to buy any more stock or to buy
shares in another company.

In futures, though, a $10,000 gain in the value of your positions does give
you additional free capital for further trades. You could take that money
and use it as margin to take on additional long or short positions, in the
same futures or other ones. This is a major advantage to futures trading
and one of the real attractions to it for many speculators.

Commissions

In the futures market brokerage commissions are generally charged on
what is referred to as a “round-turn” basis. That means you only pay the
commission when you close out a position. This contrasts with stocks
where most brokers charge you both when you enter and when you exit a
position. This is another reason why so many traders look on the futures
market so favorably.

Delivery

The delivery process is something that scares a lot of potential traders out
of the futures markets. They are concerned they’ll end up with a truckload
of something they most certainly don’t want ending up dropped off in their
driveway. This isn’t something which should prevent one from making use
of the futures markets to pursue your trading objectives, though.

Why?

Well, first of all, some of the more popular futures contracts—like the ones
for stock indices—are cash settled. That means no physical products of
any kind changes hands during the delivery process. In this situation, the
exchange just credits or debits the contract holders’ accounts as if they had
offset their position at the final price recorded when the contract was up.
For example, consider a futures contract in which the value of the contract
is 100 times the value of Index X. If one enters a long position at 100, the

value of the contract is thus $10,000. Now assume the index is at the 110
level when the contract matures. The contract value is then $11,000. The
long holder would then be credited with $1000 in profits at maturity.
Of course, most futures contracts do involve some kind of physical delivery
at maturity, at least in theory.

You see, a large majority of futures posi-
tions are not entered in to with delivery (or receipt of delivery) intended.
This is because much of the futures trading volume actually comes from
speculator and hedgers who are only looking to protect themselves from
price movements.

That said, delivery can and does happen. To avoid getting in to that kind
of situation when trading futures which feature physical delivery, simply
make sure to close/offset your open contract(s) prior to the deliver period.
The exchanges set the delivery dates and other terms for all contracts, and
that information is readily available either directly from them or through
any futures broker.

FUTURES PRICING

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Futures are derivative instruments. That means their price is derived from
that of something else, the latter generally referred to as the underlying.
For example, wheat futures are based on the price of wheat.

As their name implies, though, futures contracts are influenced by events
to come. The prices involved take in to consideration current market fac-
tors, but also at least attempt to account for developments between the
present and the time the contract is delivered upon. We are talking supply
and demand considerations here.

Let’s consider our wheat example. The futures prices for any given con-
tract period are going to take into account anything which would impact
how much wheat is going to be demanded at the time of the contract’s de-
livery. That includes things like trade negotiations. If a trade deal is stuck
whereby the U.S. were to send a considerable amount of wheat to China,
that would represent and increase in demand and tend to push prices
higher. On the flip side, if an expected trade deal fell through, prices may
drop because of less than anticipated demand.

On the supply side, consider things like weather. A bad growing and/or
harvesting season could severely impact the amount of wheat produced.
Less available wheat means higher prices, while a bumper crop would see
an excess supply push prices down.

These sorts of things impact all markets in one way or another. It may not
be weather or international trade that is the driving force, but in every sin-
gle market there are factors which influence supply and factors which in-
fluence demand. Those factors are what determine prices.
Keep in mind, though, that the supply demand considerations can vary
from futures contract to futures contract. What impacts the supply and/or
demand for wheat deliverable against the July contract may not have any
impact at all on the wheat deliverable against the December contract, and
vice versa. That is why you can sometimes see substantial differences in
the prices of the various contract months, especially for agricultural goods.

Cost of Carry

Another factor in the pricing of futures contracts is what’s referred to as
the cost of carry. In brief, this is the expense incurred by the holder of a
commodity or other product over the duration of the futures contract.
This expense can come in a variety of forms.

For example, storing 5,000 bushels of wheat requires a place to keep it, so
you have a storage charge factored in to the price. That is going to be the
case for basically any physical good. This means that futures prices will al-
most always be higher than current spot/cash prices. Why? Because oth-
erwise no one would ever take a short position with intent to deliver be-
cause they would lose money.

At the same time, futures prices will never venture too far above the cur-
rent spot/cash (immediate delivery) market. If they did so, one could sim-
ply go short the futures, buy the product at current prices, store it, and de-
liver at the contract date, thereby making a nearly risk-free profit. Market
efficiency dictates that such selling of the futures contract would push
prices down enough to get them back in line relatively quickly.

Not only does the cost of carry (or just carry) imply that the futures price is
higher than the current cash price, it also implies that more forward fu-
tures contract prices are going to be higher than more nearby contract
prices. That means the December contract price is going to be higher than
the September contract price (for the same calendar year, obviously) be-
cause longer time to delivery means higher carry expenses.

Not all carry is positive, though. It is for physical products in the vast ma-
jority of cases, but for many other markets that is not the case. Anything
which actually produces income for the holder, as opposed to incurring an
expense, would result in what would be termed a negative carry. That
means the price of the futures would be lower than the current cash mar-
ket price, and the price of the more forward (further out) contracts are
lower than the nearer contracts.

What kinds of things produce income to hold, and thus negative carry? In-
teresting bearing securities like bonds are one. Dividend paying stocks,
and the indices which contain them, are another. That reverses the situa-
tion outlined for a positive carry market as we just described it above.
Keep in mind that the cost of carry (positive or negative) shrinks as one
moves closer to contract delivery. That creates a convergence between the
cash and futures prices such that they are virtually the same when the ac-
tual delivery date hits.

It should also be noted that the cost of carry, and thus the spread between
the futures and the current cash price, also accounts for the cost of actu-
ally making delivery factored in as well, if applicable.

Price Quotes

The futures markets have a fairly standard quoting convention which uses
a three part symbol. This symbol comprises of a 1-2 character code for the
instrument, one character code for the month (each month is assigned a
letter), and the last two digits of the year in questions.

For example: WN06 is the July 2006 Wheat futures contract. The CBOT
symbol for wheat is ‘W’, the code for July is ‘N’, and 2006 is represented
by the ‘06’. Below is an example of how one might see prices for futures
quoted. This is from FutureSource

In this case, the data is presented not only by symbol, but also verbiage ex-
plaining the commodity and month being displayed. After the ‘Month’ col-
umn is ‘Time’ which indicates when the price quotes were taken. The
‘Last’ column is the most recently traded price (in this case with a small ‘s’
indicated it as the day’s close or ‘settled’ price), with ‘Chg’ indicating the
different between the current and the previous close (last). The ‘Open’ is
the session’s first price traded, while the ‘High’ is the maximum traded
price and the ‘Low’ being the lowest traded price on the session.

Looking at the price quotes in question, there are some additional conven-
tions worth noting. The first is in terms of the price itself. Wheat is
quoted in terms of cents per bushel, so if one were to divide the prices
shown on the table by 100 it would produce a $/bushel rate.

Remembering that the wheat futures contract is 5,000 bushel, a 1 cent
move in price is equal to $50 ( 5,000 x $0.01 ). So if the September ‘06
contract (WNU06) went up from 429 to 439, a rise of 10 cents per bushel,
the profit for a long position holder would be $500 ($50/cent x 10 cents).
You are probably wondering about the ‘4 at the end of the first price, and
other similar figures on other contracts.

That is how fractions are dis-
played. What you see there is actually 8ths of a cent. So 4 would mean
4/8 or 1/2 cent. A 2 is thus 2/8 or 1/4, while a 6 would be 6/8 or 3/4. To
translate our July 2006 futures price it would be 415.5 cents per bushel.
The reasons these fractions are used is because Wheat prices actually move
in quarter cent increments (2/8).

These fractions of a cent are applied to the base tick value of the futures
contract. Since wheat has a $50/tick value (a tick being the standard price
movement increment—one cent in this case), a quarter of a tick (1/4 of a
cent per bushel) would be worth $12.50 ($50/4).
Different markets have different conventions for pricing and price move
increments. Some are decimals while others are fractions. Refer to the
contract specifications to get the specifics.

Price Limits

In many futures markets there are price limits. More specifically, there are
maximum limits to how far prices can move in a single trading session.
The idea is to maintain an orderly market and ensure that things do not
get too carried away—allowing participants to sleep on it, so to speak.

When price moves the maximum permitted amount, it is referred to as a
limit move. When the market makes a limit move and stays there, you
have what is known as a lock limit situation. When that happens, trading
literally stops. The reason for that is traders consider the clearing price of
the market to be beyond the permitted tradable price (previous close +/-
the allowed limit) - the clearing price being the one which will match up
willing buyers with willing sellers.

Limit moves have become less frequent than in the past, but still do hap-
pen from time to time.
It should be noted, though, that a limit move does not necessarily mean
the exchange halts trading. In most markets it does not.

There are some, such as stocks, in which the limits operate a bit differ-
ently, though. They are based on percentages, first of all. Secondly, hit-
ting them triggers what are often referred to as “circuit breakers”. That
means trading is officially halted for some period of time, then allowed to
resume. This is not done by the futures exchange, though. It is done by
the stock exchange itself. The futures just follow along for the ride.

Fast Markets
Before moving on, the concept of fast markets must be addressed. This is
a situation which happens in pit-traded futures whereby there are different
prices trading in different parts of the trading floor. These sorts of occur-

rences sometimes happen in large pits (like the Treasury Bond one) when
a major surprise data release or news announcement comes out.
In such a situation, the exchange will indicate fast market conditions. By
doing so they are telling folks that they cannot guarantee the reported
price quotes that are going out. It tells non-floor traders that they could
see fills (trade executions) on their orders at prices significantly different
than what their data feed indicates.

FUTURES MARKETS

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As was noted at the beginning of this guide, the futures market takes in a
wide array of different tradables. Many people think of futures as only be-
ing “commodity futures”, which certainly was true out the outset. These
days, however, the largest trading volumes are in markets which do not
even represent hard products.

Commodities

Commodities are tangible things. They are actual products, often ones
which are used in the production of finished products. We used Wheat as
the example in our earlier discussion. That is a tangible good which is
used to make flour, for example.

The commodities market can be broken up in to several groupings:
Agricultural—This is pretty much anything grown by farmers in-
cluding Corn, Wheat, Soybeans, Cocoa, Sugar, Coffee and the related
goods produced from those base products.

Live Stock—These are animals such as cattle and live hogs and the
products derived from them (e.g. milk)
Energy—The products in this category are those used for power
generation such at Crude Oil and it’s distillates (Unleaded Gasoline,
Heating Oil) and Natural Gas.

Metals—Gold is the star of this group, but it also includes several
other precious and non-precious elements.

Currencies (Forex)

All of the major world currencies are represented in the futures markets
(and a few of the lesser ones as well). There are contracts both in terms of
their value against the US Dollar and in their values against each other (so-
called cross rates).

Delivery for currency futures is a little different than that for a physical
commodity. It means exchanging one currency for another. For example,
if one were long the Canadian Dollar futures it would mean exchanging US
Dollars for the Canadian Dollars at the contract rate. That is pretty easy.
If it a cross-rate pair such as British Pound-Japanese Yen, then the deliv-
ery is actually the exchange of Pounds for Yen at the contract rate.

The spot market volume by far dominates the futures trading volume on
an aggregate dollar basis, but there are many individual traders who prefer
to the futures because of the strict regulation and better market transpar-
ency. This compares to most spot trading which is done directly with a
dealer, not on the open market as such.

Interest Rates (fixed income)

One of the biggest futures market is that involving interest rates and the
products involved. This includes sovereign debt such as US Treasury Bills,
Notes, and Bonds. Eurocurrencies like the Eurodollar are included. There
are also futures markets for the mortgage backed security market.
Delivery for interest rate futures means the long trader will receive the
specified amount of the instrument in question. For example, on the Chi-
cago Board of Trading (CBOT) the US Treasury Bond contract has a size of
$100,000. That being the case, the individual holding the long side of that

Contract will, at delivery, receive $100,000 in par value worth of Treasury
Bonds. (Exactly which Bonds are deliverable against any given futures
contracts is defined by the exchange).

The interest rate market is a massive one. It is used by governments and
large institutions alike to manage their positions. That volume and liquid-
ity, in turn, also makes it a favorite trading arena for large hedge funds and
speculators who can trade large positions with relative ease.
Indices

A wide number of stock market index futures contracts exist and are quite
actively traded. They include all the big names such as the S&P 500 and
the Dow Jones Industrial Average (DJIA), as well as several of the less well
known ones like the NYSE Index and the Russell.

Index futures do not have physical delivery. They are cash settled.
The most popular index trading instruments for the individual trader are
the so called e-minis. These are electronically traded contracts of reduced
size. For example, the standard S&P 500 futures contracts are valued at
$500 per index point.

That makes them much too pricey for smaller trad-
ers. The e-mini S&P contract, though, only has a $50 per point multiplier,
which makes it much more readily tradable for non-institutional folks like
you and I. These are now among the most active futures contracts.

There are also several non-stock related indices. Two of the prime exam-
ples are the CRB Index and the Goldman Sachs Commodity Index (GSCI).
Another is the US Dollar Index. The Volatility Index (VIX) is also becom-
ing more popular.

Stocks
In recent
years there has been introduced Single Stock Futures. As the
name implies, these are contracts based on a single company’s shares,
such as Microsoft. They operate similarly to normal futures contracts in
terms of delivery and wha
tnot. They do require higher margin deposits,
though (20% or better).

Single stock futures do have physical delivery, so the long position holder
would buy the shares in question from the short at delivery.
Contract Specifications & Mini Contracts
It should be noted that while some futures contracts trade only on one ex-
change, many trade on multiple exchanges—some all over the world. That
can mean differing contract specifications, as each exchange is perfectly
within its rights to set its own.

Even for single-exchange markets like many of the agricultural products,
there can sometimes be different types of contracts or different sized ones
traded on the same exchange. The e-mini S&P futures spoken of above are
a perfect example. Below is a table of some of the more popular mini fu-
tures contracts.

The table lists only a few of the available mini contracts. The list of what
can be traded is growing, especially in terms of what can be electronically
traded. This serves to increase volumes for the exchanges involved, of
course, but also provides a great deal more opportunity for the smaller
traders who might otherwise be shut out of certain markets because of the
high margin requirements and point values.

It should be noted that even though the regular and mini contracts trade
separately (sometimes on different exchanges all together) there will gen-
erally be little to no difference between the actual prices of the various con-
tracts. Arbitragers will generally see to it that the prices stay in line.

How is the Forex Market Different?

2008-02-17T12:34:00.000-08:00

There are some significant differences between the forex market and oth-
ers like the stock market. While it may be that a good trader can handle
any market, structural differences in forex can force a different approach.
Time

For most stock traders, the first difference they will notice between the
forex market and equities is timeframe. Although the hours of stock trad-
ing have been expanding in recent years, the forex market is still the only
one which can truly be viewed as 24-hour. There is ready forex trading ac-
tivity in all time zones during the week, and sometimes even on the week-
ends as well. Other markets may in fact transact 24-hours, but the volume
outside their primary trading day is thin and inconsistent.

No Exchanges

The lack of an exchange is probably the next big thing that sticks out as be-
ing different in forex. While it is true that there is exchange-based forex
trading in the form of futures, the primary trading takes place over-the-
counter via the spot market. There is no NYSE of forex.

On the largest scale, forex transactions are done in what is referred to as
the inter-bank market. That literally means banks trading with each other
on behalf of their customers. Larger speculators also operate in the inter-
bank market where they can execute multi-million dollar trades with ease.
Individual traders, who generally trade in much smaller sizes, primarily do
so through brokers and dealers.

This is something which can trouble stock traders. There is no central loca-
tion for price data, and no real volume information is attainable. Since
volume is an often reported figure in the stock market, the lack of it in spot
forex trading is something which takes a bit of getting used to for those
making the switch.

Also, the lack of an exchange means a difference in how trading is actually
done. In the stock market an order is submitted to a broker who facilitates
the trade with another broker/dealer (over-the-counter) or through an ex-
change. In spot forex much of the trading done by individuals is actually
executed directly with their broker/dealer. That means the broker takes
the other side of the trade. This is not always the case, but is the most com-
mon approach.

Transaction Costs

The lack of an exchange and the direct trade with the broker creates an-
other difference between stock and forex trading. In the stock market bro-
kers will generally charge a commission for each buy and sell transaction
you do.

In forex, though, most brokers do not charge any commis-
sions. Since they are taking the other side of all the customer trades, they
profit by making the spread between the bid and offer prices.

Some traders do not like the structure of the spot forex market. They are
not comfortable with their broker being on the other side of their trades as
they feel it presents a type of conflict of interest. They also question the
safety of their funds and the lack of overall regulation. There are some
worthwhile concerns, certainly, but the fact of the matter is that the major-
ity of forex brokers are very reliable and ethical. Those that are not don't
stay in business very long.

Margin Trading

The forex market is a 100% margin-based market. This is a familiar thing
for those used to trading futures.

In fact, spot forex trading is essentially trading a 2-day forward (futures)
contract. You do not take actual possession of any currency, but rather
have a theoretical agreement to do so in the future. That puts you in a po-
sition of benefiting from prices changes. For that your broker requires a
deposit on your trades to provide surety against any losses you may in-
cur.

How much of a deposit can vary. Some brokers will asked for as little
as 1/2%. That is fairly aggressive, though. Expect 1%-2% on the value of
the position in most cases.

Now, unlike the stock market, margin trading does not mean margin
loans. Your broker will not be lending you money to buy securities (at
least not the way a stock broker does). As such, there is no margin interest
charged. In fact, since you are the one putting money on deposit with your
broker, you may earn interest in your margin funds.
Interest Rate Carry (Rollover)

When trading forex, one is essentially borrowing one currency, converting
it in to another, and depositing it. This is all done on an overnight basis,
so the trader is paying the overnight interest rate on the borrowed cur-
rency and at the same time earning the overnight rate on the currency be-
ing held. This means the trader is either paying out or receiving interest on
their position, depending on whether the interest rate differential is for or
against them.

This is commonly handled is what is referred to as a rollover. Spot forex
trades are done on a trading day basis, and as such are technically closed
out at the end of each day. If you are holding your position longer than
that, your broker rolls you forward in to a new position for the next trading
day. This is generally done transparently, but it does mean that at the end
of each day you will either pay or receive the interest differential on your
position.

The type of trader you are and the way your broker handles rollover will be
the deciding factors in determining whether the interest rate differentials
are an important concern for you. Some brokers will not apply the day's
interest differential value on positions closed out during the trading day.
By that I mean if you were to enter a position at 10am and exit at 2pm, no
interest would come in to play.

If you were to open a position on Monday
and close it on Tuesday, though, you would have the interest for Monday
applied (the full day regardless of when you entered the position), but
nothing for Tuesday. (Note: There is at least one broker who calculates in-
terest on a continuous basis, so you will always make or pay the interest
differential on all positions, no matter when you put them on or took them
off).

It should also be noted that although some folks will claim there is no roll-
over in forex futures, the interest rate spread is definitely factored in. You
can see this when comparing the futures prices with the spot market
rates. As the futures contracts approach their delivery date their prices
will converge with the spot rate so that the holders will pay or receive the
differential just as if they had been in a spot position.

Intervention

Fixed income traders know that central bankers, like the Federal Reserve,
are active in the markets, buying and selling securities to influence prices,
and thereby interest rates. This is not something which happens in stocks,
but it does in the forex markets. This is known as intervention. It happens
when a central bank or other national monetary authority buys or sells
currency in the market with the objective of influencing exchange rates.

Intervention is most often seen at times when exchange rates get a bit out
of hand, either falling or rising too rapidly. At those times, central banks
may step in to try to nullify the trend. Sometimes it works. Sometimes
not.

The US has traditionally taken a hands-off approach when it comes to the
value of the Dollar, preferring to allow the markets to do their thing. Oth-
ers are not quite so willing to let speculators determine their currency's
value. The Bank of Japan has the most active track record in that regard.

Advantages of Forex

2008-02-17T12:30:00.000-08:00

Trade on Your Schedule

The single biggest advantage the forex market has over other markets is its
24-hour nature. A trader can put on or take off positions literally any time
of day or night, regardless of their base of operations. That opens the game
up to a great many individuals who might not otherwise have the time
available to trade.

Consider, for example, the working person with a 9 to 5 type of job. Most
folks like that cannot be expected to operate effectively as day traders in a
market such as stocks. They just can't spend the requisite time watching
the market during trading hours. With forex, though, one could theoreti-
cally day trade in the evenings after work, or in the mornings before-
hand. The forex market is never really closed (yes, in some cases you can
even trade on the weekend!).

No (or low) Transaction Costs

For most traders, the forex market also offers the benefit of no transaction
costs. For the most part, forex brokers do not charge commissions (if they
do, they are relatively small). There is, of course, the bid/offer spread,
which can be viewed as a transaction cost, but the reality of the situation is
that most traders buy at the offer and sell at the bid in whatever other mar-
ket they trade, so that's really no different. Actually, the forex spreads can
be quite small in the major currency pairs.

Low (or no) Account Minimums

Forex trading is also open to a wider trading demographic in that there are
many opportunities to open smaller accounts than is the case in other
markets. In fact, there is at least one broker which has no minimum ac-
count size.

What's more, they also have no minimum trade size. That sort
of flexibility opens the door to essentially anyone who wants to explore
forex trading. This isn't to say that all brokers are that flexible. There are,
however, a great many which offer so-called mini-contracts.

Multiple Trading Vehicles

Additionally, forex trading can be done in a number of fashions. Many
folks tend to think strictly of the spot market. While that is certainly the
largest of the components, it is not the only one. The futures market has
become a bit more attractive with the expansion of e-mini currency con-
tracts. There are futures options as well. What's more, an array of other
option trading alternatives have been popping up, providing traders even
more ways to take positions in the forex market.

Always Moving

One of the biggest attractions to forex trading is that there's just about al-
ways something moving. There are a number of primary currencies in-
volved, each of which is continuously interacting with all the others.
Chances are, at any given time, there is movement in at least one of those
exchange rates based simply on the sheer volume of trading and the num-
ber of global news events providing impetus to action.

Easily Trade Long or Short

In the stock market there are restrictions imposed on selling short. In
forex there is nothing of the sort. It is just as easy to taking a short posi-
tion as it is to take a long one.
Disadvantages of Forex

No Exchange

The disadvantage to forex, some would say, is in the lack of an exchange
system in forex trading. Some traders find comfort in knowing that there
is a regulated mechanism backing their market participation. What's
more, the lack of a centralized data point means the spot forex market
does not have all the great add-on information stock and futures are used
to seeing (volume, for example).

Complex Nature

In terms of market analysis techniques, technical analysis is just as useful
in forex trading as in any other market - some might say more so. The
thing that gives some traders concern. however, is the complexity of the
fundamental side of the forex market. Currency exchange rates are influ-
enced by a wide variety of factors, which can fluctuate over time.

Two-Sides to Every Position

By it's very nature, there are always two sides to the forex market, because
currencies are quoted in terms of their value against each other. That
means for any given exchange rate there are two countries (or region's) to
take in to consideration. Sometimes issues related to one of the countries
will dominate, while sometimes the other will. It can be quite fluid in that
regard, which can sometimes lead to quite confusing reactions to news and
events.

While these issues may seem like significant barriers to trading forex for

some, the fact of the matter is that for most folks they are easily overcome.
Just like any market, forex requires some getting used to. Once you do,
though, it provides a wide array of opportunity.

Terminology and Market Conventions

2008-02-17T12:24:00.000-08:00

Terminology and Market Conventions If you are going to trade forex you need to understand the terms and quot- ing conventions used, especially in regards to the spot market.
Notational Conventions
The forex market uses 3-letter codes for all currencies. These are com- monly known as SWIFT or ISO codes. For example, USD is the code for the US Dollar. Here are the codes for the other primary currencies:
AUD Australian Dollar CAD Canadian Dollar CHF Swiss Franc EUR European Euro GBP British Pound JPY Japanese Yen

Expressing a relational value between two currencies is done by combining two currency abbreviations in the fashion of XXX/YYY. This indicates the amount of YYY currency (the "quote" currency) equivalent to one unit of XXX ("base" currency). For example if the exchange rate for USD/JPY - the US Dollar to Japanese Yen rate - was 100 it would mean that each USD is worth 100 JPY.

Using this convention, changes up or down in the quoted exchange rate in-
dicate changes up or down in the value of the base currency. Using the USD/JPY example again, if the rate went from 100 to 101 it would mean a 1% increase in the value of the USD against the JPY. Similarly, a decline from 100 to 99 would represent a 1% fall in the USD value vs. the JPY. In theory, one could quote the exchange rates either way around - meaning if USD/JPY is 100 it is the same as saying JPY/USD is 0.01 (one JPY is worth $0.01). In practice, however, the forex market has specific conven- tions for the traded pairs. In most cases, USD is the base currency, with the other currency in question being the quote currency. USD/JPY is an example.

There are a few exceptions, though. When it was introduced in 1999, the market authorities decided the Euro would always be the base currency in all traded pairs. Before that, the Pound (GBP) held that distinction. Thus, when traded against either of those, the USD is the quote currency (EUR/ USD, GBP/USD).

The same also holds for former British Commonwealth currencies the Australian Dollar (AUD/USD) and the New Zealand Dollar (NZD/USD).
It is worth noting that forex futures contracts involving currencies as quoted against the US Dollar do not hold to the spot market conven- tion. Instead they all use the USD as the quote currency. Majors and Crosses
In the forex you will here the terms "majors" and "crosses" when traders refer to different categories of currency pairs. In general terms, the "majors" are the pairs which include the USD quoted against the other pri- mary industrialized currencies. Those include the ones listed above. So the majors are as follows:

While technically every currency pairing is a cross-rate, the term "cross" is
most commonly used to refer to currency pairings which do not include
the USD. For example, EUR/JPY is the Euro-Yen exchange rate. That
would be considered a cross.

Forex Price Quotes

With an understanding of what we are looking
at, now we can turn out focus to the actual
price quotes. The graphic shows a sample ta-
ble of quotes for an array of currency pairs -
majors and crosses.

One thing you will notice in the table is that
some pairs are quoted to four decimal places,
while others only go out two places. In gen-
eral, those pairs with values of 10 or less will
go out to four places, while those with higher
values will be quoted only at two places.

Regardless of how many decimal places a currency pair is quote to,
though, the term "pip" is used to define a single price movement value. So,
for a two decimal place pair, a pip would be .01, while for a four decimal
place pair a pip would be .0001.

We can see this in the quotes on the chart, especially when looking at the
bid/offer spreads. AUD/JPY is quoted at 79.60-79.64, which is a 4 pip
spread, while AUD/USD is quoted 0.7648-0.7650 for a 2 pip spread.

In recent times there has been introduced the "pipette", which is a fraction
of a pip. In essence, some of the more popular pairs like EUR/USD are
trading at five decimal places now, which is why you can see a spread of 1.5
listed on the chart (column to the right of the price quote itself). That
means the bid-offer spread is 1 and 5/10 pips.

One will sometimes here the term "figure" in spot forex trading. That is
used to refer to a price level which is a round 100 pip figure. In USD/JPY
that would be a multiple of 1 full JPY (such as 104), while in GBP/USD the
figure would be a $0.01 multiple (like 1.8800).

The term "yard" sometimes comes up as well. That is used to refer to a one
billion base currency transaction. So a yard of USD/JPY would be $1 bil-
lion.

Getting in to the Trading

Opening an Account

It is quite easy to start trading forex. There are a great many forex brokers
available and opening an account is pretty straightforward. Some things
you should consider as you look to identify the one best suited to you are:

• Account minimum deposit (if any)
• Transaction size flexibility
• Spreads
• Execution

• Commissions (if any)
• Security of deposited funds
• Allowable leverage
• Currency pairs available for trading
• Usability of the trading platform

The great thing is that nowadays the vast majority of brokers have avail-
able demo trading platforms you can use to evaluate their system. Be sure,
though, to make note of any differences there are between the real plat-
form and the demo one. Some brokers' platforms are both the same across
the board, but some have noticeable differences in things like execution
speeds. It wouldn't hurt to check around the discussion boards to see what
others are saying.

Actually, if you are new to forex trading it is well worth it to spend a while
trading via a demo platform first. It will help you develop and understand-
ing of how it all works. That way, when you do go live, you will be more
confident and ready for action.

Forex trading is really little different from an execution perspective than
most other markets. You can buy or sell. In most cases, the same types of
orders (stops, limits, etc.) are available. The trading platforms are very
modern and trades can be done very quickly. Anyone who has ever used
an online trading platform for any other market will have no trouble mak-
ing the move to forex and easily executing trades. For that matter, even
those new to trading will find entering and exiting forex positions a breeze.

POSITIONS & PROFITS

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Understanding the Trades

The best way to understand what happens in a forex trade is to demon-
strate by way of example. In this case we will outline a trade in which we
buy EUR/USD at 1.2100.

Remember, when buying or selling in the forex market you are doing so in
regards to the base currency (the first one listed in the pair). That means
for EUR/USD we are long the Euro, and by extension, short the USD.
This diagram shows the way the transaction runs it's course:
Simple Spot Forex Trade

Buy 100,000 EUR/USD at 1.2100
Borrow 121,000 USD (100,000 x $1.21)

Convert USD to EUR at 1.2100

Deposit 100,000 EUR

When we close out this trade, it is a simple reversal process. The EUR po-

ition is converted back in to USD and we pay-off the USD loan we took
out. If the exchange rate increased, then we would have Dollars left over,
which would be our profit. For example, if the rate went to 1.25 we would
have $4000 left over after paying back our loan

(100,000 x $1.25 =
$125,000 - $121,000 = $4000)

If the rate had dropped, we would have a
shortfall on our loan repayment, and thus a loss on the trade.
For a trader whose account is denominated in US Dollars, the above exam-
ple is pretty straightforward.

There is only one exchange happening each
way. When one is trading cross-rates, however, things get more complex.
Everything remains essentially the same when we enter the trade. If, for
example, we were buying 100,000 EUR/JPY at 131.00 we would borrow
13,100,000 JPY (100,000 x 131), exchange that in to EUR, and deposit it.

We would pay interest on the JPY loan and earn it on the EUR deposit,
just like we did in the EUR/USD example.
The complexity of a cross trade comes when unwinding the trade. Assume
EUR/JPY rises to 132.00, and see how the long position unwind would

look:

Cross-Rate Trade
Unwind 100,000 EUR/JPY long
(Entered trade at 131.00)
100,000 EUR

Convert EUR back to JPY at 132.00

(100,000 x 132 = 13,200,000 JPY)

Repay 13,100,000 JPY

(13,200,000 - 13,100,000 = 100,000 JPY remains)
You will note that there are 100,000 JPY remaining after the original JPY
loan is repaid. That is our profit, but as USD-based traders we need to
convert that back in to USD for our accounting purposes. That happens by
exchanging the JPY for USD at the current USD/JPY rate. If that rate is
107.00, then we have a gain of $934.58 on the trade (100,000/107.00). Of
course, we must also take in to account the interest carry when determin-
ing our net profit.

Calculating Profits & Losses

The above outlines of forex trades may seem complicated, but as an indi-
vidual trader, you don't see all that stuff. When it comes down to deter-
mining your profit or loss (P&L), it's pretty simple. The essence of deter-
mining one's P&L boils down to starting value and ending value (as set by
the market).

Here are the formulas for calculating your profit or loss on a forex trade:
Non-USD Base (i.e. EUR/USD):

Long: (Units x R2) - (Units x R1) or Units x (R2—R1)
Short: (Units x R1) - (Units x R2) or Units x (R1—R2)

Where R1 is the starting rate and R2 is the ending one.

Ex: Buy 100,000 EUR/USD at 1.3000 and sell at 1.3100:
(100,000 x 1.31 = $131,000)—(100,000 x 1.30 = $130,000) = $1000

USD Base (i.e. USD/JPY):

Long: ((R2/R1) - 1) x Units
Short: ((R1/R2) - 1) x Units

Long Ex: Buy 100,000 USD/JPY at 110.00 and sell at 111.00:
(( 111.00 / 110.00 ) - 1) x $100,000 = $909.09

Short Ex: Short 100,000 USD/JPY at 110.00 and cover at 109.00:
(( 110.00 / 109.00 ) - 1) x $100,000 = $917.43

As we know from the EUR/JPY example, cross trades require an addi-
tional step. The same calculation can be used as above (the non-USD base
is probably the easiest, though either could be used), but the Profit/Loss
figure would then have to be converted using one of the currencies in-
volved to get it back to the account currency as demonstrated earlier.

Remember, forex trades have an interest rate carry based on the interest
rate differentials. This can be either positive or negative. For longer-term
trades, this can be a significant influence on the final P&L.

Multiple Open Positions

A common piece of advice offered by experienced forex traders to novices
is to focus on one currency pair and stick to that. There are two rea-
sons. One is to develop a good understanding of one forex relationship
and not spreading things too thin. The other reason is to avoid some of the
issues which can crop up when a trader has positions open in multiple cur-
rency pairs.

The first of those issues is creating excessive exposure to one cur-
rency. This is done by going long or short the same currency in different
pairs. For example, I you were to sell EUR/USD and at the same time buy
USD/JPY you would have two USD long positions. In shorting EUR/USD
you are going long USD, and obviously in buying USD/JPY you are doing
the same thing. This is a very quick way to put your trading account at se-
rious risk if you are not aware of your total exposure. If the USD were to
suffer a decline you would likely lose on both those positions.

The other issue in holding positions in multiple currency pairs is that you
can accidentally create a position completely different than what you in-
tended. For example, if you were to buy EUR/USD and buy USD/JPY the
USD exposure in those trades would at least partially offset each other
(you are selling USD in the first trade and buying it in the second), de-
pending on the values of the two trades in question. What you are left with
is a long EUR/JPY position, which has very different trading characteris-
tics than either EUR/USD or USD/JPY.

The combination of the risk factor and the offsets that can happen is why
even experienced traders often will only carry one open forex position at a
time. It just keeps things simpler.

INFLUENCES ON FOREX PRICES ??

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Foreign exchange rates are both a market unto themselves and an influ-
ence on the fundamental situation of other markets. They reflect the
strength or weakness of an economy and are a factor in it. This kind of du-
ality can create a truly mind-spinning situation at times. There are a few
things, however, which directly influence forex prices.

Interest Rates

Most people will think first of interest rates when the idea of evaluating
one currency against another comes in to play. They are indeed a major
part of the forex market equation. Interest rates on the one side determine
the "yield" of a currency, while on the other side can be viewed as a ba-
rometer of the position of a country's economy (or of an economic region
like the European Union).

To that end, the same sorts of things which impact interest rates also play
a part in forex prices. Inflation, or rather the expectations for inflation, is
the single largest influence on interest rates. But even there it is not a
clean scenario. If interest rates are rising because of strong economic
growth leading to mild concerns about inflation, that tends to be a positive
for a currency. On the other hand, if rates are rising because signs of infla-
tion are starting to show (or significant inflation already exists), that can
be a negative.

Keep in mind that the value of a currency is a reflection of its buying
power. Inflation erodes that, so a country seeing high rates of inflation will
generally have a weaker currency. This can easily be seen in the emerging
markets where interest rates are often quite high, but the the currencies

remain weak because of issues with inflation.

Trade

The forex market exists first and foremost to facilitate trade, and trade is a
huge determinant in the value of a currency. The more a country's goods
are in demand, therefore requiring buyers to convert their currencies in to
the exporter's currency, the stronger it will be. It is a simple supply and
demand equation. More demand means higher values.

Because of this influence, forex traders keep a keen eye on trade
data. These figures, of course, are historical by the time the market sees
them, meaning the trade transactions have already happened and their
push or pull on a currency's value have taken place. What traders want to
know, however, is if money is flowing in to or out of a country.

Capital Flows

Capital flows are a parallel to trade. Rather than representing the value of
goods and services being exchanged, they indicate the investment of capi-
tal in to a country. Investment works the same way as trade. A country re-
ceiving a lot of investment money is similar to a country selling a lot of
goods on the trade market. It's currency is in demand.

What creates capital inflows?

Higher relative real interest rates (rates ad-
justed for inflation) is one thing. Opportunities for investment profits in a
country's stock market is another. Capital seeks returns. It will go where
it thinks it is going to get the highest one for a given level of perceived risk.
Capital flows are seen in the balance of payments information released by
the government. Traders look at it the same way they do the trade data. Is

money coming in or going out of the economy?

Reserve Currency

You may have heard that the US Dollar is a reserve currency, which means
other country's keep a supply of Dollars on hand as a safety measure
against adverse conditions. This helps provide demand for the Dollar,
even when the items noted above would suggest a negative scenario.
A similar situation can be found in the fact that global commodities like oil
and gold are denominated in US Dollars. Anyone buying them must ex-
change their own currency for Dollars in order to make a purchase, provid-
ing an added layer of demand for the US currency.

Comparison

The thing which makes the forex market so complex is the fact that when
one is trying to perform the kind of fundamental analysis we have dis-
cussed here, it is a multisided equation. Looking at one country is not
enough because a currency is valued and traded against an array of others,
all of which have their own sets of considerations.

The comparison for a stock trader would be a spread trade in which one is
going to buy one company's shares and sell those of another related one in
a bet that the former outperforms the latter. Obviously, you would buy the
stock of the firm with the better fundamental outlook and sell the one
which looks weaker.

This multiple analysis is enjoyable to some, but is probably the biggest fac-
tor behind the extreme popularity of technical analysis among forex trad-
ers.

Featured Video

2008-02-12T13:52:00.000-08:00

ForexPros Analysis 12.02.08

2008-02-12T13:29:00.000-08:00

Overnight Asia/Europe

• USD two-sided, muted trade
• UK CPI surprises
• German ZEW surprises

Today’s Economic Reports

• 1:00 PM CST Treasury Budget, no factor

Looking Ahead

• Thursday Balance of Trade
• Friday TICS

Summary
The USD is trading in solid two-way action continuing to consolidate recent gains after starting mixed in Asia overnight. Largely tracking stocks the USD remained within Monday’s ranges and hovering around the New York close for most of the session, the majors had light volume as traders remained mostly sidelined ahead of European data.

The Greenback suffered some selling after the release of the better-than-expected UK CPI numbers which showed less inflation potential. Cable had rallied along with EURO expecting a worse number and possibly some short covering. After the news the GBP took a hit leaving the highs at 1.9559 intact but pushing for lows at 1.9441; currently back at 1.9525 area to start New York.

EURO is also two-way, first rallying to a high print at 1.4551 in response to the better-than-expected ZEW sentiment reading showing a gain for the first time in six months; then falling back as technical selling broke the rate back under the 1.4500 handle briefly. Currently the pair is 1.4525 area in quiet trade. Both EURO and GBP appear to be tracking each other in light volume with traders reporting that both pairs had close-in stops triggered creating the intraday volatility.

Analysts remind that both pairs are showing signs of further potential for declines and warn that aggressive selling could take either rate to a new low this week; stops are likely being moved up closer underneath the recent lows. USD/JPY is firmer with traders reporting that equities continue to be the focus. Equities were flat in Asia but higher in Europe and are set to open modestly higher on Wall Street this morning; high prints so far in the rate at 107.26, lows at 106.78.

Clearly USD/JPY is range-trading within established S/R and the coiling is continuing to store energy for a breakout. Light stops were reported in the pair at the 107.10 area which is very tight and almost an amateurish place to have them based on recent activity. In my view, the USD is set for another leg higher; aggressive traders can ADD to open EURO shorts at the 1.4550 area and ADD to open USD longs in USD/JPY on a close over the 107.60 area.

It won’t take much for the USD to rally from current pricing as traders are increasingly nervous on the short side.

EURO/USD Daily

R3: 1.4620
R2: 1.4580
R1: 1.4550

/60Current Price: 1.4542

S1: 1.4500
S2: 1.4480
S3: 1.4460

Inside range day suggests point of indecision but volumes are very light; upside likely limited to R2 or R3. Stops likely above the 1.4560 area but offers are said to be resting and layered to 1.4620 area. Studies are turning bearish as rate drops into the 1.4400 handle suggesting that rallies are being sold. Aggressive traders can ADD to open shorts at 1.4550 area in my view. Look for the rate to continue two-way but look for rotation lower on higher volume.

USD/JPY Daily

R3: 107.80/90
R2: 107.50
R1: 107.20

/30Current Price: 107.12

S1: 106.80
S2: 106.60S
3: 106.40

Rate firming again after dipping into tech support at 106.80. If coiling is set to unload to the upside, the next dip should be on middle-volume but bought back quickly with a low print no lower than about the 106.40/50 area; stops under the 106.60 area should be light and overwhelmed by bids immediately. Close over the 107.20 area argues for another test of the 107.80 area; pullback from there should be brief with a re-test coming. Stops above the 108.00/10 area said to be “in size” Read: JUST HUGE

Trading off-exchange Cash Foreign Currency transactions (FOREX) involves substantial risk of loss and may not be suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.

A tool for the latest Central Bank Interest Rates

2008-02-12T12:32:00.000-08:00

As I've "crawled" the forums I see several people asking where they can get the Central Bank Interest Rates for the respective countries. I have yet to see a good answer (Oanda's calculator is interesting but hard to understand for noobs, like me).I can see the validity in wanting to know this to know why your account was debited/credited something that doesn't show in the spread or price movement. Or if you want to play the interest rate spread on a sideways trending pair.So. I propose that we have a quick chart/list of the banks and their current interest rates. I'll even maintain it! (Yes, I'm serious about that but I need help getting the data.)I'd suggest the the columns tracked should look something like this:Central Bank Current Rate Last Change Date Submitted By NotesTherefore we as a "hive mind" can have a useable quickly referenceable (and understandable) list.

Central Bank Next Meeting Last Change Current Interest Rate

Bank of Canada Jan 22 2008 Dec 04 2007 4.25%
Bank of England Feb 07 2008 Dec 06 2007 5.5%
Bank of Japan Jan 22 2008 Feb 21 2007 0.5%
European Central Bank Feb 07 2008 Jun 06 2007 4%
Federal Reserve Jan 30 2008 Dec 11 2007 4.25%
Swiss National Bank Mar 13 2008 Sep 13 2007 2.75%
The Reserve Bank of Australia Feb 07 2008 Nov 06 2007 6.75%

Country Current Interest Rate Previous Last Change

Egypt 8.75% 8.00% Dec 15 2006
South Africa 11.0% 10.5% Dec 06 2007

Asia Pacific
Country Current Interest Rate Previous Last Change
Australia 6.75% 6.50% Nov 06 2007
China 7.47% 7.29% Dec 20 2007
Hong Kong SAR 5.75% 6.00% Dec 12 2007
India 7.75% 7.50% Apr 24 2007
Japan 0.50% 0.25% Feb 21 2007
Korea, Republic of 5.00% 4.75% Aug 09 2007
New Zealand 8.25% 8.00% Jul 25 2007
Taiwan 3.375% 3.250% Dec 20 2007

Europe
Country Current Interest Rate Previous Last Change
Czech Republic 3.50% 3.25% Nov 29 2007
European Monetary Union 4.00% 3.75% Jun 06 2007
Hungary 7.50% 7.75% Sep 24 2007
Iceland 13.30% 13.75% Jun 20 2007
Norway 5.25% 5.00% Dec 12 2007
Slovakia 4.25% 4.50% Apr 24 2007
Sweden 4.00% 3.75% Oct 30 2007
Switzerland 2.75% 2.50% Sep 13 2007
United Kingdom 5.50% 5.75% Dec 06 2007

Middle East

Country Current Interest Rate Previous Last Change
Turkey 15.75% 16.25% Dec 13 2007

North America

Country Current Interest Rate Previous Last Change
Canada 4.25% 4.50% Dec 04 2007
United States 4.25% 4.50% Dec 11 2007

South America

Country Current Interest Rate Previous Last ChangeBrazil 11.25% 11.50% Sep 05 2007

Here are our latest news about the foreign exchange

2008-02-12T12:16:00.000-08:00

EUR-USD
1.4519. It is a triangle configuration. Market should break either side. Acceleration should occur above 1.4577 or under 1.4481 limits.

USD-CHF
1.1024. It should test 1.1078 area after which a sell off down to 1.0965 or extended to 1.0906 area is expected.

USD-JPY
106.97. It is likely to fall towards 106.34 as its corrective rally could falter in 107.29 - 106.97 area. Stop above 107.61 zone.

GBP-USD
1.9509. A corrective/consolidation activity between 1.9430 and 1.9610 is likely for a while.

EUR-CHF
1.6004. It looks set for gains to above 1.6038. Supports at 1.5974 and 1.5991. A break of 1.5957 will damage this bullish structure.

EUR-JPY
155.30. One more dip to 154.32 or 153.34 is likely followed by a grind higher to above 155.80 or 157.28. After which it can resume its downtrend.

EUR-GBP
0.7441. It looks more likely that it would rise to above 0.7475 or 0.7487 from 0.7440 or 0.7416. After which a downside move to below 0.7392 is expected.

AUD-USD
0.9036. Uptrend is still intact in a triangle configuration. It should continue to rally to 0.9093 or 0.9119 if support around 0.9017 hold. After which a pullback to 0.9017 - 0.8996 zone is possible.

USD-CAD
1.0016. It should test 1.0058 area after which a sell off down to 0.9970 or extended to 0.9924 area is expected.

Forex Glossary2

2008-02-11T19:44:00.000-08:00

Fundamental Analysis Analysis of political and economic conditions that can affect currency prices.Leverage or Margin The ratio of the value of a transaction to the required deposit.

A common margin for Forex trading is 100:1 - you can trade currency worth 100 times the amount of your deposit.Limit Order An order to buy or sell when the price reaches a specified level.Lot The size of a Forex transaction.

Standard lots are worth about 100,000 US dollars.Major Currency The euro, German mark, Swiss franc, British pound, and the Japanese yen are the major currencies.Minor Currency The Canadian dollar, the Australian dollar, and the New Zealand dollar are the minor currencies.

Offer (Ask) The rate at which a dealer is willing to sell a currency.Offsetting transaction A trade with which serves to cancel or offset some or all of the market risk of an open position.One Cancels the Other (OCO) Two orders placed simultaneously with instructions to cancel the second order on execution of the first.

A designation for two orders whereby one part of the two orders is executed the other is automatically cancelled.Open Order An order that will be executed when a market moves to its designated price. Normally associated with Good 'til Cancelled Orders.

Open Position An active trade that has not been closed. An active trade with corresponding unrealized Profit and Loss, which has not been offset by an equal and opposite deal.Order A customer's instructions to buy or sell currencies.Over the Counter (OTC) Used to describe any transaction that is not conducted over an exchange.Overnight Position Trader's long or short position in a currency at the end of a trading day.

Pips or Points The smallest unit a currency can be traded in. The smallest unit of price for any foreign currency. Digits added to or subtracted from the fourth decimal place, i.e. 0.0001.Political Risk Exposure to changes in governmental policy which will have an adverse effect on an investor's position.

Price The price at which the underlying currency can be bought or sold. Price Transparency The ability of all market participants to "see" or deal at the same price. Describes quotes to which every market participant has equal access.

Principle Value The original amount invested by the client.Profit /Loss or "P/L" or Gain/Loss The actual "realized" gain or loss resulting fromtrading activities on Closed Positions, plus the theoretical "unrealized" gain or loss on Open Positions that have been Mark-to-Market.Quote Currency The second currency in a currency pair.

In the currency pair USD/EUR the euro is the quote currency.Rally A recovery in price after a period of decline.Range The difference between the highest and lowest price of a future recorded during a given trading session.Rate Price at which a currency can be purchased or sold against another currency.

The price of one currency in terms of another, typically used for dealing purposes.Resistance Price level at which technical analysts note persistent selling of a currency.
A term used in technical analysis indicating a specific price level at which analysis concludes people will sell.
Revaluation Daily calculation of potential profits or losses on open positions based on the difference between the settlement price of the previous trading day and the current trading day.

An increase in the exchange rate for a currency as a result of central bank intervention. Opposite of "Devaluation".Risk (Forex Risk) The risk that the exchange rate on a foreign currency will move against the position held by an investor such that the value of the investment is reduced. Exposure to uncertain change, most often used with a negative connotation of adverse change.

Risk Management The employment of financial analysis and use of trading techniques to reduce and/or control exposure to financial risk.Rollover (Roll-Over) The process of extending the settlement value date on an open position forward to the next valid value date.

Settlement The process by which a trade is entered into the books and records of the counterparts to a transaction.

The settlement of currency trades may or may not involve the actual physical exchange of one currency for another.Short Position An investment position that benefits from a decline in market price. When the base currency in the pair is sold, the position is said to be short.

Spot Market Market where people buy and sell actual financial instruments (currencies) for two-day delivery.Spot Price The current market price of a currency that normally settles in 2 business days (1 day for Dollar/Canada). The current market price.

Settlement of spot transactions usually occurs within two business days.Spread This point or pip difference between the bid and ask price of a currency pair.Square Purchase and sales are in balance and thus the dealer has no open position.Squawk Box A speaker connected to a phone often used in broker trading desks.Squeeze Action by a central bank to reduce supply in order to increase the price of money.

The difference between the bid and offer prices.Stable Market An active market which can absorb large sale or purchases of currency without major moves.

Standard A term referring to certain normal amounts and maturities for dealing.
Sterilization Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the FX market.Sterling (The Pound - GBP) Another term for the British currency, "The Pound".
Stop An order to buy or to sell a currency when the currency's price reaches or passes a specified level.
Stop Loss Order Order to buy or sell when a given price is reached or passed to liquidate part or all of an existing position.

Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor's position.

As an example, if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49.Support Levels A price at which a currency or the currency market will receive considerable buying pressure. A technique used in technical analysis that indicates a specific price ceiling and floor at which a given exchange rate will automatically correct itself. Opposite of "resistance".Swap A transaction which moves the maturity date of an open position to a future date.

The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another. A swap can be a swap against a forward. In essence, swapping is somewhat similar to borrowing one currency and lending another for the same period. However, any rate of return or cost of funds is expressed in the price differential between the two sides of the transaction.

Swap Price A price as a differential between two dates of the swap.Swiss Market slang for Swiss Franc.Take Profit Order A customer's instructions to buy or sell a currency pair which, when executed, will result in the reduction in the size of the existing position and show a profit on said position.

Technical Analysis Analysis of historical market data to predict future movements in the market.Technical Correction An adjustment to price not based on market sentiment but technical factors such as volume and charting.

Thin Market A market in which trading volume is low and in which consequently bid and ask quotes are wide and the liquidity of the instrument traded is low.Thursday/Friday Dollars A US foreign exchange technicality.

If a foreign bank buys dollars on Tuesday for Thursday delivery.
If the bank leaves the funds overnight and transfers them on Friday by means of a clearing house cheque then clearance is not until Monday, the next working day. Higher interest rates for this period are thus available.

Tick The smallest possible change in a price, either up or down.Today/Tomorrow Simultaneous buying of a currency for delivery the following day and selling for the spot day, or vice versa.

Also referred to as overnight.Tomorrow Next (Tom Next) Simultaneous buying of a currency for delivery the following day and selling for the spot day or vice versa.Trade Date The date on which a trade occurs.Tradeable Amount Smallest transaction size acceptable.

Transaction The buying or selling of currencies resulting from the execution of an order.Transaction Cost The cost of a Forex transaction - typically the spread between bid and ask prices.

Transaction Date The date on which a trade occurs.Turnover The total volume of all executed transactions in a given time period.Two Tier Market A dual exchange rate system where normally only one rate is open to market pressure, e.g. South Africa.Two-Way Price A quote in the foreign exchange market that indicates a bid and an offer.Two-Way Quotation When a dealer quotes both buying and selling rates for foreign exchange transactions.

Uncovered Open position.Under-Valuation An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.
Unrealized Gain/Loss The theoretical gain or loss on Open Positions valued at current market rates, as determined by the broker in its sole discretion. Unrealized Gains' Losses become Profits/Losses when position is closed.
Uptick A new price quote at a price higher than the preceding quote. A transaction executed at a price greater than the previous transaction.
Uptick Rule In the US, a regulation whereby a security may not be sold short unless the last trade prior to the short sale was at a price lower than the price at which the short sale is executed.

US Prime Rate The interest rate at which US banks will lend to their prime corporate customers.
US Treasury The United States Department of the Treasury is the government department responsible for issuing all Treasury bonds, notes, and bills.Value Data The maturity date of the currency for settlement, usually two business days (one day for Canada) after the trade has occurred.

Value Date The date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments. For spot currency transactions, the value date is normally two business days forward. Value Date is also known as "maturity" date. For a spot transaction it is two business banking days forward in the country of the bank providing quotations which determine the spot value date.

The only exception to this general rule is the spot day in the quoting centre coinciding with a banking holiday in the country(ies) of the foreign currency(ies). The value date then moves forward a day.

Value Spot Normally settlement for two working days from today. See value date.Variation Margin Funds, which are required to bring the equity in an account back up to the initial margin level, calculated on a day-to-day basis. Funds a broker must request from the client to have the required margin deposited. The term usually refers to additional funds that must be deposited as a result of unfavorable price movements.

Volatility (VOL) Statistical measure of the change in price of a financial currency pair over a given time period. A statistical measure of a market's price movements over time. A measure of the amount by which an asset price is expected to fluctuate over a given period.

Vostro Account A local currency account maintained with a bank by another bank. The term is normally applied to the counterparty's account from which funds may be paid into or withdrawn, as a result of a transaction.Wash Trade A matched deal which produces neither a gain nor a loss.

Whipsaw Slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.Withholding Tax Income tax withheld from employees' wages and paid directly to the government by the employer.

Working Day A day on which the banks in a currency's principal financial centre are open for business. For FX transactions, a working day only occurs if the bank in both financial centre's are open for business (all relevant currency centers in the case of a cross are open).Yard A slang word used in the currency industry meaning "billion".X A Nasdaq stock symbol specifying that it is a mutual fund.Z-Score A statistical measure that quantifies the distance (measured in standard deviations) a data point is from the mean of a data set.

In a more financial sense, Z-score is the output from a credit-strength test that gauges the likelihood of bankruptcy. at 9:16 AM 1 comments FOREX Trading News Forex Trading as commonly called stands for Foreign Exchange Trading. It is biggest financial trading market in the world having a daily turnover in excess of US$1 Trillion.

The figure signifies a volume amounting to about 28 times the combined volume of all US equity trading markets.Forex Trading means buying of one foreign currency by paying in another.

Each transaction involves a purchase and a sale of currency at the same time, since currency trading is always done in pairs for example USD/EUR or USD/GBP etc.Foreign Currency trading or Forex Trading is undertaken for two purposes. About 5-7% of the transactions are undertaken by institutions that do business in foreign lands or companies that have to convert their foreign currency earnings into domestic currency.

The rest of the Forex Trading is done purely on speculative basis with profit objectives.For trading by speculation purposes, the best profit making opportunity lies in most traded currencies (obviously the currencies of most economically advanced countries) also called the "majors" in Forex Trading parlance. They consist of US Dollar, GB Pounds, Japanese Yen, European Unions EURO, Swiss Franc, Canadian Dollar, Australian Dollar etc

Speculation Vs Investment

2008-02-11T19:20:00.000-08:00

It is very important that the individual wanting to trade foreign exchange be aware of the very marked difference between speculation and investment. Forex trading is by nature a speculative occupation.

Foreign exchange markets are amongst the most volatile markets in the world. When traded on a margined basis they effectively become the most volatile in the world. Day trading in foreign exchange can be extremely profitable and high-risk profile traders can generate huge percentage returns even overnight.

Day trading is however a mentally and psychologically challenging activity and is by no means meant for everyone. Day trading is essentially speculation and day traders essentially only do that: day trading. Most people who trade foreign exchange are not professional day traders however.

Often the contractors of foreign exchange brokerage services are professionals in some capacity or other. These people do not day trade but take the occasional position from time to time. This is also speculation and should not be confused with making an investment.

Itself as much to investment as it does to speculation and hedging (hedging may be performed in forward instruments). It is possible in a sense to make an investment in foreign exchange over a long-term period but this necessitates a large account value and low leveraging.

Main Forex Markets

2008-02-10T17:20:00.000-08:00

Foreign exchange is traded essentially in two distinctive ways. Over an organized exchange and 'over the counter'. Exchange traded foreign exchange represents a very small portion of the total foreign exchange market the great majority of foreign exchange deals being traded between banks and other market participants 'over the counter'.

1. Exchange traded currencies

In the case of an organized exchange like the Chicago Mercantile exchange (CME) in the US, standardized currency contract sizes that represent a certain monetary value are traded in the International money market (IMM). A central clearing house organizes matching of transactions between counter-parties. There are various disadvantages to trading currency futures as outlined in the chapter Advantages of trading FX.

2. Forex market

In comparison the over the counter market is traded around the world by a multitude of participants and price quality, reputation and trading conditions determine who a participant wishes to trade with. It is probably the most competitive market in the world and brokers like ACM must insure they live up to the highest standards of service and be compliant with market standards and practices if they want to acquire new customers and retain their existing ones. In 1998 a survey under the auspices of the Bank for International Settlements (BIS), global turnover of reporting dealers was estimated at about USD 1.49 trillion per day. In comparison, currency futures turnover was estimated at USD 12 billion.

Among the various financial centers around the world, the largest amount of foreign exchange trading takes place in the United Kingdom, even though that nation's currency, the British pound is less widely traded in the market than several others.

As shown in the graph underneath, the United Kingdom accounts for about 32 percent of the global total; the United States ranks a distant second with about 18 percent, and Japan is third with 8 percent.

Market Participants

2008-02-10T17:19:00.001-08:00

In the last years, the foreign exchange market has expanded from one where banks would execute transactions between themselves to one in which many other kinds of financial institutions like brokers and market-makers participate including non-financial corporations, investment firms, pension funds and hedge funds.

Its' focus has broadened from servicing importers and exporters to handling the vast amounts of overseas investment and other capital flows that currently take place. Lately foreign exchange day trading has become increasingly popular and various firms offer trading facilities to the small investor.

Foreign exchange is an 'over the counter' (OTC) market, that means that there is no central exchange and clearing house where orders are matched.

Geographic trading 'centers' exist around the world however and are: (in order of importance) London, New York, Tokyo, Singapore, Frankfurt, Geneva & Zurich, Paris and Hong Kong.

Essentially foreign exchange deals are made between participants on the basis of trust and reputation to deliver on an agreement.

In the case of banks trading with one another, they do so solely on that basis. In the retail market, customers demand a written legally accepted contract between themselves and their broker in exchange of a deposit of funds on which basis the customer may trade.

Some market participants may be involved in the 'goods' market, conducting international transactions for the purchase or sale of merchandise. Some may be engaged in 'direct investment' in plant and equipment, or may be in the 'money market,' trading short-term debt instruments internationally.

The various investors, hedgers, and speculators may be focused on any time period, from a few minutes to several years.
But, whether official or private, and whether their motive be investing, hedging, speculating, arbitraging, paying for imports, or seeking to influence the rate, they are all part of the aggregate demand for and supply of the currencies involved, and they all play a role in determining the exchange rate at that moment.

Origins Of Foreign Exchange

2008-02-10T17:17:00.000-08:00

In order to gain a complete understanding of what foreign exchange market is, it is useful to examine the reasons that lead to its existence in the first place.

Exhaustively detailing the historical events that shaped the foreign exchange market into what it is today is of no great importance to the fx trader and therefore we happily will omit lengthy explanations of historical events such as the Bretton Woods accord in favor of a more specific insight into the reasoning behind foreign exchange as a medium of exchange of goods and services.

Originally our ancestors conducted trading of goods against other goods this system of bartering was of course quite inefficient and required lengthy negotiation and searching to be able to strike a deal.

Eventually forms of metal like bronze, silver and gold came to be used in standardized sizes and later grades (purity) to facilitate the exchange of merchandise.

The basis for these mediums of exchange was acceptance by the general public and practical variables like durability and storage. Eventually during the late middle ages, a variety of paper IOU started gaining popularity as an exchange medium.

The obvious advantage of carrying around 'precious' paper versus carrying around bags of precious metal was slowly recognized through the ages. Eventually stable governments adopted paper currency and backed the value of the paper with gold reserves. This came to be known as the gold standard. The Bretton Woods accord in July 1944 fixed the dollar to 35 USD per ounce and other currencies to the dollar.

In 1971, president Nixon suspended the convertibility to gold and let the US dollar 'float' against other currencies.Since then the foreign exchange market has developed into the largest market in the world with a total daily turnover of about 1.5 trillion USD.

Traditionally an institutional (inter-bank) market, the popularity of online currency trading offered to the private individual is democratising foreign exchange and widening the retail market.

Advantages Of Trading Forex

2008-02-10T17:16:00.000-08:00

Although the forex market is by far the largest and most liquid in the world, day traders have up to now focused on seeking profits in mainly stock and futures markets. This is mainly due to the restrictive nature of bank-offered forex trading services.Advanced Currency Markets (ACM) offers both online and traditional phone forex trading services to the small investor with minimum account opening values starting at 5000 USD.There are many advantages to trading spot foreign exchange as opposed to trading stocks and futures. Below are listed those main advantages.

1. Bid/Ask Spread rates

Spread rates have tightened dramatically in the last years. Most online forex brokers offer a spread of 5 pips on EURUSD which is the most widely traded and liquid currency pair. ACM offers a 3 pip spread on EURUSD. In stock trading, only liquid stocks offer tight spreads.

Those spreads often represent on average between 0.04% and 0.06% of the value of the stock. In comparison ACM offers a 3 pip spread on all major currencies, this equates to approximately between 0.02% and 0.03% on the underlying dollar value.

Exact percentages at current rates (May 2002)
EURUSD 3 pips 0.03%GBPUSD 3 pips 0.03%USDJPY 3 pips 0.023%USDCHF 3 pips 0.018%

In the futures market spreads can vary anywhere between 5 and 9 pips and can become even larger under illiquid market conditions (which tends to happen substantially more often in futures currencies).

2. Commissions

ACM offers foreign exchange trading commission free. This is in sharp contrast to (once again) what stock and futures brokers offer. A stock trade can cost anywhere between USD 5 and 30 per trade with online brokers and typically up to USD 150 with full service brokers. Futures brokers can charge commissions anywhere between USD 10 and 30 on a round turn basis.

3. Margins requirements

ACM offers a foreign exchange trading with a 1% margin. In layman's terms that means a trader can control a position of a value of USD 1'000'000 with a mere USD 10'000 in his account. By comparison, futures margins are not only constantly changing but are also often quite sizeable. Stocks are generally traded on a non-margined basis and when they are, it can be as restrictive as 50% or so.

4. 24 hour market

Foreign exchange market trading occurs over a 24 hour period picking up in Asia around 24:00 CET Sunday evening and coming to an end in the United States on Friday around 23:00 CET. Although ECNs (electronic communications networks) exist for stock markets and futures markets (like Globex) that supply after hours trading, liquidity is often low and prices offered can often be uncompetitive.

5. No Limit up / limit down

Futures markets contain certain constraints that limit the number and type of transactions a trader can make under certain price conditions. When the price of a certain currency rises or falls beyond a certain pre-determined daily level traders are restricted from initiating new positions and are limited only to liquidating existing positions if they so desire.
This mechanism is meant to control daily price volatility but in effect since the futures currency market follows the spot market anyway, the following day the futures market may undergo what is called a 'gap' or in other words the futures price will re-adjust to the spot price the next day. In the OTC market no such trading constraints exist permitting the trader to truly implement his trading strategy to the fullest extent. Since a trader can protect his position from large unexpected price movements with stop-loss orders the high volatility in the spot market can be fully controlled.

6. Sell before you buy

Equity brokers offer very restrictive short-selling margin requirements to customers. This means that a customer does not possess the liquidity to be able to sell stock before he buys it. Margin wise, a trader has exactly the same capacity when initiating a selling or buying position in the spot market. In spot trading when you're selling one currency, you're necessarily buying another.

Forex Glossary

2008-02-10T17:15:00.000-08:00

Accrual The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals, over the period of each deal.Actualize The underlying assets or instruments which are traded in the cash market.Adjustable Peg An exchange rate system where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency.

The official rate may be changed from time to time.Adjustment Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or.Agent Bank A bank acting for a foreign bank. In the Euro market - the agent bank is the one appointed by the other banks in the syndicate to handle the administration of the loan.Aggregate Demand Total demand for goods and services in the economy.

It includes private and public sector demand for goods and services within the country and the demand of consumers and and firms in other countries for good and services.Aggregate Risk Total amount of exposure a bank has with a customer for both spot and forward contracts.Aggregate Supply Total supply of goods and services in the economy from domestic sources (including imports) available to meet aggregate demand.Agio Difference in the value between currencies.

Also used to describe percentage charges for conversion from paper money into cash, or from a weak into a strong currency.Aggressor A trader dealing on an existing price in the market.Appreciation A currency is said to 'appreciate' when it strengthens in price in response to market demand. Describes a currency strengthening in response to market demand rather than by official action.Arbitrage Profiting from differences in the price of a single currency pair that is traded on more than one market.

Arbitrage Channel The range of prices within which there will be no possibility to arbitrage between the cash and futures market.Around Used in quoting forward "premium/discount". "Five-five around" would mean five points on either side of the present spot value.Ask Price Sometimes called the Offer Price, this is the market price for traders to buy currencies. Ask Prices are shown on the right side of a quote - e.g. EUR/USD 1.1965 / 68 - means that one euro can be bought for 1.1968 US dollars.Asset An item having commercial or exchange value.

Asset Location Dividing instrument funds among markets to achieve diversification or maximum return.At Best An instruction given to a dealer to buy or sell at the best rate that is currently available in the market.At or Better An order to deal at a specific rate or better.

Authorized Dealer A financial institution or bank authorized to deal in foreign exchange.Average Rate Option A contract where the exercise price is based on the difference between the strike price and the average spot rate over the contract period.

Sometimes called an "Asian option".Back Office The office location, or department, where the processing of financial transactions takes place.Balance of Trade The value of a country's exports minus its imports.Bank Notes Paper issued by the central bank, redeemable as money and considered to be full legal tender.

Bank Rate The rate at which a central bank is prepared to lend money to its domestic banking system.Bar Chart A type of chart used in Technical Analysis.

Each time division on the chart is displayed as a vertical bar which show the following information - the top of the bar is the high price, the bottom of the bar is the low price, the horizontal line on the left of the bar shows the opening price and the horizontal line on the right of bar shows the closing price.Base Currency In terms of foreign exchange trading, currencies are quoted in terms of a currency pair.

The first currency in the pair is the base currency. The base currency is the currency against which exchange rates are generally quoted in a given country. Examples: USD/JPY, the US Dollar is the base currency; EUR/USD, the EURO is the base currency. Bear Market An extended period of general price decline in an individual security, an asset, or a market.Bid Price is the price a trader can sell currencies.

The Bid Price is shown on the left side of a quote - e.g. EUR/USD 1.1923 / 68 - means that one euro can be sold for 1.1923 US dollars.Bid/Ask Spread is the difference between the bid price and the ask price in any currency quotation. The spread represents the broker's fee, and varies from broker to broker.

Big Figure The first two or three digits of a foreign exchange price or rate Examples: USD/JPY rate of 108.05/10 the big figure is 108.
EUR/USD price of .8325/28 the big figure is .83Bretton Woods The site of the conference which in 1944 led to the establishment of the post war foreign exchange system that remained intact until the early 1970s.

The conference resulted in the formation of the IMF. The system fixed currencies in a fixed exchange rate system with 1% fluctuations of the currency to gold or the dollar.Broker An agent, who executes orders to buy and sell currencies and related instruments either for a commission or on a spread.

Brokers are agents working on commission and not principals or agents acting on their own account. In the foreign exchange market brokers tend to act as intermediaries between banks bringing buyers and sellers together for a commission paid by the initiator or by both parties.

There are four or five major global brokers operating through subsidiaries affiliates and partners in many countries.Bull Market A market which is on a consistent upward trend.Bundesbank Central Bank of Germany.Buy On Margin The process of buying a currency pair where a client pays cash for part of the overall value of the position.

The word margin refers to the portion the investor puts up rather than the portion that is borrowed.Buy Limit Order An order to execute a transaction at a specified price (the limit) or lower.Candlestick Chart A chart that displays the daily trading price range (open, high, low and close).
A form of Japanese charting that has become popular in the West.
A narrow line (shadow) shows the day's price range.
A wider body marks the area between the open and the close. If the close is above the open, the body is white (not filled); if the close is below the open, the body is black (filled).

Central Bank A bank, administered by a national government, which regulates the behavior of financial institutions within its borders and carries out monetary policy.
Chartist A person who attempts to predict prices by analyzing past price movements as recorded on a chart.
Closing a Position The process of selling or buying a foreign exchange position resulting in the liquidation (squaring up) of the position.
Commission The fee that a broker may charge clients for dealing on their behalf.
Cross Currency A currency pair that does not include US dollars - e.g. EUR/GBP.
Currency Money issued by a government.
Coins and paper money. It is a form of money used as a unit of exchange within a country.
Currency Pair Two currencies involved in a Forex transaction - e.g. EUR/USD.
Currency Risk The risk that shifts in foreign exchange rates may undermine the dollar or any other foreign currency value of overseas investments.

Day Trade A trade opened and closed on the same trading day.Day Trading Refers to a style or type of trading where trade positions are opened and closed during the same day.
Day Trader A trader who buys and sells on the basis of small short-term price movements.
Dealer An individual or firm that buys and sells assets from their portfolio, acting as a principal or counterpart to a transaction.
Depreciation A fall in the value of a currency due to market forces.
Desk Term referring to a group dealing with a specific currency or currencies.
Devalution The act by a government to reduce the external value of its currency.
Direct Quotation Quoting in fixed units of foreign currency against variable amounts of the domestic currency.
Discretionary Account An account in which the customer permits a trading institution to act on the customer's behalf in buying and selling currency pairs. The institution has discretion as to the choice of currency pairs, prices, and timing-subject to any limitations specified in the agreement.Economic Indicator A statistical report issued by governments or academic institutions indicating economic conditions within a country.

Euro (EUR) The single currency of the European Economic and Monetary Union (EMU) introduced in January 1999. This is the amalgamation of the following currencies, after Jan. 1, 2002 these currencies will be considered legacy currencies. Germany Deutsche Marks, Italy Lira, Austria Schillings,

France Franc, Belgium Francs, Netherlands (Dutch) Guilders, Finland Markka, Portugal Escudo, Greece Drachmas, Ireland Punt, Luxembourg Francs, Spanish Pesetas.European Central Bank (ECU) The Central Bank for the new European Monetary Union.Execution The Process of completing an order or deal.First In First Out (FIFO) refers to the order open orders are liquidated. The first orders to be liquidated are the first that were opened.Foreign Exchange (Forex, FX) Simultaneously buying one currency and selling another.

How To Choose a Forex Trading System That Works and Suits With You

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The first logical step in determining what type of trading system would best suit you is actually being aware and understand the widely known methods of analysis used in trading the currency market. Once you are aware of the tools that are available, you can generally tell what type of analysis suits you. For example some of the main technical analysis methods which are popular include:
Pivot points
Chart patterns
Fibonacci retracements
Candlestick patterns
And some fundamental factors which are widely used include analyzing:
Interest rates
Trade balances
Unemployment rates
Gross domestic product (GDP)
You may now actually be able to develop your own system by combining certain methods of analysis together, giving you a method which you are comfortable with. On the other hand you may decide that you would like to trade someone else’s system, either way, that brings us to the next step which is determining the profitability of a trading system.
Determining Profitability
Most people would think that back testing is the best way to determine a systems profitability. However back testing doesn’t always give you a true idea of how profitable a system is. The reason for this is because when you’re back testing your system on historical charts, you are only seeing the obvious setups which have occurred, and not always seeing the ones that are less obvious. These less obvious ones sometimes can produce losses, which is why back testing isn’t always the best method to implement.
A better method of determining profitability is by trading your system in real-time with a demo account. This would give you a true understanding of what your system is capable of. This would also allow you to familiarize yourself with your trading platform at the same time. When determining profitability you must look at it in terms of expectancy and opportunity.
Expectancy & Opportunity
These two factors together will be able to tell you what you could expect to make over a period of time. Expectancy is calculated with the following formula:
(Probability of winning × average win) – (Probability of losing × average loss)
This will give you a figure which is the average amount you can expect to make per trade. This shouldn’t be a negative amount, if it is you should look at some other method of trading since you cannot make money on a system that produces a negative expectancy. Obviously the higher this figure is the better. Now to the opportunity factor.
The opportunity factor is how often you are able to trade using your system. By multiplying your expectancy figure with your opportunity factor it will tell you how much you could expect to make over a period of time. The more opportunity you have to trade, the more money you should expect to make. This now brings us to the last component of a trading system, money management.
Money Management
Without proper money management you will end up as a statistic. In other words one of those 90%+ of traders who loose their money. Money management tells you how much of your account balance to risk per trade. The whole point of money management is to ensure your survival over the long term, and to preserve your capital.
The most common form of money management is the percent risk model which tells you not to risk more than x percent of your account balance on any one trade. A range between 1-3% is generally an accepted amount which has been a reliable percentage to use in order to make money in the long term.
Conclusion
By taking into consideration the above factors you will be able to determine if a trading system best suits you, and with some simple mathematical calculations you will be able to determine its profitability

Forex Resources

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Forex Resources
The live forex charts can be used to track ten currency pairs in real time and click on forex rates for a pop-up window of ten currency pairs with live rates for the EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD, EUR/JPY, EUR/GBP and EUR/CHF, including the daily highs and lows from 17:00 EST. For a selection of free ebooks, trial offers, calculators and tutorials, visit free downloads. For a current snapshot of the foreign exchange market, use the market monitor to display time zones for several key markets, as well as live forex rates, a sentiment indicator and an economic calendar in a detachable window. Use the online money management calculator to calculate the correct position size for your trade based on your risk profile. Browse the selection of forex books on offer in forex books which includes special sections on technical analysis and general trading. There is a great number of forex related resources to be found in the categorised forex directory to help you find a particular niche or service.

What Is Forex ?

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FOREX (FOReign EXchange market) is an international foreign exchange market, where money is sold and bought freely. In its present condition FOREX was launched in the 1970s, when free exchange rates were introduced, and only the participants of the market determine the price of one currency against the other proceeding from supply and demand.As far as the freedom from any external control and free competition are concerned,

FOREX is a perfect market. It is also the biggest liquid financial market. According to various assessments, money masses in the market constitute from 1 to 1.5 trillion US dollars a day. (It is impossible to determine an absolutely exact number because trading is not centralized on an exchange.) Transactions are conducted all over the world via telecommunications 24 hours a day from 00:00 GMT on Monday to 10:00 pm GMT on Friday. Practically in every time zone (that is, in Frankfurt-on-Main, London, New York, Tokyo, Hong Kong, etc.) there are dealers who will quote currencies.FOREX is a more objective market, because if some of its participants would like to change prices, for some manipulative purpose, they would have to operate with tens of billions dollars. That is why any influence by a single participants in the market is practically out of the question. The superior liquidity allows the traders to open and/or close positions within a few seconds. The time of keeping a position is arbitrary and has no limits: from several seconds to many years. It depends only on your trading strategies. Although the daily fluctuations of currencies are rather insignificant, you may use the credit lines, that are accessible even to currency speculators with small capitals ($ 1,000 - 5,000), where the profit may be impressive. (You can learn more about it in the section: The main principles of trading.)

The idea of marginal trading stems from the fact that in FOREX speculative interests can be satisfied without a real money supply. This decreases overhead expenses for transferring money and gives an opportunity to open positions with a small account in US dollars, buying and selling a lot of other currencies. That is, on can conduct transactions very quickly, getting a big profit, when the exchange rates go up or down. Many speculative transactions in the international financial markets are made on the principles of marginal trading.Margin trading is trading with a borrowed capital. Marginal trading in an exchange market uses lots. 1 lot equals approximately $100,000, but to open it it is necessary to have only from 0.5% to 4% of the sum.For example, you have analyzed the situation in the market and come to the conclusion that the pound will go up against the dollar. You open 1 lot for buying the pound (GBP) with the margin 1% (1:1000 leverage) at the price of 1.49889 and wait for the exchange rate to go up. Some time later your expectations become true. You close the position at 1.5050 and earn 61 pips (about $ 405). For the calculation of 1 pip click here.Everyday fluctuations of currencies constitute about 100 to 150 pips, giving FX traders an opportunity to make money on these changes.

In FOREX, it's not obligatory to buy some currency first in order to sell it later. It's possible to open positions for buying and selling any currency without actually having it. Usually Internet-brokers establish the minimum deposit such as $ 2000, for working in the FOREX market, and grant a leverage of 1:100. That is, opening the position at $100,000, a trader invests $1,000 and receives $99.000 as a credit. The major currencies traded in FOREX, are Euro (EUR), Japanese yen (JPY), British Pound (GBP), and Swiss Franc (CHF). All of them are traded against the US dollar (USD).

In order to assess the situation in the market a trader has to be able to use fundamental and/or technical analysis, as well as to make decisions in the constantly changing current of information about political and economic character. Most small and medium players in financial markets use technical analysis. Technical analysis presupposes that all the information about the market and its further fluctuations is contained in the price chain. Any factor, that has some influence on the price, be it economic, political or psychological, has already been considered by the market and included in the price. The initial data for a technical analysis are prices: the highest and the lowest prices, the price of opening and closing within a certain period of time, and the volume of transactions.A technical analysis is founded on three suppositions:Movement of the market considers everything;Movement of prices is purposeful;History repeats itself. That is, technical analysis is a statistical and mathematical analysis of previous quotes and a prognosis of coming prices.A number of technical indicators have been installed into the PRO-CHARTS trading system. Analyzing the indicators one can come to the conclusion about further movements of the quoted currencies. For a more detailed description of the indicators, analyzing price charts and volumes of trading, click here.Fundamental analysis is an analysis of current situations in the country of the currency, such as its economy, political events, and rumors.

The country's economy depends on the rate of inflation and unemployment, on the interest rate of its Central Bank, and on tax policy. Political stability also influences the exchange rate. Policy of the Central Bank has a special role, as concentrated interventions or refusal from them greatly influence the exchange rate.At the same time one should not consider fundamental analysis just as an analysis of the economic situation in the country itself.

A far bigger role in the FOREX market belongs to the expectations of the market participants and their assessment of these expectations. Various prognoses and bulletins, issued by the participants, have a strong influence on the expectations. Very often an effect of the so-called self-filfilling prophecy occurs when market players raise or lower the exchange rates according to the prognosis. But a deep and thorough fundamental analysis is available only for big banks with a staff of professional analysts and constant access to a wide field of information.In spite of these different approaches, both forms of analyses complement one another.

Traders who act on the basis of a fundamental analysis, have to consider some technical characteristics of the market (the main rates of support, such as resistance and resale), and supporters of the technical approach to the market must track the main news (interest rates, important political events).

About Forex

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To buy foreign goods or services, or to invest in other countries, companies and individuals may need to first buy the currency of the country with which they are doing business. Generally, exporters prefer to be paid in their country's currency or in U.S. dollars, which are accepted all over the world.
The foreign exchange market, or the "FX" market, is where the buying and selling of different currencies takes place. The price of one currency in terms of another is called an exchange rate.

The market itself is actually a worldwide network of traders, connected by telephone lines and computer screens there is no central headquarters. There are three main centers of trading, which handle the majority of all FX transactions United Kingdom, United States, and Japan .