Foreign Exchange Spreads

The concept of spreads in the forex trading market is extremely complicated and difficult to understand. However, it is also a fact that it is an important and inevitable parameter that determines your ability to make remarkable profits.
What is Spread in Forex Trading?


Spread in Forex Trading

In the forex market, spreads are the difference between the offer prices and the bidding prices that are quoted in pips. For instance, the quote of GBP/USD is 1.8281/84 which means that the bidding price of GBP is 1.8281 US dollar while the offer price is 1.8284 US dollar. In this particular case, the spread is 3 pips.
Role of Spread in Forex Trading

Spread is an important parameter that helps brokers to make profit in forex trading. Wider spreads indicate a high offer price and a low bidding price. This simply means that you have to pay more when you buy and make fewer amounts when you sell out, this property makes the realization and estimation of profit difficult for forex traders.
Spreads & Trading Skills

The return which you get on your trading skills is greatly affected by the spreads. Being a trader, your ultimate goal is to make profit by buying low and selling high. Traders usually take a half-pip lower spread as granted, but in reality it can make an effective trading strategy into an ineffective strategy.

Spreads & Execution

You can achieve stability and success with spreads only if you work with appropriate execution. The quality of execution identifies whether you are going to get tight spreads or not. You must be aware of the denied trades, slippage, delayed execution and stop hunting which nullifies the effects of tight spread forex trade.

You must always take forex spread into consideration with the depth of the book. In most cases, forex brokers provide tight spreads only for capped trading volumes which are totally inappropriate for the traditional forex trading strategies.
What Forex Brokers Claim?

Tight Spreads

At present, almost all forex brokers claim that they are having the tightest spreads in the forex industry. However, spread terms and policies vary remarkably from one forex broker to another, besides the transactions that are not clear. Some brokers offer non-variable spreads that remain unchanged regardless of the quality of the liquidity of forex market. However, non-variable spreads are usually higher than that of the variable spreads.

Some other brokers provide variable spreads in accordance with the liquidity of market. For such brokers, spreads become tighter when the market liquidity is at good level, however, it widens when the market liquidity falls. There are various brokers who provide different spreads for different forex traders.

Forex traders who are having larger forex accounts or others, who carry out big trades, may get tighter spreads than other traders. Therefore, it is a wise idea to seek for a broker who is offering you the tightest variable spreads without any discrimination.

An Introduction to Forex Trading

One might think forex trading is a piece of cake until they enter in it seriously. Beginner forex traders must work hard to achieve real success in forex market as a beginner. Beginners must follow effective strategies; they must acquire effective money management skills and gain complete knowledge about forex trading.

Beginners Forex Lessons

If you are starting your forex trading beginners for very first time then you should take help from beginner forex lessons. This is because there is a huge traffic of forex beginner traders because of the incorporation of convenient and welcoming ways to join forex trading. Forex trading market is growing rapidly and its annual turnover is 1.9 million USD. Beginners should not take it easy. Beginner forex lessons will help forex traders to understand the buying and selling processes in forex market. In forex market, currency exchange trading occurs in pairs and at the same time buying and selling occurs.

Starters Forex

If you are starting forex trading with a starter forex then you must know about the rules of forex trading business. Particularly, you should know the basics of the buying and selling different currencies. According to recent surveys, government or companies that buy or sell their services and products daily in other countries constitute over 5% of the total profit generated in forex market. On the other hand, the remaining 95% profit is contributed by the speculation methods.

Dominant Currency Pairs

Beginner forex is a great helping tool for amateur traders. It provides them information about the perfect currency pairs that are dominating the forex trading market.

The actual dominating currency pairs in forex market are listed below.

• USD-CAD
• EUR-USD
• NZD New Zealand Dollar-USD
• USD-CHF Swiss Franc
• AUD Australian Dollar-USD
• USD-JPY
• GBP-USD

Forex Quote

Beginner forex will help you to read the forex quote. Basically, forex quote comprises of two numbers. These numbers are bid and offer. The best way to understand forex quote is to use the currency pair. For instance, consider the currency pair AUD/USD. The cost offered by the Australian dollar will act as the bidding price and it will be used by the traders as a price to buy the Australian dollar against the USD.

On the contrary, the price that is offered by the US dollar will act as the offer price and it will be used by the traders to sell the Australian dollar against the other i.e. USD. At 1 point, the base price value is taken in forex trading.

What is expected from Beginner Traders?

• Beginner forex traders must acquire right approach while working in forex trading. This is a beginner forex is all about; it helps beginners to understand the two approaches of forex trading. These two approaches include two different analysis methods. Beginner forex traders should either work with fundamental or technical analysis.
• Beginner trader should also make contact with a genuine forex pips to get effective and correct guidance.
• Beginner traders should also acquire correct risk and management skills.

Forex Pivot Point Calculators

In the Forex trading the technique of Pivot has been used for an extended time period. The trader used to apply this strategy to develop a thought process on the market path with the help of some easy computations

Forex Pivot Point

The Forex pivot point is actually the echelon where the path of market alters for a particular day. This is calculated with the application of easy arithmetic formulas. Besides this, the preceding day’s high, low and close points are also taken into consideration

These points can offer decisive support and resistance levels. Hence the pivot level, support and resistance levels computed with the help of these points jointly denoted by the terminology of pivot points.

Popularity of Pivot Points in Forex Market

The pivot points are well liked in the Forex trading market, because they offer the market prognosis.

You can apply the preceding day details to compute the prospective turning points on the existing day. Since large number of traders track these pivot points, hence the market generally respond at these levels.

Forex Pivot Calculator

Pivot point can be considered as an echelon where the traders response alters from bull to bear (bull and bear are the market terms to depict high and low activity). The computation of Forex pivot is not difficult at all. In fact, you will be able to locate a number of pivot calculators available on internet. With the help of these calculators, you can very quickly calculate the pivot point. The formula to compute pivot point is pretty easy

Resistance 3 = High + 2 ´ (Pivot – Low)
Resistance 2 = Pivot + (R1 – S1)
Resistance 1 = 2 ´ Pivot – Low
Pivot Point = (High + Close + Low )/3
Support 1 = 2 ´ Pivot – High
Support 2 = Pivot – (R1 – S1)
Support 3 = Low – 2 ´ (High – Pivot)

Hence, with the help of this Forex pivot calculator, if you have the following points

High Point: 1.2297
Low Point: 1.2213
Close Point: 1.2249

You will get the following figures with the above given formula

Resistance 3 = 1.2377
Resistance 2 = 1.2337
Resistance 1 = 1.2293
Pivot Point = 1.2253
Support 1 = 1.2209
Support 2 = 1.2169
Support 3 = 1.2125

What does it indicate?

Keeping in view the above, if you acquire the preceding day’s high, low and close levels, you will obtain 7 points, i.e. three support levels, three resistance levels and one actual pivot point. If the market starts at more than the pivot point, then it signifies an extensive trading activity for that day. If market starts less than the pivot point, then short trades can be predicted on that day

Pivot points are the frequently utilized initiators for trading systems. If you have Forex pivot calculator, then you will find a great deal of assistance in your trading activities.

The Forex market has no specific opening or closing times; hence the most practical solution to consider the opening of market at 00:00 GMT (Greenwich Mean Time) and closing at 23:59 GMT.

Icelandic Kronur: Lessons from a Failed Carry Trade

A little more than two years ago, the Icelandic Kronur was one of the hottest currencies in the world. Thanks to a benchmark interest rate of 18%, the Kronur had particular appeal for carry traders, who worried not about the inherent risks of such a strategy. Shortly thereafter, the Kronur (as well as Iceland’s economy and banking sector) came crashing down, and many traders were wiped out. Now that a couple of years have passed, it’s probably worth reflecting on this turn of events.



At its peak, nominal GDP was a relatively modest $20 Billion, sandwiched between Nepal and Turkmenistan in the global GDP rankings. Its population is only 300,000, its current account has been mired in persistent deficit, and its Central Bank boasts a mere $8 Billion in foreign exchange reserves. That being the case, why did investors flock to Iceland and not Turkmenistan?
The short answer to that question is interest rates. As I said, Iceland’s benchmark interest rate exceeded 18% at its peak. There are plenty of countries that offered similarly high interest rates, but Iceland was somehow perceived as being more stable. While it didn’t apply to join the European Union (its application is still pending) until last year, Iceland has always benefited from its association with Europe in general, and Scandinavia in particular. Thanks to per capita GDP of $38,000 per person, its reputation as a stable, advanced economy was not unwarranted.
On the other hand, Iceland has always struggled with high inflation, which means its interest rates were never very high in real terms. In addition, the deregulation of its financial sector opened the door for its banks to take huge risks with deposits. Basically, depositors – many from outside the country – parked their savings in Icelandic banks, which turned around and invested the money in high-yield / high-risk ventures. When the credit crisis struck, its banks were quickly wiped out, and the government chose not to follow in the footsteps of other governments and bail them out.

Moreover, it doesn’t look like Iceland will regain its luster any time soon. Its economy has shrunk by 40% over the last two years, and one prominent economist has estimated that it will take 7-10 years for it to fully recover. Unemployment and inflation remain high even though interest rates have been cut to 4.25% – a record low. The Kronur has lost 50% of its value against the Dollar and the Euro, the stock market has been decimated, and the recent decision to not remunerate Dutch and British insurance companies that lost money in Iceland’s crash will only serve to further spook foreign investors. In short, while the Kronur will probably recover some of its value over the next few years (aided by the possibility of joining the Euro), it probably won’t find itself on the radar screens of carry traders anytime soon.

In hindsight, Iceland’s economy was an accident waiting to happen, and the global financial crisis only magnified the problem. With Iceland – as well as a dozen other currencies and securities – investors believed they had found the proverbial free lunch. After all, where else could you earn an 18% by putting money in a savings account? Never mind that inflation was just as high; with the Kronur rising, carry traders felt assured that they would make a tidy profit on any funds deposited in Iceland.

The collapse of the Kronur, however, has shown us that the carry trade is anything but risk-free. In fact, 18% is more than what lenders to Greece and Ireland can expect to earn, which means that it is ultimately a very risky investment. In this case, the 18% that was being paid to depositors were generated by making very risky investments. As the negotiations with the insurance companies have revealed, depositors had nothing protecting them from bank failure, which is ultimately what happened.
Now that the carry trade is making a comeback, it’s probably a good time to take a step back and re-assess the risks of such a strategy. Even if Iceland proves to be an extreme case – since most countries won’t let their banks fail – traders must still acknowledge the possibility of massive currency depreciation. In other words, even if the deposits themselves are guaranteed, there is an ever-present risk that converting that deposit back into one’s home currency will result in losses. That’s especially true for a currency that is as illiquid as the Kronur (so illiquid that it took me a while to even find a reliable quote!), and is susceptible to liquidity crunches and short squeezes.

When you enter into a carry trade, understand that a spike in volatility could wipe out all of your profits in one session. The only way to minimize your risk is to hedge your exposure.

Forex Ambush

Forex Ambush 2.0 relies on technologies which was a lengthy time within the creating – developed by a group of 31 skilled traders, back-tested, retested – and continuously upgraded and evolved until the Forex Ambush 2.0 produced 100% accurate outcomes consistently to the satisfaction of Forex Ambush 2.0. As the Foreign Exchange currency market fluctuates, often quite a few times in each day, Forex Ambush 2.0 send out signals to its members, either by e-mail or by SMS, advising regardless of whether to sell or obtain based on the signal. These signals take place in real time, as the currency fluctuation happens and as Forex Ambush 2.0 actually trades.



The actual signals from Forex Ambush Software translate into “pips” and, since the signals are occurring at the precise minute that Forex Ambush 2.0 trades, you must be at your pc to access these signals and act upon them – should you opt for to do so. If your mobile phone is able to support the Forex software program, you can obtain the Forex Ambush 2.0 signals on your cell phone anywhere within the world and act on the signals received.

When trading in Foreign Exchange markets (Forex), the currency will be the “pip”. Forex Ambush 2.0 supports a trailing pip of 5, but some Forex software won’t support a trailing pip of below 15. Forex Ambush 2.0 have, nevertheless, thought of this and factored it in, with “expert advisor” software program which might be installed separately. This software program was developed for MetaTrader employing a 5 pip trailing quit.

Forex Ambush 2.0 function with a 5 pip trailing profit along with a 20 pip take profit. Stop loss just isn’t utilized with Forex Ambush 2.0. Fundamentally, without having going into too much confusing detail, if the signal falls between five pips and 20 pips, Forex Ambush 2.0 advises you to trade. If it falls outside of that, Forex Ambush 2.0 advises you not to trade. Basically, the automated trailing stop as well as the take profit will close the trade for you. Forex Ambush 2.0 advises you to by no means close a trade manually – leave your Forex software program running and your pc on and Forex Ambush 2.0 Software is developed to do the rest.

Is the Kiwi the Most Overvalued Currency?

During recent interviews with the Forex Blog, both Mike Kulej of FX Madness and the team at Action Forex imparted their beliefs that the New Zealand Dollar is currently the world’s most undervalued currency. Since I hadn’t written about the Kiwi in a few months, I decide to some research, ad came to a slightly different conclusion. In keeping with the spirit of debate, I’d like to defend the opposite premise- that the New Zealand Dollar is now one of the world’s most overvalued currencies.

There are two principal reasons for the Kiwi’s perennial appeal with forex traders. First, New Zealand frequently boasts some of the highest interest rates in the industrialized world. Before the credit bubble burst, New Zealand’s benchmark interest rate was a whopping 8.25%. Moreover, because of its association with Australia, investors are quick to ascribe to it (dubiously) a greater sense of security than they would to emerging market economies with similarly high interest rates. For example, while Brazilian rates are usually higher, the markets less apt to lump the Real together with the Australian Dollar, even though it’s arguably a closer fit than the Kiwi.

While it’s hard to predict New Zealand trade dynamics, we can say with relative certainty real interest rate levels will remain low for the foreseeable future. Two recent earthquakes have threatened an economy that is already in trouble (projected GDP growth in 2011 is only 1.3%). Over the next 12 months, the markets have priced in only 50 basis points in rate hikes. “Nothing here will change the RBNZ’s intentions to keep monetary policy at ‘emergency’ levels for the rest of this year,” summarized one analyst. Meanwhile, the CPI rate is currently at 4.5%, and is generally tracking commodities prices higher.

Thus, it is continually one of the most popular target currencies for carry trades. The extent of this phenomenon is such that turnover in the Kiwi is 100x greater than its GDP would imply. As I pointed out in an earlier post, this is the highest ratio of any currency in the world. In fact, “Dr Alan Bollard, Governor of the Reserve Bank [of New Zealand], once described it as an international standard of value that just happens to be used by a small country as its money.”

The credit crisis should have shattered the myth of the NZD as a stable currency, since the NZD lost 50% of its value in a matter of months. In addition, the benchmark rate has been lowered to 2.5%, a record low. When you take inflation into account, the rate is -2%, which as far as I know, is among the lowest in the world. When you factor in consecutive budget deficits for the first time in two decades and the (unrelated) explosion in public debt, it baffles me that yield seekers would still be interested in holding the Kiwi.



The other source of strength is the perception that the Kiwi is a commodity currency. To be fair, the production and export of agricultural products (dairy, meat, wool, etc.) makes a significant contribution to New Zealand’s economy. In addition, the prices for such agricultural staples have been rising faster than prices for imported goods, to the extent that the terms of trade have widened further in New Zealand’s favor. Unfortunately, this is ultimately irrelevant, since the aggregate balance of trade is currently in deficit, where it has stood for most of the last decade. If prices for energy and traditional commodities continues to rise, the current account deficit would at risk for eclipsing the record 6% set in 2008.

With all of this in mind, it’s tough to understand how the New Zealand Dollar could be closing in on a post-float (30 year) high against the Dollar, last set in 2008. The New Zealand Dollar has recovered most of its post-credit crisis losses, despite a lack of fundamental support. Its recovery has even outpaced the rise in the New Zealand stock market. In short, I’m inclined to agree with TD Securities: ” ‘If ever there was a dangerous time to enter a NZD carry trade this is it: the NZD is increasingly stretched, with the risk-reward now squarely being the NZD declining from here’…if the NZD breaches prior record highs, ‘it could be an attractive time to trim some net longs.’ ”

How to Choose The Right Forex Broker

If you are interested in forex trading, you need a right forex broker. It is necessary to have a forex account before you decide to start forex trading. The account should be opened to a reliable broker.  It is important to have a reliable source where you can deposit your cash.

It is always helpful if you seek the assistance of a professional and experienced forex broker. Brokers have a vast experience of the market and can advise you appropriately. There are several scam web sites which offer forex services, but may cause you financial damage. It is very unfortunate that there are several other platforms which claim to offer professional services but will give you any advice but professional.

Types of Forex Accounts

Deciding the amount you want to invest is necessary before you decide to open a forex account. There are two types of forex accounts available for beginners. Once you have consulted with a professional, you will be able to decide which account is suitable for you.

A mini forex trading account is the appropriate option for the people who are new in forex trading. Mini forex account can be started with a minimum deposit of $50. The maximum deposit range in a mini forex account is $250. A mini account not only provides you an opportunity to trade but also offers you a chance to learn the procedures of the forex marketing.

If you have more money and you intend to deposit more, you might want to open a Pro account. Pro account can be opened with a minimum amount of $1,000. Pro account offers better features than mini account.

Best Method of Deposit

The method to deposit your payments is as important as payment itself. When you will enter the forex market, you will learn about several methods to deposit your payment. There will be broker, in the market; who will offer deposits through checks, bank drafts, or bank notes. You certainly don’t want to do your deposits through these methods.

The best method to make your deposits is through credit cards. Credit card deposit is not only fast but safe and reliable too. You will miss the opportunity to do trading if your checks are held at the bank or your money hasn’t cleared.

Trading Through Computer

The software you use for your forex trading is an important element of the whole practice. The broker you are dealing with will offer you the software for doing the trade. There are two types of softwares which are frequently used in forex trading.

The online-based system enables you to log-on to the web site of the broker and do your trade. The broke will provide you the log-on information. This saves time and you don’t have to install anything on your computer. With the web based system you can log-on from any location in the world and you don’t need to get back to your computer and do your trade.

The other method used for trading is platform-based system. The broker will provide you software which you will have to download and install on your computer system. This software will inform you about the latest happenings of the forex market. You can communicate to the broker with the help of this software.

Learn Some Market Rules

If you own a mini account you should not pay more then 3-5 pips. Some brokers charge more as spread, to make their own profit. If you don’t want to pay more then the standard rate, look for a broker who offers guaranteed fixed spreads. You will get familiar with these and other market rules once you have started doing the trade. The most important thing to consider before you open a forex account is the safety mechanism the broker has to offer you to save you from greater lose. This means is he/she/it able to save you from loosing more money then you can afford. If you are able to find a broker who offers stop-loss function you should consider doing trade with him/her.

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Icelandic Kronur: Lessons from a Failed Carry Trade

A little more than two years ago, the Icelandic Kronur was one of the hottest currencies in the world. Thanks to a benchmark interest rate of 18%, the Kronur had particular appeal for carry traders, who worried not about the inherent risks of such a strategy. Shortly thereafter, the Kronur (as well as Iceland’s economy and banking sector) came crashing down, and many traders were wiped out. Now that a couple of years have passed, it’s probably worth reflecting on this turn of events.


At its peak, nominal GDP was a relatively modest $20 Billion, sandwiched between Nepal and Turkmenistan in the global GDP rankings. Its population is only 300,000, its current account has been mired in persistent deficit, and its Central Bank boasts a mere $8 Billion in foreign exchange reserves. That being the case, why did investors flock to Iceland and not Turkmenistan?
The short answer to that question is interest rates. As I said, Iceland’s benchmark interest rate exceeded 18% at its peak. There are plenty of countries that offered similarly high interest rates, but Iceland was somehow perceived as being more stable. While it didn’t join the European Union until last year, Iceland has always benefited from its association with Europe in general, and Scandinavia in particular. Thanks to per capita GDP of $38,000 per person, its reputation as a stable, advanced economy was not unwarranted.
On the other hand, Iceland has always struggled with high inflation, which means its interest rates were never very high in real terms. In addition, the deregulation of its financial sector opened the door for its banks to take huge risks with deposits. Basically, depositors – many from outside the country – parked their savings in Icelandic banks, which turned around and invested the money in high-yield / high-risk ventures. When the credit crisis struck, its banks were quickly wiped out, and the government chose not to follow in the footsteps of other governments and bail them out.

Moreover, it doesn’t look like Iceland will regain its luster any time soon. Its economy has shrunk by 40% over the last two years, and one prominent economist has estimated that it will take 7-10 years for it to fully recover. Unemployment and inflation remain high even though interest rates have been cut to 4.25% – a record low. The Kronur has lost 50% of its value against the Dollar and the Euro, the stock market has been decimated, and the recent decision to not remunerate Dutch and British insurance companies that lost money in Iceland’s crash will only serve to further spook foreign investors. In short, while the Kronur will probably recover some of its value over the next few years (aided by the possibility of joining the Euro), it probably won’t find itself on the radar screens of carry traders anytime soon.

In hindsight, Iceland’s economy was an accident waiting to happen, and the global financial crisis only magnified the problem. With Iceland – as well as a dozen other currencies and securities – investors believed they had found the proverbial free lunch. After all, where else could you earn an 18% by putting money in a savings account? Never mind that inflation was just as high; with the Kronur rising, carry traders felt assured that they would make a tidy profit on any funds deposited in Iceland.

The collapse of the Kronur, however, has shown us that the carry trade is anything but risk-free. In fact, 18% is more than what lenders to Greece and Ireland can expect to earn, which means that it is ultimately a very risky investment. In this case, the 18% that was being paid to depositors were generated by making very risky investments. As the negotiations with the insurance companies have revealed, depositors had nothing protecting them from bank failure, which is ultimately what happened.
Now that the carry trade is making a comeback, it’s probably a good time to take a step back and re-assess the risks of such a strategy. Even if Iceland proves to be an extreme case – since most countries won’t let their banks fail – traders must still acknowledge the possibility of massive currency depreciation. In other words, even if the deposits themselves are guaranteed, there is an ever-present risk that converting that deposit back into one’s home currency will result in losses. That’s especially true for a currency that is as illiquid as the Kronur (so illiquid that it took me a while to even find a reliable quote!), and is susceptible to liquidity crunches and short squeezes.

When you enter into a carry trade, understand that a spike in volatility could wipe out all of your profits in one session. The only way to minimize your risk is to hedge your exposure.

Forex Win to Loss Ratios

It has been observed that majority of the individual traders in the Forex market function with no trading technique; hence over the longer period of time, they incur high losses. A Forex trading system or tactic is gear to present you an upper hand in the Forex market.

Better to Work with a Systematic Approach

A Forex trading system verifies whether you are earning profit or not in a Forex market. If you make your trading in a methodical manner then your win to loss ratios will be better than the other traders or investors.

Good Trading System

An excellent trading system is that which has already been evaluated by the investors; hence it has an upper hand in the market and also deliver reasonable amount of earning on continuous basis. A gainful and money making Forex system may have win to loss ratio (the percentage of trades with winning to the trades with losing) of 80 percent.

On the other hand the profit/loss ratio on the volume of the standard win to the volume of standard loss may be 2-3 to 1. You can promptly discover that the mishmash of win/loss and profit/loss proportions (renowned as profitability ratio) enlightens you that the system is money making or not.

How Profitability of System can be Determined?

If you proliferate, the sum of profitability ratio must be more than one. Till the time you get this figure more than one, the system is gainful. Preferably the bigger figure is better

Forex System with High Win/Loss Ratio

You can work with more personal involvement with the system that exhibit high win/loss ratio. Besides that the big profit loss proportion presents worthwhile outcome of trading activities, even though you are not making ample sum to enhance the market liquidity.

Finally, it is the amalgamation of both the profit/loss and the win/loss proportions that are truly important. You must therefore, make an endeavor to look for the system in which mutually these factors are high.

What is PIP?

PIPs are actually the profits earned in the Forex system which can also be recognized as dollar amounts depending upon a float. The profits that are spoken in terms of pips are conceivably the most frequently utilized indicator to evaluate the accomplishment of a system. The alternating method is to estimate the dollar profits established by a theoretical float.

If you have two systems to evaluate, and both the systems have the identical float, in that case you can compare the win/loss ratio of these systems. It means to calculate the percentage of winner trades in comparison to that of losers.

Risk Multiple Principal

R multiple principal is one of the major information that you have to comprehend on Forex day trading. Here R stands for the Risk. It means the amount of risk you are willing to assume on any of the trade when you go in the market. In this regard, the R compound of a trade is the proportion of profit or loss as against the sum of cash put in a risk to earn revenue or incur loss.

For instance, if you put US$150 amount at risk in your preliminary buying, and you earn US$600. It signifies that you have made four times the sum of cash that you put on risk in this trade. Hence, the R multiple is 4 in this example. This data helps you in calculating the comparative volume of your profits to your losses.

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Forex Markets Focus on Central Banks

Over the last year and increasingly over the last few months, Central Banks around the world have taken center stage in currency markets. First, came the ignition of the currency war and the consequent volley of forex interventions. Then came the prospect of monetary tightening and the unwinding of quantitative easing measures. As if that wasn’t enough to keep them busy, Central Banks have been forced to assume more prominent roles in regulating financial markets and drafting economic policy. With so much to do, perhaps it’s no wonder that Jean-Claude Trichet, head of the ECB, will leave his post at the end of this year!

The currency wars may have subsided, but they haven’t ended. On both a paired and trade-weighted basis, the Dollar is declining rapidly. As a result, emerging market Central Banks are still doing everything they can to protect their respective currencies from rapid appreciation. As I’ve written in earlier posts, most Latin American and Asian Central Banks have already announced targeted strategies, and many intervene in forex markets on a daily basis. If the Japanese Yen continues to appreciate, you can bet the Bank of Japan (perhaps aided by the G7) will quickly jump back in.

You can expect the currency wars to continue until the quantitative easing programs instituted by the G4 are withdrawn. The Fed’s $600 Billion Treasury bond buying program officially ends in June, at which point its balance sheet will near $3 Trillion. The European Central Bank has injected an equally large hunk of cash into the Eurozone economy. Despite inflation that may soon exceed 5%, the Bank of England voted not to sell its cache of QE assets, while the Bank of Japan is actually ratcheting up its program as a result of the earthquake-induced catastrophe. Whether or not this manifests itself in higher inflation, investors have signaled their distaste by bidding up the price of gold to a new record high.

Then there are the prospective rate hikes, cascading across the world. Last week, the European Central Bank became the first in the G4 to hike rates (though market rates have hardly budged). The Reserve Bank of Australia, however, was the first of the majors to hike rates. Since October 2009, it has raised its benchmark by 175 basis points; its 4.75% cash rate is easily the highest in the industrialized world. The Bank of Canada started hiking in June 2010, but has kept its benchmark on hold at 1% since September. The Reserve Bank of New Zealand lowered its benchmark to a record low 2.5% as a result of serious earthquakes and economic weakness.
Going forward, expectations are for all Central Banks to continue (or begin) hiking rates at a gradual pace over the next couple years. If forecasts prove to be accurate, the US Federal Funds Rate will stand around .5% at the beginning of 2012, tied with Switzerland, and ahead of only Japan. The UK Rate will stand slightly above 1%, while the Eurozone and Canadian benchmarks will be closer to 2%. The RBA cash rate should exceed 5%. Rates in emerging markets will probably be even higher, as all four BRIC countries (Russia, Brazil, China, India) should be well into the tightening cycles.

On the one hand, there is reason to believe that the pace of rate hikes will be slower than expected. Economic growth remains tepid across the industrialized world, and Central Banks are wary about spooking their economies with premature rate hikes. Besides, Fed watchers may have learned a lesson as a result of a brief bout of over-excitement in 2010 that ultimately led to nothing. The Economist has reported that, “Markets habitually assign too much weight to the hawks, however. The real power at the Fed rests with its leaders…At present they are sanguine about inflation and worried about unemployment, which means a rate rise this year is unlikely.”  Even the ECB disappointed traders by (deliberately) adopting a soft stance in the press release that accompanied its recent rate hike.
On the other hand, a recent paper published by the Bank for International Settlements (BIS) showed that the markets’ track record of forecasting inflation is weak. As you can see from the chart below, they tend to reflect the general trend in inflation, but underestimate when the direction changes suddenly. (This is perhaps similar to the “fat-tail” problem, whereby extreme aberrations in asset price returns are poorly accounted for in financial models). If you apply this to the current economic environment, it suggests that inflation will probably be much higher-than-expected, and Central Banks will be forced to compensate by hiking rates a faster pace.
Finally, in their newfound roles as economic policymakers, Central Banks are increasingly engaged in macroprudential policy. The Economist reports that, “Central banks and regulators in emerging economies have already imposed a host of measures to cool property prices and capital inflows.” These measures are worth watching because their chief aim is to indirectly reduce inflation. If they are successful, it will limit the need for interest rate hikes and reduce upward pressure on their currencies.
In short, given the enhanced ability of Central Banks to dictate exchange rates, traders with long-term outlooks may need to adjust their strategies accordingly. That means not only knowing who is expected to raise interest rates – as well as when and by how much – but also monitoring the use of their other tools, such as balance sheet expansion, efforts to cool asset price bubbles, and deliberate manipulation of exchange rates.

Time to Short the Euro

Over the last three months, the Euro has appreciated 10% against the Dollar and by smaller margins against a handful of other currencies. Over the last twelve months, that figure is closer to 20%. That’s in spite of anemic Eurozone GDP growth, serious fiscal issues, the increasing likelihood of one or more sovereign debt defaults, and a current account deficit to boot. In short, I think it might be time to short the Euro.

There’s very little mystery as to why the Euro is appreciating. In two words: interest rates. Last week, the European Central Bank (ECB) became the first G4 Central Bank to hike its benchmark interest rate. Moreover, it’s expected to raise rates by an additional 100 basis points over the next twelve months. Given that the Bank of England, Bank of Japan, and US Federal Reserve Bank have yet to unwind their respective quantitative easing programs, it’s no wonder that futures markets have priced in a healthy interest rate advantage into the Euro well into 2012.

From where I’m sitting, the ECB rate hike was fundamentally illogical, and perhaps even counterproductive. Granted, the ECB was created to ensure price stability, and its mandate is less nuanced than its counterparts, which are charged also with facilitating employment and GDP growth. Even from this perspective, however, it looks like the ECB jumped the gun. Inflation in the EU is a moderate 2.7%, which is among the lowest in the world. Other Central Banks have taken note of rising inflation, but only the ECB feels compelled enough to preemptively address it. In addition, GDP growth is a paltry .3% across the EU, and is in fact negative in Greece, Ireland, and Portugal. As if the rate hike wasn’t bad enough, all three countries must contend with a hike in their already stratospheric borrowing costs, ironically making default more likely. Talk about not seeing the forest for the trees!

If the rumors are true, Portugal will soon become the third country to receive a bailout from the EU. (It should be noted that as recently as November, Portugal insisted that it was just fine and that a bailout wasn’t necessary). Its sovereign credit rating is now three notches above junk status. Today, Greece became the first Eurozone country to be awarded this dubious distinction, and Ireland is now only one downgrade away from suffering the same fate. Of course, Spain insists that it is just fine and denies the possibility of a bailout. At this point, though, does it have any credibility? Based on rising credit default swap rates (which serve as a gauge of the probability of default), I think that investors have become a little more cynical about taking governments at face value.

I have discussed the fiscal woes of the Eurozone in previous posts, and don’t want to dwell on them here. For now, I’d only like to add a footnote on the extent to which their problems are intertwined.  Banks in Germany and France (as well as the rest of the EU) have tremendous balance sheet exposure to PIGS’ sovereign debt, which means that any default would multiply across the Eurozone in the form of bank failures. (You can see from the chart below that the exposure of the US is small, relative to GDP).

Some analysts insist that all of this has already been priced into the Euro. Citigroup Said, “The market is treating many of these [sovereign credit rating] downgrades as rearguard actions which are already well discounted.” Personally, I don’t think that forex markets have made a sincere effort to grapple with the possibility of default, which appears increasingly inevitable. In fact, when S&P issued a warning on the US AAA rating, traders responded by handing the Euro its worst intraday decline in 2011.

Any way you cut it, I think the Euro is overvalued. Regardless of what the ECB is doing, market interest rates don’t really confer much benefit to those holding Euros. Even if the rate differential widens to 1-2% over the next year (which is certainly not guaranteed, as Jean-Claude Trichet himself has conceded!) this isn’t really enough to compensate for the possibility of default or other risk event. Regardless of whether you want to be long or short risk, there isn’t much to be gained at the moment from holding the Euro.

Trading Forex Like a Pro

Foreign exchange business, also known as forex trading is getting popularity world over as a business of choice. The reason for the popularity of forex trading is the decline in real state business and global economic recession. These days the most searched business on the internet is the forex trading.

The internet revolution and other advancements in technology have provided an equal opportunity to everyone to make a fortune by investing in the forex. Several online forex trading resources provide investment opportunities. You too can become a currency trading broker, if you are interested; and earn in millions. Before investing in the forex market, it is necessary that one should have basic knowledge about forex trading.

The Basics of Forex Trading

In simple words, forex is a place where people trade currencies. Different people in the market offer different currencies and decide their rates. There are several currencies around the world. Almost all the countries around the world own a different currency.

There are business centers like New York Stock Exchange, where you have to complete all your transactions within a given time. Forex trading is different from stock exchanges and other business centers, because forex trading is a 24 hours business. The forex market is open 24 hours a day and 6 days a week. The forex market is not centralized and extends to several times zones around the world. The traders do their business with the help of communication systems and other tools such as the internet.

What is the Importance of Currency Trade?

In Forex trading, currencies are traded on a rate decided by the market. There are several multinational companies which offer their services around the world. To pay their employees they use different currencies then the one used in their home countries. To maintain the balance, the currency exchange is necessary.

The prices of currencies do not remain constant, instead they keep on fluctuating. The traders guess the change in the rate of currencies and try to get benefit from the fluctuations of prices.

How to Become a Currency Trader

The currency trading broker must be good at estimating the fluctuation in the price of a currency. The share market is affected by the performance of a company. The company performance increases or decreases the prices of its shares. On the contrary, the currency price is affected by several factors. To understand the forex market, you can not use the same tools and experience which you use to observe the share market. Seeking the assistance of a currency broker will be helpful to understand the forex market.

You can also learn it by trying out the ‘demo account.’ A demo account is an account where you can learn forex trading using virtual money. Once you have understood the basics you will find it very exciting.

Internet Resources

There are several websites on the internet which teach about forex trading. You can learn and do trading over the internet with the help of these web sites. Several of these websites offer their services free of cost. Some of them are free but to learn advance forex trading you will have to pay. Before deciding to learn forex trading on the internet, it is always helpful if you do some research. The research will save you lots of money and time, which you could have wasted on learning what you already know.

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Where are Exchange Rates Headed? Look at the Data

At this point, it’s cliche to point to the so-called data deluge. While once there was too little data, now there is clearly too much, and that is no less true when it comes to data that is relevant to the forex markets. In theory, all data should be moving in the same direction. Or perhaps another way of expressing that idea would be to say that all data should tell a similar story, only from different angles. In reality, we know that’s not the case, and besides, one can usually engage in the reverse scientific method to find some data to support any hypothesis. If we are serious about finding the truth and not about proving a point, then, the question is: Which data should we be looking at?

I think the quarterly Bank of International Settlements (BIS) report is a good place to start. The report is not only a great-read for data junkies, but also represents a great snapshot of the current financial and economic state of the world. It’s all macro-level data, so there’s no question of topicality. (If anything, one could argue that the scope is too broad, since data is broken down no further than US, UK, EU, and Rest of World). The best part is that all of the raw data has already been organized and packaged, and the output is clearly presented and ready for interpretation.



Anyway, the stock market rally that began in 2010 has showed no signs of slowing down in 2011, with the US firmly leading the rest of the world. As is usually the case, this has corresponded with an outflow of cash from bond markets and a steady rise in long-term interest rates. However, emerging market equity and bond returns have started to flag, and as a result, the flow of capital into emerging markets has reversed after a record 2010. Without delving any deeper, the implication is clear: after 2+ years of weakness, developed world economies are now roaring back, while growth in emerging markets might be slowing.

Economic growth, combined with soaring commodities prices, is already producing inflation. (See my previous post for more on this subject). However, the markets expect that the ECB, BoE, and Fed (in that order) will all raise interest rates over the next two years. As a result, while investors expect inflation to rise over the next decade, they believe it will be contained by tighter monetary policy and moderate around 2-3% in industrialized countries.

The picture for emerging market economies is slightly less optimistic, however. If you accept the BIS’s use of China, India, and Brazil as representative of emerging markets as a whole, rising interest rates will help them avoid hyperinflation, but significant price inflation is still to be expected. I wonder then if the pickup in cross-border lending over this quarter won’t slow down due to expectations of diminishing real returns.

Any sudden optimism in the Dollar and Euro (and the Pound, to a lesser extent) must be tempered, however, by their serious fiscal problems and consequent volatility. As a result of the credit crisis (and pre-existing trends), government debt has risen substantially over the last three years, topping 100% of GDP for the US and 200% of GDP for Japan. Credit default swap rates (which represent the markets’ attempt to gauge the probability of default) have risen across the board. To date, gains have been highest for “fringe” countries, but regression analysis suggests that rates for pillar economies need to rise proportionately to account for the the bigger debt burden. According to a BIS analysis, US and UK banks are very exposed to Eurozone credit risk, which means a default by one of the PIGS would reverberate around the western world.

While I worry that such a basic analysis makes me appear shallow, I stand by this “20,000 foot” approach, with the caveat that it can only be used to make extremely general conclusions. (More specific conclusions naturally demand more specific data analysis!) They are that industrialized currencies (led by the Dollar and perhaps the Euro) might stage a comeback in 2011, due to stronger economic growth and higher interest rates. While GDP growth and interest rates will undoubtedly be higher in emerging markets, investors were extremely aggressive in pricing this in. An adjustment in theoretical models naturally demands a correction in actual emerging market exchange rates!

The Hunt For The Greatest Forex Signals

Forex Signals

Doing the job online or by using an international based company is not new to us. You may be based in the United States presently however might be earning British pounds or else you might be paying for somebody who works for you within the Philippines at a Philippine Peso rate. You should be getting accurate foreign exchange alerts every day so that you are assured that you’re getting paid the right price or else you are paying your workers the appropriate price.

The price of the different foreign currencies around the world changes often. They change in just hours. Due to this, it would always be better to get live foreign exchange signals.

Obtaining forex signals though isn’t as simple as getting updates about the various currencies on line. You must ensure that the signals you are getting are reliable enough for the business. You need to place in mind that in foreign exchange; even a few pennies can make plenty of difference specially when it’s already converted to another currency.

To help you obtain the best forex alerts for your business, there is certainly a lot of on websites that provide cost-free forex signals on a regular basis. But in choosing the web site which will update us on the various currencies, we have to make sure that they’re correct. Most free providers are quite delayed on their updates.

The ideal currency up-date providers aren’t necessarily the ones that are in the top of the search list or even those who give you the up-date for free. Instead, they are those who provide the most up-to-date foreign exchange rates. These kinds of providers are those which have a real expert who work towards their up-dates rather than just rely on the updates of other websites.

While it’s good to have free currency up-dates, it would be particularly a good idea to make sure whether the web site that you’re taking your updates from supply you with the proper figures or not. Acquiring an incorrect forex update, even once, could mean loss of earnings for your business. If you’re working with a business partner from a country which has a currency that has quite a big difference in your currency’s value, that could mean a huge amount of cash going through the drain just because you’ve not received the appropriate foreign exchange signal.

Easy Pips forex signal is a service provider of automatically delivered and traded forex alerts. Visit their site today and try their forex signals service at no charge. Simply click on the Free Trial link. Register for your free forexsignal service now.

If You Are Fascinated In This Enterprise, Listed Below Are A Few Aspects To Consider In Choosing Your Forex Trading Training Course.

You need one specific buying strategy, nevertheless we need some thing that sparks your entry into the currency exchange.

Get a functional product in which a person will pay attention to you when it comes to the advancement of the program. The particular purchase and sale made of those exchange currencies to leverage transfer in value to make money is just what we know as trading currency these days.

If you are interested in this prospect, allow me to share a few factors to consider in choosing your forex trading program.

If you are fresh to the forex trading world and youre interested to venture into this line of work, one of several essential rules that youve to take is to find out everything you can with regards to foreign exchange.

You can either do the research on your own or take a currency trading course that will lead you through the details of producing page profits in the currency market. Trading Currency online is for the majority of people a little bit more challenging then the actual gurus make you imagine.

Robotic Currency trading software program performs its miracles by using complex formula to research the tech signs of foreign currencies to find the currencies that are ready to make a move.

Any relative value of a currency exchange move up and down for diverse reason, part of which will is the substantial sector. Locate a program that is trained by any consultant. This is actually the failing men and women so frequently produce, and the reason why such information may well not always be a persons ally. Youll additionally wish to ensure that the computer software is straightforward to work with and possesses available consumer support.

Due to the fact the Forex market is open up round the clock a day (except on weekends), you should have to leave your computer working non-stop throughout the week to ensure that it can regularly appraise the marketplace and enter and exit trades for you. There exists several studies on basic investing approaches offered on the web, commence there. Come across each website you will be pleasant with, most of them are free and check out them in blend to make an educated selection to execute your trade.

Forex Becomes A Mass Movement

The market isn’t getting any more efficient is the first warning essential for all future forex traders The fashion among retail investors these days is to trade foreign exchange Before the trend catches on to you as well, note the fact that the FX market is unpredictable now, making it impossible to capitalize the same as an easy money generator.To confirm the same the test of an efficient market, volatility ratios, can be done. Thank you for reading about foreign exchange and foreign exchange.



The process involved is basic. If markets are to be efficient, past price movements shouldn’t predict future movements, but this is just one of the conditions. For this scenario the rise in volatility is proportionate to the square root of time, hence the volatility of fortnightly change is the same as the square root of two multiplied by the weekly volatility.



If we test the volatility of actual to random walk, we can see whether a price follows random walk or not. A higher random walk volatility than actual volatility translates into falls in one period leading to rises in the eventual period.



The ratio of actual to random walk volaitility for three main exchange rates can be seen in my chart. The pound may rise for a few weeks but would fall because of reversion is the suggestion here Further your knowledge on foreign exchange at currency conversion calculator.



Nevertheless, the ratios touch one, as close as 12 percent of it. One could easily lose fortunes bettinf on the inefficiency since it is so little. The diminishing profit making became staple of Forex trading in the 1990s since investors started wising up to the momentum effects.



One can see deviations over a short period of time from the random walk. Anticipating surprises better than the market can lead to a person making money even from a random walk. Our data findings show a roughly random rate move for foreign exchange over a 17 year period. The efficiency of a market would be brought down in extremely short periods.



For traders, knowing news like the US dollar turning absolutlely worthless in an years time would be priceless. It would have been possible to make money by purchasing the dollar at its lower point because it over reacted and then mean reverted.



But this is not an inefficient market. The profits made from purchasing dollar at its low point aren’t risk free ones but instead a reward for taking the crash risk. The predominant character in exchange rates over the years is the variation in crash risk.



It is obvious that the message is plain. It is but obvious that banks can do this because of their advantages over ordinary retail investors. Since banks have proprietary information about the FX orders placed by a client they can successfully predict the flow of the market. Trading costs are virtually zero for banks, this makes it profitable for them since their hoover is cheaper now. Trading in Foreign Exchange is safe only if one is aware of these edges.