ForexMetals

After more than 2 years of trading, I can tell you a story about forex system. Forex system is a way to trade to have higher chances of profit. Unfortunately not all forex system works. This is because its not the system that is not working. It is you.

What if I tell you that I have a system that consist of Moving Average only. The system can make profit and will minimize you loses or even give you a chance to break even during hard times.

You would be thirll to test it out only to find out that in the end you are losing money and you say the system is crap. The truth is if one person is making money using the exact same system yet you are losing money. So where do you think the fault is? Is it with the system or is it with yourself?

You can never gain profit in Forex until you figure out what is wrong with you. Most of the time when you are losing money you would blame it on the market, news, system etc but never on yourself. Until you figure out what you did wrong, any system no matter how good will fail in your hands. After you realize what you did wrong, then you can make money, seriously.

When you know what not to do, you can trade without any indicator. I myself is trading using only MA now. Took me a while to understand but once you see it, you no longer depending on any indicator. It is your judgement that counts.

I never know what I would learn the further I go in this world or Forex. Right now I am starting to understand why some traders trade without any indicator. The best indicator is in your brain. You just need to develope it. It will take some time. No hurry.

“China is a hostage. China is America’s bank and America basically says there’s nothing you can do to me. If I go down you don’t get paid.”

While the Obama administration has pledged the kind of fiscal responsibility that would secure its government obligations, its actions haven’t been so responsible. The Fed recently announced purchases of $1 Trillion in government debt, while the government is set to rack up Trillion-Dollar deficits over the next decade, even by the most conservative estimates.

In other words, China is in a quandary; stop lending to the US, and you might see the value of your existing reserves plummet. Continue lending, and you risk the same result. Tired of participating in this apparent no-win situation, China is finally taking action.

First, it will petition the G20 at its upcoming meeting for some level of protection on its $1 Trillion+ “investment” in the US. Meanwhile, Zhou XiaoChuan, governor of the Central Bank of China, has authored a paper calling for a decline in the role that individual currencies play in international trade and finance. According to Mr. Zhou, “Most nations concentrate their assets in those reserve currencies [Dollar, Euro, Yen], which exaggerates the size of flows and makes financial systems overall more volatile.” His point is well-taken, since of the $4.5 Trillion in global foreign exchange reserves that can be identified, perhaps 85% are accounted for by Euros and Dollars alone. When crises occur, everyone flocks to these currencies.

The Korean Won is among the biggest losers of the credit crisis, excluding Iceland of course. The currency has fallen 40% against the Dollar over the last year, even adjusting for a 10% rise in the last week. South Korean Finance Minister Yoon Jeung-hyun blames currency speculators, pledging that “The government will not sit idle when the foreign exchange rate is excessively tilted toward one direction or when there are

Perhaps understanding that it cannot possibly hope to defend its currency against such a broad tide of determined speculators, the Central Bank of Korea has all but given up on intervening in forex markets. “South Korea was the catalyst for the shift away from defensive intervention. After spending 22 percent of foreign reserves from August to November to stem won losses, Yoon…said Feb. 25 that its weakness may be an ‘engine for export growth.’ ”

There is some plausibility to this argument, since South Korean economic fundamentals (as bleak as they are) probably don’t support such a precipitous decline in the Won. In fact some South Korean exporters have benefited from the weak currency, with companies such as Hyundai and Samsung growing revenues and increasing market share. Still, the global recession has impelled foreign consumers to cut back on spending, with the end result that “A double-digit fall in exports in the last three months of 2008 seriously undermined industrial production, [and] a 16% plunge in facility investment was an equally important factor in the 5.6% contraction in Korea’s GDP from the previous quarter.”

Ultimately, the Won’s decline is being driven by an acute shortage of Dollars. A relatively large portion of Korean public and private debt is denominated in foreign currency. The collapse in liquidity spurred by the credit crisis and consequent decline in bank lending have made it very difficult for South Korean borrowers to procure the requisite Dollars to repay their loans, causing a large imbalance in the supply and demand for the Dollar within Korea. Even more alarming is that $150 Billion of such debt will come due in the immediate future. “The government stresses that foreign debt maturing within a year amounts to 77% of its foreign exchange holdings, meaning Korea can cover its obligations. However, no other Asian nation that investors care about has such a high ratio of short-term external debt (on a remaining maturity basis) to foreign exchange reserves.”

South Korea recently extended a swap agreement with the US, which enables it to exchange up to $30 Billion in Won for Dollars. Investors are evidently hopeful that this represents a step towards easing the Dollar shortage, as the news caused the Won to appreciate by the largest margin in months. Borrowing costs for Korean firms remain high, and the odds remain tilted against them. Unless the US financial system stabilizes and/or Korea is able to run a current account surplus (as a result of increased foreign investment), liquidity will remain a problem.

If you read analysts’ coverage of the Dollar decline (and consequent Euro rally), there is an even divide over whether it is sustainable. Economic data and technical indicators paint a nuanced picture, such that this kind of uncertainty is understandable.

Yesterday, both the European Central Bank (ECB) and the Bank of the UK cut their benchmark interest rates to record lows. This is especially incredible in the case of the UK, whose Central Bank over 300 years old! You can see from the following chart that both Central Banks have more than made up for their respectively slow starts in easing monetary policy by effecting several dramatic rate cuts, following the example of the Federal Reserve. The baseline UK rate now stands at .5%, only slightly higher than the Federal Funds rate, and slightly lower than the 1.5% ECB rate.

Since Chinese Premier Wen Jiabao (as the ForexBlog reported here) expressed doubts about China’s US loans and investments two weeks ago, the markets have been awash in speculation. In hindsight, it seems that the announcement was a political ploy, rather than a harbinger for a policy change. With a few qualifications, therefore, it seems to safe to conclude that China’s foreign exchange reserves will not undergo any serious changes in the near-term.

Motivated both by politics and pragmatism, “China’s top foreign-exchange official said the nation will keep buying Treasuries and endorsed the dollar’s global role. Treasuries form ‘an important element of China’s investment strategy for its foreign-currency reserves,’ she said at a briefing in Beijing today. ‘We will continue this practice.’ ” The economic fortunes of China and the US have become increasingly intertwined over the last decade, such that China has come to depend on exports to the US to drive economic growth, while the US simultaneously depends on China to fund its fiscal and current account deficits. As a result, “about two-thirds of China’s nearly $2 trillion in reserves is parked in dollar assets, primarily U.S. government and other bonds.”

“China is a hostage. China is America’s bank and America basically says there’s nothing you can do to me. If I go down you don’t get paid.”

While the Obama administration has pledged the kind of fiscal responsibility that would secure its government obligations, its actions haven’t been so responsible. The Fed recently announced purchases of $1 Trillion in government debt, while the government is set to rack up Trillion-Dollar deficits over the next decade, even by the most conservative estimates.

In other words, China is in a quandary; stop lending to the US, and you might see the value of your existing reserves plummet. Continue lending, and you risk the same result. Tired of participating in this apparent no-win situation, China is finally taking action.

First, it will petition the G20 at its upcoming meeting for some level of protection on its $1 Trillion+ “investment” in the US. Meanwhile, Zhou XiaoChuan, governor of the Central Bank of China, has authored a paper calling for a decline in the role that individual currencies play in international trade and finance. According to Mr. Zhou, “Most nations concentrate their assets in those reserve currencies [Dollar, Euro, Yen], which exaggerates the size of flows and makes financial systems overall more volatile.” His point is well-taken, since of the $4.5 Trillion in global foreign exchange reserves that can be identified, perhaps 85% are accounted for by Euros and Dollars alone. When crises occur, everyone flocks to these currencies.

Having fallen well below parity with the USD, the Canadian Loonie is now being attacked on two fronts. First, there is the deteriorating economic situation. Prices for virtually all commodities, namely oil, have declined significantly this year, dealing a harsh blow to the natural resource-dependent Canadian economy. In addition, its largest trade partner, the US, is suffering from economic woes of its own and is in no position to support the Canadian export sector. The result is surging unemployment and the most precipitous decline in factory production in 25 years. The most optimistic economists are forecasting GDP growth of 0.0% in 2009. The second prong of the attack against the Loonie is being waged unintentionally by the country's Prime Minister, who recently suspended Parliament in order to avoid a no-confidence vote in his leadership. In short, bulls for the Canadian Dollar (not to mention democracy) don't have much to be excited about these days. Bloomberg News reports:

"The global backdrop is bearish for the Canadian dollar and domestic numbers are merely piling on,"said a senior currency strategist. "No one is looking for reasons to buy the Canadian dollar right now. They want reasons to sell."

Since touching a fresh 24-year low in the beginning of March, the British Pound has recovered strongly, rising 5% against the USD in a matter of days. Analysts are at a loss to explain the sudden strength of the Pound, outside the confines of the safe-haven hypothesis: “The risk premium that sterling has taken on works both ways, and you can see sterling outperforming whenever risk appetite picks up.

The Swiss Franc is in the same boat as the US Dollar and Japanese Yen, benefiting from an increase in risk aversion and an unwinding of carry trade positions. In other words, the currency rising on the back of the sound monetary policy of the National Bank of Switzerland, with its low rate of inflation and proportionately low interest rate. Despite the fact that the Swiss economy is poised to contract in 2009, its economy is in better shape than its rivals, and its current account balance is still in surplus. As a result, the consensus among analysts is that investors will continue to flock to the Franc, as Switzerland is sill perceived as a relatively low-risk place to invest. Especially compared to the Euro, which has risen against the Dollar of late, the Swiss Franc remains undervalued. Bloomberg News reports:

Investors are drawn to the franc in times of international tension and economic upheaval because of the country’s history of neutrality and political stability

• Spread

  The spread is the difference between the price that you can sell currency at (Bid) and the price you can buy currency at (Ask). The spread on majors is usually 3 pips under normal market conditions. For more information on the trading conditions at Saxo Bank, go to the Account Summary on your Client Station and open the section entitled “Trading Conditions” found in the top right-hand corner of the Account Summary.

• Pips

  A pip is the smallest unit by which a cross price quote changes. When trading Forex you will often hear that there is a 3-pip spread when you trade the majors. This spread is revealed when you compare the bid and the ask price, for example EURUSD is quoted at a bid price of 0.9875 and an ask price of 0.9878. The difference is USD 0.0003, which is equal to 3 “pips”.
  
  On a contract or position, the value of a pip can easily be calculated. You know that the EURUSD is quoted with four decimals, so all you have to do is cancel out the four zeros on the amount you trade and you will have the value of one pip. Thus, on a EURUSD 100,000 contract, one pip is USD 10. On a USDJPY 100,000 contract, one pip is equal to 1000 yen, because USDJPY is quoted with only two decimals.

If you believe that the euro will strengthen against the dollar you'll want to buy euro now and sell it back later at a higher price.

• You buy euro We quote EURUSD at Bid 0.9875 and Ask 0.9878, which means that you can sell 1 euro for 0.9875 USD or buy 1 euro for 0.9878 USD.

In this example you buy euro 100,000, at the quote price of 0.9878 (ask price) per euro.
• The market moves in your favor Later the market turns in favour of the euro and the EURUSD is now quoted at Bid 0.9894 and Ask 0.9896.
• Now you sell your euro and get the profit You sell euro at a Bid price of 0.9894.
• The profit is calculated as follows Sell price-buy price x size of trade
(0.9894 minus 0.9878) multiplied by 100.000 = USD 140 Profit
(Note that the profit or loss is always expressed in the secondary currency)

If, on the other hand, you believe that the euro will weaken against the dollar, you'll want to sell EURUSD.

• You sell euro

We quote EURUSD at a Bid price of 0.9875 and Ask price of 0.9880 and you decide to sell euro 100,000 at a Bid price of 0.9875.

• The market moves in your favour

The euro weakens against the dollar and the EURUSD is now quoted at bid 0.9744 and ask 0.9749.

• Now you buy back your euro

You buy EUR at an ask price of 0.9749.

• Your profit/loss is then

Sell price-buy price x size of trade (0.9875 minus 0.9749) multiplied by 100.000 = USD 1260 Profit

Remember that trading EUR 100,000 as we have done in our examples, does not mean that you have to put up euro 100,000 yourself. On a 2% margin means that you have to deposit 2.0% of euro 100,000, which is euro 2,000 on margin as a guarantee for the future performance of your position.

• Appreciation

An increase in the value of a currency.

• Ask

The price requested by the trader. This usually indicates the lowest price a seller will accept.

• Base currency

The currency that the investor buys or sells (i.e. EUR in EURUSD).

• Bear

Someone who believes prices are heading down. A bear market is one in which there has been a sustained fall in prices and which does not look like it will recover quickly.

• Bid

The price offered by the trader. This usually indicates the highest price a purchaser will pay.

• Bid/Ask

The Bid rate is the rate at which you can sell. The Ask (or offer) rate is the rate at which you can buy.

• Bull

Someone who is optimistic about the market. A bull market is characterised by enthusiastic and sustained buying.

• cross

When trading with currencies, the investor buys one currency with another. These two currencies form the cross: for example, EURUSD.

• Cross rate

An exchange rate that is calculated from two other exchange rates.

• Depreciation/decline

A fall in the value of a currency.

• Exchange rate

What one currency is worth in terms of another, for example the Australian dollar might be worth 58 US cents or 70 yen. Currencies traded freely on foreign-exchange markets have a spot rate (applying to trades settled “spot”, i.e., two working days hence) and a forward rate. Countries can determine their exchange rates in a variety of ways. 1. A floating exchange rate system where the currency finds its own level in the market. 2. A crawling or flexible peg system which is a combination of an officially fixed rate and frequent small adjustments which in theory work against a build-up of speculation about a revaluation or devaluation. 3. A fixed exchange-rate system where the value of the currency is set by the government and/or the central bank.

• EURUSD

Means that you trade EUR against dollars. If you buy euro you pay in dollars and if you sell euro you receive dollars.

• FX, Forex, Foreign Exchange

All names for the transaction of one currency for another, e.g. you buy GBP 100.00 with USD 150.25 or sell USD 150.25 for GBP 100.00.

• Interbank

Short-term (often overnight) borrowing and lending between banks, as distinct from a banks business with their corporate clients or other financial institutions.

• Interest rate differential

The yield spread between two otherwise comparable debt instruments denominated in different currencies.

• Leverage (gearing)

The investor only funds part of the amount traded.

• Long

To buy.

• Long position

A position that increases its value if market prices increase.

• Liquid (-ity)

The capacity to be converted easily and with minimum loss into cash. A liquid market is one in which there is enough activity to satisfy both buyers and sellers. Ultra-short-dated treasury notes are an example of a liquid investment.

• Margin

The deposit required when entering into a position as well as to hold an open position. Your margin status can be monitored in the Account Summary.

• NYSE

The New York Stock Exchange.

• Open position

A position in a currency that has not yet been offset. For example, if you have bought 100,000 USDJPY, you have an open position in USDJPY until you offset it by selling 100,000 USDJPY, thus “closing” the position.

• Over the counter

When trading takes place directly between two parties, rather than on an exchange. Over the counter trades can be customised whereas exchange-traded products are often standardised.

• Pips

A pip is the smallest unit by which a Forex cross price quote changes. So if EURUSD bid is now quoted at 0.9767 and it moves up 2 pips, it will be quoted at 0.9769.

• Position

Traders talk of “taking a position” which simply means buying or selling currency cross. “Position” can also refer to a trader's cash/securities/currencies balance, whether he or she is short of cash, has money to lend, is overbought or oversold in a currency, etc.

• Risk

Trying to control outcomes to a known or predictable range of gains or losses. Risk management involves several steps which begin with a sound understanding of one's business and the exposures or risks that have to be covered to protect the value of that business. Then an assessment should be made of the types of variables that can affect the business and how best to protect against unwelcome outcomes. Consideration must also be given to the preferred risk profile – whether one is risk – averse or fairly aggressive in approach. This also involves deciding which instruments to use to manage risk and whether a natural hedge exists that can be used. Once undertaken, a risk-management strategy should be continually assessed for effectiveness and cost.

• Secondary currency (variable currency or counter currency)

The currency that the investor trades the base currency against (i.e. USD in EURUSD).

• Short position

A position that benefits from a decline in market prices.

• Short

To sell.

• Speculative

Buying and selling in the hope of making a profit, rather than doing so for some fundamental business-related need.

• Spot

A Spot rate is the current market price of an asset.

• Spot market

The part of the market calling for spot settlement of transactions. The precise meaning of “spot” will depend on local custom for a commodity, security or currency. In the UK, US and Australian foreign-exchange markets, “spot” means delivery two working days hence.

• Spread

The difference between the bid and the ask rate.