Trading Forex: Basic Facts

Forex trading requires a different set of preparation and tools than from other markets...

To many experienced stocks and futures traders, foreign exchange (forex) market is a whole new world to them. It’s almost considered the wild, wild West to them since there is no central location where transactions take place in a single organization with strict compliance to a governmental body.

Here are some facts:

1.Forex is a single biggest market in the world, trading over $1.9 trillion day. This volume overshadows the daily volume of all US exchanges. Liquidity is the number one reason why speculators prefer to trade this market.
2.The market opens 24 hours with liquidity at almost all hours, especially in the biggest currencies. Getting out of a position, no matter how large, is normally not a problem.
3.The market is de-centralized, only market participants create and control these transactions. This makes a collection of data about the transaction difficult or incomplete.
4.Since it’s a 24-hour market, there is more than one session in a single day. The London, New York and Tokyo session make up the three most liquid and important sessions.
5.Forex is unique in that it takes two currencies to create a market. The pip (tick in futures or cent in stocks) is the minimum movement and calculated normally to 4 decimal places, while others are 2 decimal places, depending on which pair discussed.
6.The leverage set by forex brokers is higher than other markets, going from 50 up to 200 times the cash provided by the clients. With this high leverage, little starting capital is required. At the same time, it takes just as little to get margin call.
7.Gaps rarely occur. If they do it’s usually the beginning of the weekend break where the closing on late Friday and opening on late Sunday due to some political or economic events that take place while the market was closed.
8.There are correlations between pairs. Similar to stocks in the same sector or similar futures, combining a few pairs to create a strategy can be done.
9.Although technical analysis plays a major role, currencies are more in tuned with fundamental analysis than in stocks where earnings play a major influence. In forex, currencies are especially sensitive to macro-economic policies. These policies involve two countries that make up the pair.
10.Forex brokerage firms are not as well regulated as the futures, options and stocks brokers where there are no exams or certifications required to be brokers. Brokers mainly charge no commissions but make their revenues by taking the spreads.
11.Spreads differ from pair to pair. Despite being a liquid market, the spread can be a hindrance to trade profitably. These spreads are created by the brokers and not to due lack of liquidity. Even most liquid pairs have wide spread, according to each broker and account type. Institutional accounts have lower spreads in general.
12.No volume is revealed – due to the decentralized market, there is no centralized collection of total volume in real-time or even on daily basis.
13.No market depth – same as volume, market depth is only seen by each bank’s own order flow from their own clients. Other than that, they cannot see the market’s overall order flow.



Approaches to forex trading require:
1.Continuous 24 hour trading alertness. Depending of each strategy and style, but in general markets can move at any time. For US traders, many times market move during sleeping hours. Holding periods are longer than normal due to the nature of the markets.
2.Fundamental and economic analysis and knowledge is not entirely required but play a bigger role than stocks. They tie very closely in with economic reports, such as interest rate, non-farm payroll, inflation, gross domestic product, international trade, among others. Report release time directly affect the markets. A macro-economic view can be useful in evaluating the general market condition and direction. Technical analysis can help time the entries and exits.
3.A different style of trading. Forex market trends more than equities or futures. Swing trade holding periods are longer. Scalping can be done but mainly during news release periods.
4.Difference set of chart reading and technical analysis. Since there is no market depth and volume, using other types of charts and indicators are required. Some use tick charts to substitute the lack of volume. Volume-based indicators are useless while price-based indicators such as MACD and Stochastic do serve their purpose.
5.Important consideration for spreads (slippage). This will have the biggest impact on profitability. However, many new traders tend to ignore this and instead consider them an advantage since commissions are waived. But spreads can turn a profitable trading system into a losing one in the long run if they are not seriously considered. Backtesting results have proven spreads are a crutch to sustained success in forex.
6.Understanding of how pairs correlate and affect each other. There are many traders who specifically focus on a single pair while others trade a few pairs as well as hedge each other. But watching a few other pairs help keep a bigger picture of a specific currency.

Forex trading requires a different set of preparation and tools than from other markets. Take time to learn the nuances, pros and cons as well as personalities of each pair. In addition, learn what news affect prices, when reports are released (in two countries!) as well as other routines of the market movements.

Ringgit Climbs Further Against US Dollar In Late Trade

KUALA LUMPUR -- The ringgit climbed further against the US dollar in late session Wednesday on brisk commercial demand for the local currency, dealers said.

At 5.00pm, the local unit was traded at 3.4195/4210 versus the greenback, stronger than Tuesday's closing of 3.4210/4230.

"The ringgit restored its steady gains. Bank Negara Malaysia heavily supported the ringgit buying. We have seen strong intervention at the 3.4205 level today," said one of the dealers from a local brokerage.

He said the ringgit's gain was also supported by weaknesses of the greenback in most overseas markets following the weaker-than expected US housing data for March.

In late Tokyo trade today, the US dollar was quoted lower at 118.48 against the Japanese yen compared with 118.62 on Tuesday.

The dealers said that most forex players maintained a firm near-term outlook, expecting more upside for the ringgit on the back of a growing current account surplus and capital inflows.

In the late session today, the ringgit was mostly lower against other major currencies.

It fell against the Singapore dollar at 2.2611/2636 from Tuesday's 2.2569/2596 but strengthened against the yen at 2.8844/8867 from 2.8845/8871 previously.

Against the British pound, the ringgit slipped to 6.8540/8588 from 6.8324/8368 yesterday and it declined against the euro at 4.6649/6680 from 4.6406/6436 previously.

Banker: China should use forex to buy oil

China should find more ways to use its huge foreign exchange reserve by "reasonably" increasing the holdings of gold and buying strategic resources, including oil and metal, said a central bank vice governor Tuesday.


Xiang Junbo,vice governor of the People's Bank of China. [file]
However, Xiang Junbo said he was not speaking on behalf of the People's Bank of China and giving his own opinion in a speech he made at the Fudan University in Shanghai, according to the International Finance News.

At the end of the first quarter, China's foreign exchange reserve reached US$1.2 trillion, the world's largest, according to the central bank. It is estimated that more than 70 percent of the holdings are low-yield US treasuries.

The country is in the process of setting up a state forex investment company modeled on Singapore's government-owned investment arm Temasek to look for higher-yield opportunities worldwide.

This new firm is expected to receive anywhere from US$200 billion to US$400 billion from the central bank.

Xiang also suggested the Chinese government should establish a closed-end fund to raise capital from the domestic market before buying forex from the central bank for overseas investment.

Part of China's forex reserve should be invested in low-risk overseas bond market, he continued, adding that another portion of the reserve should flow into state-owned, policy and share-holding banks in an effort to facilitate their international expansion.

The vice governor noted an interest rate hike had a limited role in curbing excess liquidity that is currently plaguing China's economic situation.

Raising the bank's reserve requirement and issuing central bank bills could better absorb the capital, he added.

FOREX: Ringgit To Climb Further Against The Greenback

The ringgit is expected to climb further against the U.S. dollar next week amid steady commercial demand following the recent government moves aimed at improving the investment climate in the country, analysts said.

The local unit has strengthened to RM3.42 per U.S. dollar, its strongest in almost 10 years, on continued brisk demand by foreign funds in line with the rally in the local stock market.

Year-to-date, it has climbed more than two percent, making it the second-best performing currency after the Thai baht.

The gain was driven by various factors including Bank Negara Malaysia's (BNM) upbeat assessment of the economic outlook, further relaxation of the foreign exchange policy, the Prime Minister's endorsement of the ringgit's strength and speculation that BNM will allow the ringgit to be traded offshore this year.

"There were a lot of positive factors which had contributed to the ringgit's rise and we believe that the upward trend will continue," one analyst said.

The analyst said foreign funds are also expected to increase their ringgit position in view of the country's strong economic fundamentals.

The Malaysian Institute of Economic Research (MIER) had said this week that the ringgit will continue to strengthen and is likely to reach RM3.35 to the U.S. dollar if offshore trading on the local unit is allowed.

Meanwhile, CIMB Investment Bank Bhd has forecast that the ringgit will reach RM3.40 by year-end and RM3.30 by the end of 2008 as BNM tolerates its appreciation.

During the week, the local currency was traded higher against the greenback on the back of follow-through ringgit buying by foreign funds.

It started the week on a steady note, trading at RM3.44, and maintained its gains until Friday to close the week at RM3.42.

On a week-to-week basis, the ringgit was firmer against the greenback at 3.4200/4220 from 3.4410/4430.

The local unit was also mostly higher against other major currencies.

It advanced against the Singapore dollar at 2.2631/2661 from 2.2683/2704 and perked against the yen at 2.8817/8841 from 2.9065/9089.

However, against the British pound, the local unit depreciated to 6.8438/8488 from 6.8321/8371. Against the euro it went up to 4.6519/6549 from 4.6533/6570.


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