Developing a Forex Trading Strategy

DEVELOPING A FOREX TRADING STRATEGY

After you've had a few weeks of experience in the forex market (possibly on a Demo Account) - you'll want to sit down and take a close look at how you are going to proceed with FX trading in the future. One of the things you might want to do is to develop a trading strategy which will encompass your objectives and trading personality.

Some people find that a particular strategy which they have used is exceedingly profitable - and that by simply following a number of predetermined rules, they are able to generate a profit.

If this is the case - there is no need to sit behind your computer all day and wait for your criteria to be met. There are actually Forex brokers out there which offer automated trading tools and forex system scripting programs which allow you to take the "human factor" out of trading (something which could be very useful).

Building Technical Trading Systems

Technical trading systems are most common with people who use technical analysis as their main strategy when trading. It is very rare to find a fundamental analyst who is using an automated trading system.

Essentially, a Forex system is a trading strategy which has been coded to run automatically, regardless of whether the trader who owns the system is sitting at their desk or not. In this respect, forexs system are run on a server - and are therefore able to monitor the markets 24 hours per day (i.e. they do not need to sleep like you do!).

It is very inconvenient if you have to change broker a few weeks in to Forex trading, because you realized that you got it wrong initially.

Hence - look out for Forex brokers which offer the following features. All of these features are useful when running automated Forex systems:

• Fast (instantaneous) execution
• No slippage or requotes
• Ability to run server-side Forex systems
• Direct market access (no broker intervention)

Assuming you find a Forex broker which meets these requirements, it is often a good idea to check that running an automated Forex script will be possible before actually signing up. This way you'll be sure that you're signing up with the right people.

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Forex Terminology

FOREX TERMINOLOGY

Forex markets, just like most of their other counterparts, have a number of terms considered "Forex lingo". If you've been reading something about forex and have absolutely no idea what something meant, take a look at this guide to see if we can possibly explain that term in a better and more understandable way.

Spread

The spread on a particular currency dair is the difference between the "bid" and "ask" prices. This represents the cost of trading. If for example the spread on the EUR/USD was 3.0 - it might mean that the quote would read: 1.3020 / 1.3023.

Essentially, you could buy the pair at 1.3020 and simultaneously sell it for 1.3023 - representing a 3 pips loss. This loss is the broker's profit - which is how they are able to avoid charging you a commission.

Pip

A pip is a single price unit in Forex. For example - if a currency pair was quoted at 1.2050 and then moved up to 1.2075 - it is said to have increased by 25 pips. Additionally, say the quote was 85.50 which went to 85.20 - the currency pair has decreased (depreciated, fallen, etc) by 30 pips.

Rollover (Financing Cost)

Because Forex trading involves leverage (which is essentially borrowed money) there is a financing cost for holding position (charged once per day). This financing cost is usually charged on positions which are open at a particular time (i.e. 5pm GMT).

Make sure you check with your broker to see what the rollover fee (or premium payable to you) is on any particular currency pair.

Margin

Margin is the amount of money required in your trading account to place a single trade. This is dependent on the amount of leverage you are able to trade with. Let's assume your broker offers you 100:1 leverage.

If you want to open a trade for $10,000 - you'll be required to have margin (that is, capital in your trading account) of $100 available. Whilst the trade is open, the margin will be frozen so you can't use it for another trade.

Margin Call

Because margin is the brokers way of "securing" your open trade - you need to maintain a certain level of margin for any open trades that you have. Whilst a small level of loss is usually permitted on an open trade, you'll soon find that your broker will require excess money to be in your trading account for any open trades.

A margin call occurs when the available cash in your trading account falls below a certain level which is predetermined by your broker. In this situation, your open position are often automatically closed by the broker for a loss (which is not what you want to have happen!).

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How to Choose the Right Forex Broker?

HOW TO CHOOSE THE RIGHT FOREX BROKER?

When you decide to take the plunge in to the Forex markets, there are a number of things you need to think about. How much money should you commit, which trading style is best suited to you, and of course - which broker should you choose?

There are many brokers available to trade Forex through - each with its own set of features, pros, and cons. Here is a list of the things you should weigh up before signing up to a particular broker.

1. Customer Service

Arguably the most important factor of all - customer service is a hugely important aspect of Forex trading. Why? Because in a Financial market - where trades are being executed at the push of a button - things can sometimes go wrong.

The last thing you want is for an unsupportive FX Broker  to simply shoulder you off. What you really need is a broker who works alongside you; a broker who is there for you whenever you have a question or query. Never underestimate the value of good customer support in any financial market.

These days, a few brokers also have personal account managers - almost like a dedicated bank manager to assist you whenever you need help.

2. Deposit Requirements

It's pretty obvious that if you have $200 to commit to the Forex markets, you're not going to want to sign up to a broker with a minimum account deposit of $1,000. Hence - it pays to do your home work before filling in the entire application from, only to find out that the broker is not the one you wanted to go with.

If you only have a small amount of money to invest, there are brokers around with initial deposit requirements as low as $100 - or even "no minimum" at all.

3. Trading Platforms

When it comes time to place a trade, you'll want the experience to be easy, streamlined, and hassle-free. This is where the brokers trading platfrom comes in to play.

There are generally two different types of trading platforms available - online trading and desktop trading. Some brokers offer only one of these types of platform; others offer both - so that you can choose.

The key here is to decide exactly what it is that you want out of a Forex trading platform - and then search for one which has all the features you need. Looking to start small? A simple FX Platfrom might be right for you. Already an experienced financial trader? A platform with features such as trailing stop losses, conditional orders, and market depth information is probably going to be what you're looking for.

4. Slippage and Execution Speed

When you see a rate quoted, you expect your order to be executed at exactly the rate displayed when you push the "buy" or "sell" button right? Of course you do. However, some brokers purposely build in a delay between execution and quotes - usually to buffer their own profit levels.

To prevent this, look for a broker which advertises a solid "slippage" policy. Assuming you find one - you'll be able to relax knowing that the rate you see is exactly the rate your trades will be executed at.

5. Spreads, Commissions and Costs

It's generally accepted in the Forex Trading world that there is no such thing as commissions in Forex trading. This is often true. However, brokers still need to make a profit, and this is where the spread comes in.

The spread is the difference between the bid and ask prices of a given currency quote. Let's say that the bid is at 1.4000 and the ask is at 1.4001. This represents a spread of 1 pip.

In the above example - the "actual" market spread might only be 0.2 pips, meaning thatthe broker is making 0.8 pips in profit for your trade. In this instance, the broker makes a profit. You'll usually find that pips vary of currency pairs, usually between 2 and 10 pips. Brokers usually advertise their pips in advance - so look for a broker with the lowest pips possible to minimize your trading costs.

6. Regulation and Security

The last thing you want when you sign up to a broker is for your capital to disappear because the broker went bankrupt. Therefore - it's always best to choose a reputable, regulated broker. You'll be able to find a regulated broker by looking at the small print at the bottom of their home page. If they are regulated, they are required to publicly display their regulatory authority, as well as their registration number.

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Forex Trading - What Exactly Is It?

FOREX TRADING - WHAT EXACTLY IS IT?

Forex trading has been available to retail inveristarfor the last decade, but has really increased in popularity over the last few years only. Essentially, Fx trading is the trading of currencies of different countries - for an eventual profit.

If you have ever travelled to a different country outside the UK - you will no doubt have had to exchange your home currency for another. This in effect is Forex Trading. However - trading $3,000 for holiday spending money doesn't really encompass retail FX trading - as we are about to show you.

Here, we are dealing with Forex trading on the 'Spot Forex' market - which is a special, interbank market with rates being quoted at far more attractive rates than those you would expect to find when you walked in to the bank.

So how can you make a profit from Forex? How do you get started with Forex trading? And what should you know about the FX market before you start investing your hard earned cash to try and earn a return?

24 Hour Market, Open 6 Days per Week

The first point of difference between normal equity and commodity markets and the FX markets are the opening hours. If you have traded equities before, you'll know that there are only a certain number of hours that you are able to trade particular markets - whether it be between 8am and 5pm, or perhaps even 12pm to 6pm.

With Forex markets, there are no opening hours and closing hours (except for the weekend obviously). Therefore, Forex can be traded in any time zone, at any time of the day, usually from Monday to Saturday (or Sunday to Friday - depending on where you are).

This is a big advantage over strict opening hours, and allows for a huge amount of flexibility when trading. People here in the UK commonly favour keeping their full time job, and then coming home to trade part time after work.

Small Capital Requirements - High Leverage

If you thought you needed $50,000 to get started in Forex, think again. One of the great things about the FX markets is that you are able to start trading with as little as $100 with some brokers.

We know what you're thinking - $100? How can I make any money by trading just $100? The answer is leverage.

Leverage is a function which is highly utilized in the FX markets. Because of the relative ease at which Forex trades can be opened and closed, brokers often capitalize on the ability of the market to utilize leverage. In this case, even having $100 in your account could mean that you could use up to 100 or 200 times this amount (by borrowing it temporarily off the broker) for each trade.

This means that for a $100 account size, you can effectively trade $10,000 worth of currency.

As evident, Forex trading offers an opportunity to probe the huge potential that the market makes available to earn vast amounts of money. Take a look around our site for more helpful FX trading info.

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Forex Hedge Funds and Absolute Return

Hedge funds pursue strategies that guarantee a large absolute return and deserve a close investigation of the actual performance and risk of those strategies. Before starting dfferent question will raise such as;

a)      What are Hedge Funds?

b)      What are objectives?

c)      How do they legally work?

d)      How many are classifed?

Hedge Funds:

 

Objective:

It offers play against the markets, using short selling, futures and other derivative products. However, funds are highly levaeraged; others are not. Some keep in hedging activities; others do not. Several focus on making macroeconomic gamble on commodities, curriencies, interest rates, and so on. Future funds belong to the world of hedge funds.

Legal requirement:

It has a limited partnership,  (in the US). These structue allow the fund manager to take short (sell) and long (buy) positions in any asset, to use all kind of derivatives, and to levarage the fundwithout boundaries.

Initially, Hedge funds based in United States, most of them had organized limited partnership under sec 3(c)(7) of the investment Company Act of 1940, thus   getting excempotion from registration with the U.S. SEC regulations. While hedge funds remain under light regulatin throughout the world, some countries are pushing for tightr regulation; Germany has been the most verbal promoter.

Fee Structure:

The manager is remunerated through a base manegement fee based on the value of assets under management plus incentive fee. Base fee depend upon the performance of the fund.

 

Example:   Hedge Fund Fee

 

Base mangement fee: 1%, Incentive fee: 20%

Gross return: 40%       ; Risk-free rate: 5%

 

Solution:

 

Fee:1%+20% x (40%-5%)

Net return:40%-8%=32%

 

Classification:

Hedge funds have become quite worldwide, as evidenvced by the collection of global investments. These clasifcation are somewhat aribirary, and differ broadly across sources.

1.      Long/ short funds:

These are traditional hedge fund which taking short and long bets in common stocks. They have diverged short and long exposure throughout the world and oftenly maintain net positive or negative market exposures.

2.      Market neutral funds

They are form of long/short funds that attempt to be hedged against a general market movement. They take bets on valuation differences of individual securitires within some market segment. A market-neutral long-short portfolio is constructed so that the total value of the position held long equals the total value of the positions old short (dollar neutrality) and so that the total sensitivity of the short positions (beta neutrality). The long position would be in stocks considered undervalued, and the short position would be instocks vorauled.

There has been a different types of arbitage make use of complex securities with option like clauses, such as convertibles mortgage obligations. Among the vqarious technique used by various tecniques used by the market neutral funds are the following:

•          Equity long/ short
•          Fixed income arbitrage
•          Pairs trading
•          Warrant arbitrage
•          Mortgage arbitarage
•          Convertible bond artibage
•          Closed fund arbitarge
•          Staistical arbitarage

The above label “arbitrage,” “neutral”, these funds are not riskless because hedges can never be perfect. Loss can be incurred if the model is used imperfect, and it can be high because hedge funds tend to be highly leveraged.

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How Much Can You Earn With Forex Trading?

As with almost any financial market, the possibility to earn large amounts of money is always present. The key question of course - instead of how much can I earn, is: "what are the chances of earning a high return from Forex"?

The answer to this is that given the right skills, patience, and market knowledge - the chances of a solid financial return are greatly increased in comparison to other markets. After all, the FX markets are a 1.2 trillion pound per day market.

The Power of Leverage in Forex

Leverage is the key driver of profit in Forex trading. Without it, the returns you make wouldn't really be worth your time and effort. Thus, it is worth explaining exactly how leverage works so that you have a good idea of what is going on.

Leverage is, in effect, a multiplier of your earnings. Essentially, it allows you to "lever up" the amount that you have in your account as capital - and use this to make larger proportional profits (and also potentially larger losses) whilst trading.

Let's look at an example of how this works:

Let's say that you want to trade the GBP/USD. You only have $200 in your account to use as capital however. If you were to go in to your bank with $200 and ask them to change the pounds in to USD (which is essentially what we are doing by trading the GBP/USD) - they would happily do so.

However, if the rate of the currency moved over a week or so, the gain or loss on your $200 would be so minimal that there would almost be no effect whatsoever. Hence - your actions might yield just a few pence in return - which is not an extraordinary profit at all.

Alternatively, if you use a Forex broker and utilize the power of leverage, you will see a much greater effect. At 100:1 leverage (which is standard in the FX market) - your $200 would turn in to $20,000. Hence, trading with $20,000 will obovilusy yield you a far greater return on your money than in the previous example.

24 Hour Earnings Opportunities

The great thing about the Forex markets is that they are truly international. There are no time zones/opening hours. There are no lunch breaks or holidays. Forex markets are open 6 days per week - 24 hours per day - regardless of what is happening in a particular country. Therefore, there is always the opportunity to gain from the market.

Another wonderful feature of forex is that there are no commissions. Brokers take a "spread" instead of a commission, thereby reducing your overall trading costs and making the entire industry more competitive.

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