Understanding Spot Forex Market (Part II)

By Ahmad Hassam

These big banks make an exclusive club where most trading activities take place. This club is known as the Interbank Market. The worlds big banks are the main players in the spot forex market.

Unlike other markets, the interbank market operates on the principle of highest credit standing in dealing with the counterparty in any forex transaction. For this reason, big banks prefer to deal with big banks only. As a result smaller fish are shut down the line from the interbank market. Down the hierarchy in the spot forex market are the smaller banks, big multinational companies, hedge funds and other institutional investors or speculators and the retail forex brokers. The wealthier you are and the more money you have or are able to get credit for, the more chances you have of accessing this big boys club.

The independent retail traders lie at the bottom of the market structure. These big players conduct currency transactions in the interbank market if they have large capital and have credit standing with the large banks.

So there is no central exchange in the spot forex market to set the prices. Then who sets the currency prices? The retail forex trades trade through their forex brokers. They generally trade in much smaller lot sizes. Central banks are also occasionally involved in currency transactions. Unregulated nature of the spot forex market as well as poor governmental oversight lets the forex dealers to behave the way they want. Because of the tight knit nature of the forex market and its lack of regulation, the spot forex market is an unfair market for the nonprofessional to operate in.

Market makers make the bid and ask prices based on the currency movements that they anticipate will take place. Without a central exchange, the currency prices are set by the market makers.

Largest banks are the major market makers and they handle billions of dollars worth of forex transactions on behalf of their clients like the other institutions and companies and also for themselves. Many banks have professional traders solely dedicated to trading forex for speculation.

This big money laden network is knows as the interbank market. Interbank market is where large banks deal with one another. The resulting massive flow of money handled by these big banks is what primarily drives the currency markets.

Most of the trading activity takes place in the interbank market. The transactions carried out by these big banks like the Citigroup, Barclays, UBS, Deutsche Bank etc amounts to the greatest bulk of the total daily forex volume.

How do the big banks deal with one another in the interbank market? The banks deal directly with one another through the electronic brokering platforms like the Electronic Brokering Services (EBS) or Reuters Dealing 3000 Matching. These brokering services get the best available rates for the various currency pairs. Products from EBS, Currenex, FXAll etc enable banks to reach a larger client base while still maintaining control over their risk. The reality is that a small group of banks control the forex market.

These brokering systems match buying and selling requests from the bank dealers. Between these two competitors they connect at least 1000 banks together. The banks establish specific credit lines with one another in order to deal with one another in the forex market as there is no exchange to serve as each banks counterparty.

Smaller banks that also trade forex also get access to these brokering platforms. Next large companies come. As the main market makers, these big banks constantly quote bid and offer prices to one another thereby making the market. - 31876

About the Author:

Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Try These 1500 Pips A Day Forex Signals From Heaven. Develop Your Own Forex Trading System!

Learn To Trade The FX Market

By Marc Carson

Here's a secret that may possibly amaze you: There is not to much to study to learn forex trading. Better: Studying to trade FX like a pro can be done in your spare schedule...

Before Studying to trade FX, you must spend some time to familiarize yourself with what the forex market is. The forex market is 36 of the worlds currencies being traded against each other. In the region of 3 trillion US dollars is traded each day. Moreover this enormous international market is also the most accessible, because it's open 24/7.

One of the most exciting feature of the forex market is that it's not restricted like some markets. In fact it is one of the easiest markets on the planet where you can trade anytime, anywhere. It's very possible to achieve remarkable financial profits.

One of the advantages of FX trading is that you don't need a significant amount of capital in order to trade FX. A small amount of capital can be an adequate amount if you use leverage, a method that can redouble your trade power and your return on investment (ROI).

Basically "leverage" means you have the capability to control a greater amount of capital using a small amount of real capital and borrowing the rest from your FX broker. The FX trading leverage can be very extreme, up to 400:1. This is a proven technique successfully implemented in their strategies by many traders.

One of the most compelling techniques for successful FX trading is to have your orders in place. And what are the most important orders? It's simple: The stop loss order and the limit order. This very straightforward technique will protect you from sizeable losses and will allow you to live through bad trading trends and become successful.

The best way to make sure you are learning to trade FX like a Professional is to undoubtedly understand the nuts and bolts of buying and selling the currency pairs. Again, this is a uncomplicated yet often overlooked strategy: You cannot buy just for the sake of trading - you have to trade only with the expectation that the currency you desire to trade is going to go up in terms of profit to you. - 31876

About the Author:

Want to find out more about forex free trading, then visit Marc Carson's site on how to trade forex free trading now.

Forex And Other Financial Markets (Part I)

By Ahmad Hassam

The New York time between 3:00 PM EST to 7:00 PM EST is best suited for scalping with the counter trend strategy. Off hours between 3:00 PM and 7:00 PM EST is when all the world banks are closed. The U.S. banks are closing their doors and the Asian banks have not yet opened. This is a great time to scalp the market using a counter-trend strategy, because no larger banks are moving money (i.e. the markets) at that time. Just as with the London close, there is no set way in which the New York afternoon market plays out. On more active days where prices have moved significantly, the lower liquidity can cause additional outsized price movements. So traders just need to be aware that lower liquidity conditions tend to prevail and adapt accordingly.

Today we live in a global economy. Internet is just one example of it. You are browsing online searching for handbags. You like one but it is priced in Euros. You take out your credit card and make the payment without bothering about the foreign exchange transaction that you have made. Your credit card company is supposed to take care of everything. Todays global economy has become as simple as that. Why do investors need to exchange their domestic currencies for foreign currencies? Many want to invest in foreign assets. For that they need to convert their domestic currency into foreign currency. Companies involved in import and export business need foreign exchange to order new consignments or make payments. Multinationals need foreign exchange to repatriate profits. Big banks need foreign exchange and the list goes on. The forex market does no exist in a vacuum. You may have heard of other markets that exist like the gold, stocks, bonds, oil, futures and commodities.

Forex is only one market. It may be the largest and the most liquid global financial market. It is an over the counter market. There are many other financial markets that may not be as global as forex but nonetheless they perform important functions. Thinks about crude oil futures market at NYMEX! Without the supply of oil, the global economy will come to a screeching halt. Are crude oil prices and currency prices interlinked? Is there any relationship or correlation between these different financial markets and the forex market? There is a fair amount of noise and misinformation about the supposed relationship among these markets and the individual currency pairs. You can always find some correlation between two markets over time.

All these individual financial markets function according to their own internal dynamics based on data, news, positioning and sentiment. However, always keep this in kind that all the various financial markets are markets in their own right.

Each financial contract has its own characteristics, functions and markets where they trade. You should view each market in its own right perspective and trade accordingly. These markets will occasionally overlap and display varying degrees of correlation due to various underlying economic factors. Remember the sub prime mortgage markets. Crisis started in the US housing market when the bubble burst and real estate prices came down. It triggered the sub prime mortgage market crisis in 2006. From there it spread to the investment banks that have invested heavily sub prime mortgage securities. Many investment banks went bankrupt. The famous being Goldman Sachs! This made the US stock market crash. The contagion spread to Europe. In the end it developed into a global financial crisis. At times it is just a chain reaction.

Lets discuss some major financial markets and see what conclusions we can draw for currency trading. Its always important to be aware of whats going on in the other financial markets.

Gold: Gold is commonly viewed as a store of value in times of economic and political instability and uncertainty. Gold is also considered to be an alternative to the US Dollar and a hedge against inflation.

Gold prices have been rising for the last two years. There is an uptrend in the gold prices. Many investors are flying towards safety and investing into gold as a hedge against deflation and the present financial crisis. A weaker US Dollar is generally accompanied by higher gold prices and a stronger US Dollar is accompanied by lower gold prices. Over the long term, the relationship between Gold and US Dollar is mostly inverse or negative.

In the short term, the relationship between gold prices and US Dollar may not be as solid as it has been historically in the long term. This makes short term relationship between the gold prices and US Dollar generally tenuous. However, in the short term, each market has its own dynamics and liquidity. Overall, the gold market is much smaller than the forex market. There is only a limited and finite quantity of gold. No major gold mine has been discovered in the past many decades. Only the discovery of a major gold mine can bring the prices of gold right now.

Extreme movements in the gold prices tend to attract currency traders attention and usually influence the US Dollar in a mostly inverse fashion. At the same time, gold traders tend to keep an eye on whats happening to the US Dollar.

Oil: The global economy runs on oil. In 2008, crude oil prices skyrocketed from $60-70 to almost $150. It was being predicted at that time that oil prices will reach $200. It made the whole world jittery. Oil prices rise is a cause of inflation in almost every economy in the world. Then all of the sudden the bubble burst in a few months. Were the hedge funds involved in the sudden increase in the oil prices and than their collapse? A lot of confusion is usually spread on the relationship between oil and US Dollar and other currencies like CAD and JPY. Correlation studies show no appreciable relationship to that effect in the short run which is where most of the currency trading is focused. The idea behind these theories is that if the country is an importer of oil, its currency will be hurt by the higher oil prices and helped by lower oil prices. - 31876

About the Author:

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Try These 1500 Pips A Day Forex Signals From Heaven. Develop Your Own Forex Trading System!

Play With The House's Money With Covered Calls

By Maclin Vestor

Great Gamblers actually have a lot in common with great investors. They know excellent money management is the key to success. Their view is that as long as their money is on the table, it belongs to the game. Their Goal is often to get their own money off the table quickly, so they can play with the house's money. In the investment world, a Covered call trading strategy is a good way to play with the house's money. However, there are many different viewpoints. One is that you just find a good stock, and then if it trades options to just sell calls against it until the stock pays for itself. However this is a very limited viewpoint that doesn't explain what a "good stock" is.

If you are typically a growth and momentum investor, you are generally relying on accelerating earnings and sales growth and price momentum and buying momentum to take over as the stock is bid higher. If you identify a good buy point this will NOT make a good covered call strategy.

The reason is, the premium on the option is generally based on recent volatility, and stocks that set up for a buy point typically consolidate as buyers take profit, sellers try to battle this stock back and buyers and sellers reach a stand still, then buyers gain momentum, and soon right near the buy point the buyers begin to take control. Sometimes the sellers will give-up, and cover their shorts, and the buyers will come in full force. This means that right before the buy point the stock's premium is fairly low, and it's not until after the stock breaks out that the price of the premium will be reflected based upon this volatility. In addition, this strategy is generally based on price appreciation. If you sell options on these stocks, you will limit your gain, and you will most likely not increase your potential very much. Generally the best strategy would be to sell out of the money options at your price target. However, generally this will net you a very small amount unless you are buying a lot of shares, and your fees per trade and per contract are very low. Even then, this is just adding a very small premium onto your shares, and usually isnt worth it as much. Instead, you may be better off learning to BUY options if this is your strategy.

On the other hand, If someone is not a momentum trader, and is going to buy stock s perhaps that just received upwards earning guidance, or if they have a strategy where they expect mild price appreciation, or if theyre just index investors, then perhaps a covered call strategy would work well. If you expect a mild price appreciation, you can sell out of the money options, and still gain from price appreciation up to the strike price, while also collecting a premium. Say you Identify a stock that is starting an upward or sideways channel, You are following a trend, you would want to identify the peak of that trend at expiration, and sell a call option near that strike price. This will allow you to adjust price targets, receive the capital appreciation gains, and also collect a premium.

Now generally covered call strategies are better for value investors, or even contrarian investors. You want a stock that you can own for a very long time, but is one that you dont anticipate any short term price appreciation. You can just collect premiums by selling at the money call options, or if you expect the stock to actually decline slightly at the moment, you can sell in the money options, hoping that the stock declines out of the money, and that you dont have to be assigned on your call. This way you can own the call and write another call option month to month, collecting income.

There are other strategies such as just collecting the maximum premiums that are available. This may be a bit dangerous since these are stocks that people expect to make big moves, and those moves arent always up. The price of a call and put are directly correlated, so just because a covered call will yield you a high percentage yield, doesnt mean it is worth it. It is generally associated with higher risks, and most likely, if the stock does go up, it will be a big move, you will be limited in only being able to collect the premium, and you could potentially lose everything if the stock tanks to zero. However, if you do enough research, seeking some of the top yielding covered call options is a good strategy, that can sometimes have you yielding around 10% a month. In addition, you may decide to use this to find stocks that are ready to move, and just buy the stock outright, avoiding additional costs associated with the option (such as the time premium and extra brokerage fees), and still allowing you to profit from the gains. Or perhaps you want to identify the stock and just buy out of the money calls.

Ultimately its up to you to pick a strategy you understand, and learn as much as you can, taking whatever courses you need to and educating yourself so that you are prepared to make money in a way that works for you. - 31876

About the Author:

Maclin Vestor teaches about varioustrading systems and teaches you how to buy stock online.

Should You Buy Or Sell Options

By Maclin Vestor

To buy options, or sell them?

If you are a seller of options, you have a fixed amount of income that you can collect. You will always receive this portion of the option. Now, there is another part of the option that you may or may not receive. You always receive the theta or time value. Now the rest of the option is based on what the stock does. If a $50 strike priced option expires at $49.99, you collect that entire premium. Now if you were to sell a $40 strike priced option for a $50 stock, you might receive $10.50 per share. This .50 per share is what you will always get. You will also technically get the $10 per share, but you will have your shares "called" in, and that means that you have to sell them at $40, but you keep the $10.50 so if it expired at the same price, you would only gain the $.50. Now say you instead sold a $50 strike price. Now the value might be $1.00. The theta value is now $1, which is much greater. However, in the last example, if the stock dropped from $50, to $40, you would still end up with a slight gain. In this example, if the stock fell to $40, you would incur a $9 a share loss.

Now lets say you buy a stock with $50 a share, and sell an option at $60 a share. Now this option might cost you $0.50. Again the time value is 0.50. The difference is, now you have room for your stock to go up and less of your upside is capped. However, Now if your stock goes to $40, that's a $9.59 loss. These aren't real numbers based on a real stock and real options, but they illustrate the point. The point is that whether you buy or sell a stock option depends on your outlook, and what strike price you are looking at.

Buying and selling options have advantages.

As the buyer of a call option, you are saying, I believe this stock will go up. You would buy an at the money option because you want the full leverage per 100 shares and you want to get as close to a gain as 100 shares as you can. You would buy a deep in the money option because you want to pay less for theta, allow you to lose a smaller amount percentage wise, keep actual money tied up so you aren't tempted to put more leverage on or if you do you have better money management. You need less of a move to make money with a deep in the money option, and it's practically buying the stock for a discount if you buy deep enough in the money.

As the buyer of an out of the money option, you first must have enough money on the side, but you believe that if you can get a stock to move big, that you should bet big, you allow yourself to buy more shares and diversify while still keeping a lot of capital on the side (which you will have to do). If you can manage your larger swings, these have limited time value, and very high upside. Now a covered call is when you own the actual stock so things will be different.

A covered call you would sell a deep in the money call if you want to collect the theta, but want to insure against greater losses and are willing to accept less for this protection. You would sell an at the money option because you want to collect the maximum theta, don't believe the stock will decline much in value, but you don't believe the upside will be that great. You would sell out of the money options if you bet on the stock being slightly bullish. This is just a start which tells you what to consider when determining what strike price to buy an option at, it does not tell you what to consider when determining whether you want a long term, or short term option, but thats another story. - 31876

About the Author:

Maclin Vestor teaches about How To Buy Stock Online. You can even learn about virtual stock markets and advice on the Stock Market For Beginners at his blog.

Forex Markets

By AHmad Hassam

Right now forex trading is being promoted as the Recession Proof Business of the 21st Century. Many investors got their fingers burnt in the recent stock market crash. They are looking for new opportunities to rebuild their retirement savings. Is forex trading the solution? Forex trading has got some benefits. You can trade forex from anywhere in the world. You only need a computer, an internet connection and a few hundred dollars to begin trading. But before you trade forex understand the forex market. The foreign exchange market most often called the forex market is the most traded financial market in the world. Average daily currency trading volumes exceed $2 trillion per day. To give you an idea it is 10-15 times the size of the daily trading volume on all the world stock markets combined. That is a mind boggling number isnt it.

If you have been a tourist to another country, you would have definitely converted your domestic currency into travelers cheques. Now a day you dont need any conversion, your credit card company will automatically do the conversion for you. There many players in the forex markets. Big banks, multinational companies and other institutions require foreign exchange to carry out their day to day business. While commercial and financial transactions in the currency markets represent huge nominal sums, they still pale in comparison to amounts based on speculation. By far the vast majority of the currency trading volume is based on speculation.

Almost something like 90% of the volume in currency trading is speculative in nature. Traders buying and selling currencies for short term gains based on minute to minute, hour to hour and day to day fluctuations.

There are only a few currencies that take the bulk of foreign exchange transactions. Unlike stocks, forex trading involves trading two currencies simultaneously in pairs. The major currency pairs are EUR/USD, GBP/USD, JPY/USD and CHF/USD. Activity in the forex market frequently functions on regional currency blocs basis where bulk of the trading takes place between the USD bloc, JPY bloc and the EUR bloc representing the three largest economic regions. The bulk of the spot currency trading almost like 75% takes place in the so called major currencies which represent the worlds largest and most developed economies.

A highly liquid market like the forex can see large trading volumes transacted with relatively minor price changes. Liquidity represents how much faster or easier it is to buy or sell an asset. Forex markets are highly liquid. In other words, liquidity is the level of buying or selling volume available at any given moment for a particular asset or security.

Forex markets are the most liquid financial markets with a very high volume of transactions. At any given moment, dozens of global financial centers are open such as Sydney, Hong Kong, Tokyo, New York or London and currency trading desks in those financial centers are active in the market. The forex market is open and active 24 hours a day from the start of the business hours on Monday morning in the Asia-Pacific time zone straight through to the Friday close of business hours in New York.

There is no official starting time for trading day or week. But for all practical purposes the market kicks off when Wellington, New Zealand, the first financial center opens on Monday morning local time. It roughly corresponds to Sunday afternoon in US, Sunday evening in EU and early Monday morning in Asia.

Forex markets are unlike the stock markets or for that matter any other market. Unlike other financial markets, you can see around the clock action in the forex markets except on weekends. Forex markets are open 24/5. Sunday open represents the resumption of trading after the Friday close of trading in North America. This is the first chance for the forex market to react to news that may have happened during the weekend. Prices may have closed New York trading at one level. However, they may start trading at another level altogether at the Sunday open. - 31876

About the Author:

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Try These 1500 Pips A Day Forex Signals From Heaven. Develop Your Own Forex Trading System!

Examining Draw Downs When Selecting A Forex Signal Provider

By Tom K Kearns

So, you are in the market for a third party signal provider. The maximum draw down of the trader is your first step in the selection process. To define the maximum draw down - this is the gap between the ultimate amount of loss between the absolute top and the absolute bottom. Included in this number is also the open positions, but not included is the account margin necessary to keep you away from a margin call. How much is too much of a draw down you may well ask. Of course, like many answers to many questions, it is - That depends. Many, many issues need to be examined when coming up with an answer to this very important question. It goes without saying that a person with an account in the high thousands of dollars can stand more of a draw down than a person with a much smaller account. So, that being said, what are some other things to consider?

You have the draw down number. How was that number derived? If the draw down number seems intolerable to you but other factors make the trader a good bet, examine the number of positions the trader opens at a single time. Say he opens 5 trades on whatever pair at one time, right away you can cut their recorded draw down by 5. If a trader's number of open trades is limited, that alone severely reduces the entire draw down figure.

Sometimes you will find a trader who has a great track record aside from one major meltdown where a single trade ran out of control for days unchecked. This will produce an abnormal draw down in relation to the trader's real ability. He may be the kind of guy who can't recognize when a trade has no chance of coming back to even. He may also be a guy who lost his internet connection at an inopportune time once or twice. Either way you can keep this trader from doing this to your account by setting your own stops for him. Just make sure that you only stop out his trades that are well out of a realistic trading range.

Now that we're half way down the page lets revisit our original question. After doing anything and everything you can to limit draw down, I would say that anything over 35% of your entire account equity is just too much. Once you start to get into a situation where you are losing 50% or more it is very tough to ever recover without taking extreme risks. If you lose 50% you need to make 100% just to get back to even.

When considering draw down you should also look at how much history is available on that trader. If he only has 3 weeks of history than chances are that his largest draw down is yet to come. If he has 50 or 100 weeks of history he has probably already hit some rough patches and you can get a better idea of how rough the rough patches are for that particular trader.

You must constantly monitor your traders on all of your accounts, whether live or demo. Should any draw down run rampant, you will need to reevaluate and possibly delete the trader from your active portfolio. - 31876

About the Author:

To learn more about Automated Forex Trading visit Automated Forex Trading Systems.