Jul 12 2009
The History of the Forex
Gold Standard System
The creation of the gold standard monetary system in 1875 marks one of the most important events in the history of the forex market. Before the gold standard was implemented, countries would commonly use gold and silver as means of international payment. The main issue with using gold and silver for payment is that their value is affected by external supply and demand. For example, the discovery of a new gold mine would drive gold prices down.
The underlying idea behind the gold standard was that governments guaranteed the conversion of currency into a specific amount of gold, and vice versa. In other words, a currency would be backed by gold. Obviously, governments needed a fairly substantial gold reserve in order to meet the demand for currency exchanges. During the late nineteenth century, all of the major economic countries had defined an amount of currency to an ounce of gold. Over time, the difference in price of an ounce of gold between two currencies became the exchange rate for those two currencies. This represented the first standardized means of currency exchange in history.
The gold standard eventually broke down during the beginning of World War I. Due to the political tension with Germany, the major European powers felt a need to complete large military projects. The financial burden of these projects was so substantial that there was not enough gold at the time to exchange for all the excess currency that the governments were printing off.
Although the gold standard would make a small comeback during the inter-war years, most countries had dropped it again by the onset of World War II. However, gold never ceased being the ultimate form of monetary value. (For more on this, read The Gold Standard Revisited, What Is Wrong With Gold? and Using Technical Analysis In The Gold Markets.)
Bretton Woods System
Before the end of World War II, the Allied nations believed that there would be a need to set up a monetary system in order to fill the void that was left behind when the gold standard system was abandoned. In July 1944, more than 700 representatives from the Allies convened at Bretton Woods, New Hampshire, to deliberate over what would be called the Bretton Woods system of international monetary management.
To simplify, Bretton Woods led to the formation of the following:
1. A method of fixed exchange rates;
2. The U.S. dollar replacing the gold standard to become a primary reserve currency; and
3. The creation of three international agencies to oversee economic activity: the International Monetary Fund (IMF), International Bank for Reconstruction and Development, and the General Agreement on Tariffs and Trade (GATT).
One of the main features of Bretton Woods is that the U.S. dollar replaced gold as the main standard of convertibility for the world’s currencies; and furthermore, the U.S. dollar became the only currency that would be backed by gold. (This turned out to be the primary reason that Bretton Woods eventually failed.)
Over the next 25 or so years, the U.S. had to run a series of balance of payment deficits in order to be the world’s reserved currency. By the early 1970s, U.S. gold reserves were so depleted that the U.S. treasury did not have enough gold to cover all the U.S. dollars that foreign central banks had in reserve.
Finally, on August 15, 1971, U.S. President Richard Nixon closed the gold window, and the U.S. announced to the world that it would no longer exchange gold for the U.S. dollars that were held in foreign reserves. This event marked the end of Bretton Woods.
Even though Bretton Woods didn’t last, it left an important legacy that still has a significant effect on today’s international economic climate. This legacy exists in the form of the three international agencies created in the 1940s: the IMF, the International Bank for Reconstruction and Development (now part of the World Bank) and GATT, the precursor to the World Trade Organization. (To learn more about Bretton Wood, read What Is The International Monetary Fund? and Floating And Fixed Exchange Rates.)
Current Exchange Rates
After the Bretton Woods system broke down, the world finally accepted the use of floating foreign exchange rates during the Jamaica agreement of 1976. This meant that the use of the gold standard would be permanently abolished. However, this is not to say that governments adopted a pure free-floating exchange rate system. Most governments employ one of the following three exchange rate systems that are still used today:
1. Dollarization;
2. Pegged rate; and
3. Managed floating rate.
Dollarization
This event occurs when a country decides not to issue its own currency and adopts a foreign currency as its national currency. Although dollarization usually enables a country to be seen as a more stable place for investment, the drawback is that the country’s central bank can no longer print money or make any sort of monetary policy. An example of dollarization is El Salvador's use of the U.S. dollar. (To read more, see Dollarization Explained.)
Pegged Rates
Pegging occurs when one country directly fixes its exchange rate to a foreign currency so that the country will have somewhat more stability than a normal float. More specifically, pegging allows a country’s currency to be exchanged at a fixed rate with a single or a specific basket of foreign currencies. The currency will only fluctuate when the pegged currencies change.
For example, China pegged its yuan to the U.S. dollar at a rate of 8.28 yuan to US$1, between 1997 and July 21, 2005. The downside to pegging would be that a currency’s value is at the mercy of the pegged currency’s economic situation. For example, if the U.S. dollar appreciates substantially against all other currencies, the yuan would also appreciate, which may not be what the Chinese central bank wants.
Managed Floating Rates
This type of system is created when a currency’s exchange rate is allowed to freely change in value subject to the market forces of supply and demand. However, the government or central bank may intervene to stabilize extreme fluctuations in exchange rates. For example, if a country’s currency is depreciating far beyond an acceptable level, the government can raise short-term interest rates. Raising rates should cause the currency to appreciate slightly; but understand that this is a very simplified example. Central banks typically employ a number of tools to manage currency.
Market Participants
Unlike the equity market - where investors often only trade with institutional investors (such as mutual funds) or other individual investors - there are additional participants that trade on the forex market for entirely different reasons than those on the equity market. Therefore, it is important to identify and understand the functions and motivations of the main players of the forex market.
Governments and Central Banks
Arguably, some of the most influential participants involved with currency exchange are the central banks and federal governments. In most countries, the central bank is an extension of the government and conducts its policy in tandem with the government. However, some governments feel that a more independent central bank would be more effective in balancing the goals of curbing inflation and keeping interest rates low, which tends to increase economic growth. Regardless of the degree of independence that a central bank possesses, government representatives typically have regular consultations with central bank representatives to discuss monetary policy. Thus, central banks and governments are usually on the same page when it comes to monetary policy.
Central banks are often involved in manipulating reserve volumes in order to meet certain economic goals. For example, ever since pegging its currency (the yuan) to the U.S. dollar, China has been buying up millions of dollars worth of U.S. treasury bills in order to keep the yuan at its target exchange rate. Central banks use the foreign exchange market to adjust their reserve volumes. With extremely deep pockets, they yield significant influence on the currency markets.
Banks and Other Financial Institutions
In addition to central banks and governments, some of the largest participants involved with forex transactions are banks. Most individuals who need foreign currency for small-scale transactions deal with neighborhood banks. However, individual transactions pale in comparison to the volumes that are traded in the interbank market.
The interbank market is the market through which large banks transact with each other and determine the currency price that individual traders see on their trading platforms. These banks transact with each other on electronic brokering systems that are based upon credit. Only banks that have credit relationships with each other can engage in transactions. The larger the bank, the more credit relationships it has and the better the pricing it can access for its customers. The smaller the bank, the less credit relationships it has and the lower the priority it has on the pricing scale.
Banks, in general, act as dealers in the sense that they are willing to buy/sell a currency at the bid/ask price. One way that banks make money on the forex market is by exchanging currency at a premium to the price they paid to obtain it. Since the forex market is a decentralized market, it is common to see different banks with slightly different exchange rates for the same currency.
Hedgers
Some of the biggest clients of these banks are businesses that deal with international transactions. Whether a business is selling to an international client or buying from an international supplier, it will need to deal with the volatility of fluctuating currencies.
If there is one thing that management (and shareholders) detest, it is uncertainty. Having to deal with foreign-exchange risk is a big problem for many multinationals. For example, suppose that a German company orders some equipment from a Japanese manufacturer to be paid in yen one year from now. Since the exchange rate can fluctuate wildly over an entire year, the German company has no way of knowing whether it will end up paying more euros at the time of delivery.
One choice that a business can make to reduce the uncertainty of foreign-exchange risk is to go into the spot market and make an immediate transaction for the foreign currency that they need.
Unfortunately, businesses may not have enough cash on hand to make spot transactions or may not want to hold massive amounts of foreign currency for long periods of time. Therefore, businesses quite frequently employ hedging strategies in order to lock in a specific exchange rate for the future or to remove all sources of exchange-rate risk for that transaction.
For example, if a European company wants to import steel from the U.S., it would have to pay in U.S. dollars. If the price of the euro falls against the dollar before payment is made, the European company will realize a financial loss. As such, it could enter into a contract that locked in the current exchange rate to eliminate the risk of dealing in U.S. dollars. These contracts could be either forwards or futures contracts.
Speculators
Another class of market participants involved with foreign exchange-related transactions is speculators. Rather than hedging against movement in exchange rates or exchanging currency to fund international transactions, speculators attempt to make money by taking advantage of fluctuating exchange-rate levels.
The most famous of all currency speculators is probably George Soros. The billionaire hedge fund manager is most famous for speculating on the decline of the British pound, a move that earned $1.1 billion in less than a month. On the other hand, Nick Leeson, a derivatives trader with England’s Barings Bank, took speculative positions on futures contracts in yen that resulted in losses amounting to more than $1.4 billion, which led to the collapse of the company.
Some of the largest and most controversial speculators on the forex market are hedge funds, which are essentially unregulated funds that employ unconventional investment strategies in order to reap large returns. Think of them as mutual funds on steroids. Hedge funds are the favorite whipping boys of many a central banker. Given that they can place such massive bets, they can have a major effect on a country’s currency and economy. Some critics blamed hedge funds for the Asian currency crisis of the late 1990s, but others have pointed out that the real problem was the ineptness of Asian central bankers. (For more on hedge funds, see Introduction To Hedge Funds - Part One and Part Two.)Either way, speculators can have a big sway on the currency markets, particularly big ones.
Now that you have a basic understanding of the forex market, its participants and its history, we can move on to some of the more advanced concepts that will bring you closer to being able to trade within this massive market. The next section will look at the main economic theories that underlie the forex market.
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Jul 11 2009
In some cases Regulators determine that firms have been concealing retail or customers accounts and have found out that they are breaching the Regular T margin rules in the process. Sorry to say, arbitrary and selective enforcement by regulators in a prejudiced manner has proprietary traders and firms to restructure, modify how they transact business and to close down doing business in their current manner.
Since more and more scams are involve with regulators and brokers, here are 9 good questions that you can ask in choosing a Forex broker. Although looking for a broker can be a quite a complicated search for traders, you have to be certain to make sure to ask prospective brokers for you to have a reputable broker to work with. These questions may be a good basis for choosing a good broker.
* 1. Ask the broker what regulatory authority is your brokerage firm registered with and in what country. The NFA or National Futures Association conducts audit on books and is one of the best present regulators. The Forex market is presently far less regulated than stocks, bonds, and commodities.
* 2. Know how fast they can execute the order. Apparently, it should be a second or less than a second. With the present modern technology, there is no reason for it to take any longer.
* 3. Inquire if the broker is attached to any bank or lending institution. Banks are more greatly regulated, which provide extra peace in mind, in addition to financial security.
* 4. Demand from the broker what country is their corporation being held. The suitable answer is any country with firm and strict banking laws and supervision. The incorrect answer would be anywhere else.
* 5. Ask what type of broker he is. There are different kinds such as Market Makers (MM) and Electronic Communications Networks, and you will want to know the variance between the two and which fits your needs best.
* 6. Have an idea what is the minimum account trading size from your broker. This is vital to remember to make sure your position is not closed out because you are short on funds to cover.
* 7.Inquire what the margin requirement is. 1% is considered standard, but lower than that is better. The more control you have, the better.
* 8.Also ask if your money will be held by a public or private company. You should demand it should be held by a public company, because they are insured. If there is a time a company goes bankrupt, you have a better chance of getting your money back.
* 9.Know how long your broker has been in business and how many clients does he have. Apparently, the longer they have been around, the better the sign. Having a large number of customers for a long time can also help to dispel any fears.
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Jul 11 2009
From the very beginning of your forex career a term Risk/Reward Ratio will be an important part of your trading strategy. The realization that every single trade you make contains a certain degree of risk will defend you from uncontrollable fears and panic attacks during the trading hours. This is when the risk management comes in handy. The best known way to figure out the risk you take is to calculate the risk-reward ratio. What is this ratio and how is it determined?
The Risk-Reward ratio is a trading factor that shows the level of possible risk in a selected trade. It shows the amount you can possible lose versus the potential profit. Some forex traders prefer to ignore the calculation of risk-reward ration, but only find themselves with great and unnecessary losses.
Some forex traders preach that a successful trader needs to risk a lot in order to win large. In my opinion, this is not true and the best way to succeed in forex trading is to not risk everything you have got. Forex is not a guessing game, not a twirl of luck in a casino and definitely not a lottery ticket. Every trade consists of probability of winning and losing and therefore only a good strategy will reward you will profits.
Reward
The reward is of course closely related to the profits you hope t make from the price movements. The formula to figure out the reward is as follow:
the gain multiplied times the amount of lots traded
Risk
First thing to do when calculating the risk-reward ratio is to figure out the risk itself. This can be done by analyzing the total sum of money needed to enter the trade. The actual amount of money at risk is calculated by the following formula:
the price of the selected currency multiplied times the amount of lots
Now that you have two numbers on your hand, it is easy to find out the ratio. For example:
IF Risk = $200 and Reward = $500 THEN the risk-reward ratio is 200:500 or, a shorter version, 2:5
IF Risk = $1,000 and Reward = $200 THEN the risk-reward ratio is 1000:200 or 5:1
In forex market it is advisable not to bet huge amounts on a position, simply because you put your investment in danger. It is statistically proven that a successful trader doesn’t put anything larger than 10% of their funding on a trade. In case you do place more than 10%, you risk losing quite a piece of your money. And that is not all – you might blow your whole account up and therefore lose the ability to invest in other trades.
The best way is to analyze the possible risks and rewards with the selected currency pair. The ratio is important for your success and the excepted good ratio is minimum 1:2. The risk-reward ratio of 1:2 means that for every dollar you invest will bring 2 dollars back in profits. Your agenda is to analyze which trades will earn you more than the amount you invest.
What about larger ratio? An acceptable risk-reward ratio for beginners is 1:3. Trades that should be avoided at all costs are the ones with the risk-reward ratio of 1:1 or when the risk is larger than the reward.
Once you gain some experience, you can experiment on trades with ratio of 1:5 and higher. High risk-reward ratio can turn out to be very profitable if the currency doesn’t make any unexpected price movement.
Overall, the risk-reward ratio is very important for your trading success. The calculations might take up time, but it will minimize the risk in every trade you enter. Also, waiting for higher risk-reward ratio can turn out to be worth the patience.
With risk-reward ratio you will know whether the investment in each trade will pay off. Forex trading is business and you have to know the risks and the potential wins. The strategy makes a successful trader.
In the beginning you might not have a strategy of your own or you might not have developed one yet and therefore relay on daily signals received from a broker or a signal provider. If the signal services provided are legitimate, in most cases the tips are profitable.
However, you might notice at some point in your trading life that the trades your broker or the signal provider suggests has a greater Loss value than Win. For example, on the actual trade the pip profit is 150 while the pip loss is 310. Doesn’t this ruin the whole idea of not placing a trade when the risk-reward ratio is “against” you?
Here is the trick. The signal providers often apply a large stop loss to take small gains. The reason they do so, is of course the security. This way, the provided gets a high number of winning trades. You can check this by placing opposite trades in your demo account and observe the results after a few months. This will show you if the signal provider or your forex broker uses the trick!
Signal services have a different market strategy and agenda and therefore it is sometimes difficult to figure out if the stops and targets they suggest are truly meaningful. On the other hand, it does help in most cases while looking at charts.
In my opinion though, eventually you have to come up with a strategy of your own. This often takes time until you understand what kind of strategy suits you best, how often you can trade, how much free time do you have available for forex trading, what is your financial situation and the attitude towards risks, money management etc. I say, trade with demo account, use the signals received from your forex broker or signal provider to get some practice with the charts. Once you develop your strategy forex trading will be as easy as falling off the log.
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Jul 9 2009
Looking for a Forex MegaDroid review? You have come to the right place. We have gotten our hands on this red hot product, taken it apart, and tested it out. Does MegaDroid live up to the hype? Or is it simply a Forex robot scam? You will find out below.
Forex Megadroid was released on March 31st of 2009. The product was created by Forex trading legends Albert Perrie and John Grace. They have based the software on the types of strategies they have used to make a fortune over their 40 years of experience in the market.
This Forex robot uses a cool new technology known as Correlated Time and Price Analysis (RCTPA). What this does is helps the robot make trades in the present by quickly calculating years of similar looking market conditions in the past. The Forex market like any other will follow specific patterns and Mega Droid will use years of back testing to profit from those patterns.
Now the hallmark of Forex Mega Droid and why it is creating such hype is the fact that the program is the first Forex robot to have artificial intelligence (AI). What this means is instead of simply taking the same trades over and over, if one trade is a loser the robot will learn from the experience. It will then factor in why that trade was a loser and use that valuable information for later trades.
This is incredibly valuable because the problem with most Forex robots is they stop working after a certain amount of time. Forex MegaDroid learns from it's mistakes and is constantly adapting to market conditions.
Forex MegaDroid Results
This Forex MegaDroid review would not be complete without posting some initial results from our testing of the product. Now keep in mind this product is still very new, so these numbers COULD change in the future. The initial results have been pretty staggering. Forex MegaDroid has shown a 95-96% win percentage on trades and tripled one of our accounts.
The best part is the robot was very good at limiting losses by not riding costly drawdowns. A high win percentage with minimal losses are the signs of an EXCELLENT automated software.
Before jumping in I recommend learning a little more about the program. But there is an awful lot to be excited about with this one.
Want to unlock the secret to automated Forex profits? At Forex Robot Reviews, I have cut through the hype to tell you which robots are real money makers and which are complete scams. Don't spend a dime until you have gotten the REAL truth about Forex robots.
Jonathan Ryerson has been making a full time living trading the Forex for several years. Over this time he has tested and reviewed many of the top automated Forex trading systems.
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