Financial Articles

Forex trading

Recently forex markets have been opened up to the average investor as it was the domain held exclusive to large financial firms, such as banks and funds management companies. Now days it’s possible to start with $250 or less.

Forex trading is trading foreign currency and is traded in foreign currency pairs, for example: Australian / United States dollar which is represented as AUD/USD. This means when you are buying one currency you are selling the other. Unlike shares you can trade in an upward or downward trending market.

A lot of times you will claims of forex been commission free trading which is not entirely true as the commission is in the spread, this is difference between the buying and selling price. For example when go to a currency exchange booth at an airport you may notice a board with different currencies listed with a buying and selling price, this is the spread. The buying price will be less than the selling price.

Leverage This is a two sided sword that can increase your profits when the markets go your way. Should the markets go against you, it can multiply your loss. Some foreign currency brokers allow you leverage of 400:1, most will offer 100:1. This allows you buy $100,000 worth of currency with only $1000 margin deposit.

Leverage used, should be controlled as a trade going against you even slightly could wipe your entire trading funds.

Funds management

This is about protecting money from the trades that go wrong, by not having too much money on one trade. You will get wrong sometimes no matter how well you predict the market. Put too much money on each trade is a recipe for disaster. A good guide would to only 2.5 and 4 percent on each trade.

You may setup trade using a stop loss and a take profit order, allowing the freedom of not having constantly sit in front of a computer watching the market 24 hours a day.

A stop loss will reduce the size of the loss by closing the deal at a preset level automatically.

Take profit will close the deal and take the profit made a preset level automatically, the opposite to a stop loss.

The difference between a good trader and a bad trader

The good trader has a system which they have tested and proven to work using solid analysis, keeping control of emotions. Has good money management skills

The bad trader trades by gut instinct (flying by the seat of their pants approach to trading), dominated by greed and fear with no proven system. Has bad money management skills and will risk too much on 1 trade. This is gambling, not trading.

Copyright 2006 Richard Wright

Even though throughout the last thirty or so years, the Commodity Research Bureau (CRB) has been in a downtrend and the S&P 500 as been in an uptrend many people continue to invest in commodities. Before we look at why and how they are becoming successful investors, let us look at what the CRB is. The Commodity Research Bureau is something similar to the Dow Jones. It mathematically combines the prices of commodities to determine just how the commodities are moving. The equation is performed by averaging out the prices of wheat, gold, coffee, oil, and other such items.

One of the reasons that investors are doing so well, is that when you look at the indices you are not getting the whole picture. When you are looking at the general trends, you are not seeing the daily price movements in detail. This is what many investors use when they are looking to trade for profits. What matters at the end of the day, is how much you paid and how much you got when selling, not the prices that you see.

Trading strategies throughout the years have incorporated the role of commodities. Stock prices and commodities often move in very different directions. Therefore, many people incorporate commodities into a large part of hedging strategies.

Another reason might be just how investors view the different strategies and how the market should and does work. For example, some people believe with historical and substantial support, that if you are following a crowd you cannot hope to make money. People believe that before you can profit in investing, you must be doing exactly the opposite of what others are doing. Data proves that this is good train of thought and many people are taking advantage of it.

Furthermore, when thinking in terms of a hedging strategy, a smart investor will have a well-diversified portfolio. Which means they will have a little bit of everything within their portfolio, this includes commodities, cash, bonds, and stocks. Thanks to inflation, these things work in the exact opposite of each other. As an example, if bond are moving down, commodities are moving up at the same time. This helps in hedging strategies and giving you control over profits and risks.

Over the last few yeas, commodities have started to trend up. This has been observed by many investors causing a rise in commodities investments. Oil and gold are perfect examples of this observation. About thirty years ago, the gold prices peaked, after which it started on a steady downfall and continued this way until about 2003. Since then, it has been moving up and has increased by about forty percent.

Some people will tell you that the gold price will continue to grow as time moves on. This may be true a true speculation, however, you can never really tell. When it comes to inflation and the views that the Federal Reserve have taken, it could very possible be a true speculation.

However, one thing you can rely upon is other commodities such as coffee, gold, oil, and wheat. The world will continue to use them regularly. At the same time, some of these commodities cannot be replenished, which means that the more people use them, the less availability there will be. This includes oil and gold. Neither can be recovered.

As the demand continues to rise for both oil and gold, we will find that the supplies dwindle fast and leaving us to worry about high prices as investors and consumers. There are some other forms of commodity investments such as Exchange Traded Funds (ETF’s) and mutual funds. What is great about these kinds of commodities, is that they generally tend to trend in the same directions as stocks and bonds, instead of the opposite way, as with some other commodities.

There are many approaches to initiating trades and selecting stocks for investment purposes, but many of the “experts” who provide advice on getting into a day trading or investment position fall short when it comes to insights into when and at what price to get out. Let’s assume for purposes of this discussion that you have a rational basis for making the investment, or initiating the trade, in the first place, and that you have a reasonably well-disciplined approach to cutting your losses if the price of the stock does the opposite of what you expect or hope. Often the situation that experienced traders, and especially long-term investors, have the most difficulty dealing with is the happy period when the price of the stock has risen well into the profit range. How do you know when and where to get out?

A brief description of the economic concept of “opportunity cost” can help us bring some logic and good judgement to the challenge of deciding when to exit trades. Opportunity cost is the value of the next best thing you can do with your resources. Your resources clearly include your money, but they can also include your time and your comfort. For example, let’s say you bought a ticket to a show or game that you really look forward to seeing, and when you arrive for the big event you discover that fans are offering to buy tickets from scalpers for ten times the price you paid.

Now, you might think that your cost of attending the event is simply the price you originally paid for the ticket. But, in economic terms, your cost is equal to the value of your second highest priority choice about what to do with both the time you have allocated to the event for which you hold a ticket, and the amount of money you could get by selling your ticket at the new, higher free-market price. Your “opportunity cost” for using your ticket to see the event rather than converting your ticket to cash is equal to the price you could get for your ticket rather than the price you paid for your ticket.

How does this apply to exiting a trade or an investment? It is actually quite simple. As your profit in a given stock or investment increases, at regular points in time based on the time horizon of your trade or investment, you should ask yourself if you would buy the asset you currently own at the current price as a new investment or trade. If the answer is “yes” then keep holding, but if the answer is “no” then it is time to convert to cash and take advantage of that second highest priority trade or investment that is waiting for your time, attention and capital. Whether you are day trading or investing for longer periods, it is often best to take the easy, early profit from a trade and then convert to cash so you can objectively evaluate the other opportunities available to you.

Of course, you should never let the temptation to take profits early interfere with your ability to maintain disciplined management of your trading system or investment plan. Patience is the key to profitably managing any system.