Sigma Forex

Easy Ride For Hard Drives – US FOREX

Despite the recession and consumer retrenchment in the Western World, some analysts are forecasting good times ahead for hard drive manufacturers. Demand for disk space will continue to rise whether or not the economy recovers, and the big players, burned badly in 2008, have cut costs and supply of new drives to the point where they can make money in almost any environment.Both Seagate Technologyand Western Digitalhave laid off workers this year, and while their production schedules have slowed, sales are actually starting to rise from last year’s lows.”The slowdown at the end of last year came because extremely profitable companies were rapidly adding capacity,” says Avi Cohen, a partner at brokerage firm Avian Securities who writes a daily newsletter tracking the major players. “There was too much product out there, and that’s very expensive.” On Wednesday, Deutsche Bankupgraded Seagate after the Scotts Valley, Calif. data-storage company raised its estimates of demand and revenue for its fiscal Q4, ending July 3. Seagate produces a third of the disk drives sold in the U.S.After a change in leadership and a drive to slash capital expenditures and jobs, Seagate has emerged from an earnings rut-and analysts think it’ll stay in the black.Western Digital got a boost when Standard & Poors announced its addition to the S&P 500 index of U.S. companies last week.Down the line companies like Seagate and Western Digital will likely want to expand production capacity again. For that, they’ll turn to Intevac, a Santa Clara, Calif. company that makes the parts that make the drives. Cohen cites a pair of recent orders as evidence that the company will head into the recovery from a position of strength. He believes that Intevac can double or triple its sales over the next three years. Richard Kugele, a director at Boston-based Needham & Company, has been tracking hard drive stocks for eight years and recently upgraded Intevac. He is bullish on the sector.”You have an industry that has already reacted, perhaps more than it needed to, to the downturn,” said Kugele.Other competitors include Hitachi, Samsung and Toshiba. But Kugele says the Asian companies are reluctant to sink resources into fledgling disk drive units.Still the hard drive recovery story is likely global, says Cohen. He points to the hopeful example of Xyratex, a U.K. company that beat analysts’ loss estimates Thursday despite a 27% sales decline that was also less dire than the Street had forecast.The sector’s potential is being driven by cost-cutting and a short supply of new drives while the need for free disk space grows. If an increase in consumer or business demand were to materialize, these forecasts might look conservative.

Forex Miracle and technical analysis of the market

Technical analysis is considered to be the opposite of fundamental analysis. Technical analysis looks at the past performance and history of an investment. It relies on data showing this history and current trends and patterns to make predictions of future market activity. It ignores the intrinsic value of the investment in favor of its statistical abstract. The Forex market lends itself to technical analysis rather well. The history of the value of currency pairs is a matter of statistical record and can be easily accessed. Its supporters claim it is the only sure way of understanding the market and predicting its future. This is especially true in the Forex market. Fans of technical analysis say that the economies of modern nations are so very complex that they can not be accurately predicated. It is only in the study of the past history of the currency and the trends that are revealed that a possible glimpse of the future be found. To better understand the difference between fundamental analysis and technical analysis consider this example. If you were interested in determining what flavor of ice cream was the best to buy, the fundamental analyzer would go into the ice cream store and try several different types. He seeks its intrinsic value. The technical analysis man would sit outside the store and take notes on the flavors others are buying to decide which was the most popular and therefore most likely the best. He does not look at the intrinsic value, but relies on the data he gathers from others to make his decision. Of course, in the end, it is going to be his own preference that settles the question, and this is true of the market. Both fundamental analysis and technical analysis are mere tools that help you make the decisions that in the end only you can make.

Forex Miracle and fundemental analysis in the market

Fundamental analysis is considered to be the opposite of technical analysis, and both are used in the Forex market. Fundamental analysis considers the intrinsic value of an investment when making a decision as to its future activity. There are some who feel that this is an excellent method of making decisions in the Stock market as a lot of data can be gathered and studied concerning the value of a Company. But, they ask, how can a Nation have an intrinsic value? The answer is fairly simple. The economy of a country goes through a basic business cycle, and there are a lot of indicators available to the investor to measure where a particular economy is at any given time. The analysis would involve matching the stage of the cycle with its impact on the value of its currency. The normal economic cycle consists of periods of inflation and deflation with peaks and troughs in between. Certain indicators such as the Gross National Product (GNP), and current prime interest rates can give a good idea of the stage of the economy at any given time. Each of these indicators would tend to impact currency valuation in different ways, and sometimes would even vary from country to country. In the United States, rising interest rates are normally associated with currency deflation, for example, and it is factors such as this that are the heart of fundamental analysis. This analysis can become quite detailed, but the focus remains on the country and its economy. Every factor that impacts the country and its economy can play a role in the value of the currency, and understanding these factors are the tools the fundamental analyzers uses to guide their investment strategy. This is where Forex Miracle comes in, to take the load off of the investor. Using a simple but extremely effective software tool, takes all of the guess work out of the equation. You almost can't lose with this system.

Forex Miracle and choosing the right broker

The decision of which brokerage firm is best for you is as important in the Forex market as it is in the Stock Market. The way of evaluating the various firms differs slightly between the two markets, however. Forex trades do not involve commissions, but they do have what are known as spreads, which is the difference between the price a currency can be purchased and the price for which it can be sold at a given point in time. This spread (which is expressed in "pips") is how the brokerage makes its money, so it serves the same purpose for them as a commission. You can be pretty certain that the spreads vary between brokerage firms just as widely as commissions do in the Stock Market, so investigate this carefully before making your selection. Most brokerages dealing with the Forex market are involved with large financial institutions where the funds are available to provide sufficient leverage for their clients. It is still important to make sure your firm is reliable. They should be registered as a FCM (Futures Commission Merchant), and regulated by the CFTC (Commodity Futures Trading Commission). Most firms offer widely varied packages of tools that assist you in making trading decisions and understanding the market better. They provide information and research that is available to you in many different formats. It is wise to take a little time to study these tools, and to find the ones that are most helpful to you. They are going to end up being very important and you need to be comfortable with them. Look for a firm with a wide variety of account and leverage options. The ability to use the Forex market's advantages in leverage is one of the things that makes it the most attractive to you as an investor, and you want to have the maximum flexibility here. Although there are a few unethical firms operating, a few references and inquires should be able to identify them. This selection process is worth a little effort and an investment of time. It is an investment that is going to the most likely to pay off.

Forex Miracle and the Advantage of Forex over Stock and Commodity Markets

When one begins to discuss the advantages of investment in the Foreign Currency Exchange Market (Forex) over the Stock or Commodity Market, it is quite easy to sound like a cheerleader and with the same kind of bias. The Forex market offers so many advantages that it is not hard to understand its popularity. The Forex Market operates 24 hours a day. It is a truly world wide market, and when the sun goes down in one trading center, it is coming up in another. The Forex market, although it has its trends and cycles, is not locked in the Bear vs. the Bull market mentality of the Stock Exchange. Since all Forex trades involve the exchange of one currency for another, one currency's hard times opens the door for a profit in another currency. The market is not adversely affected by rising interest rates. When a nation raises rates, generally the currency is strengthened, while rising interest rates tends to depress the stock market. The combined number of different stock issues on the NYSE and NASDAQ exchanges totals 8000. That is a lot of stocks and it is time consuming to keep up with even a portion of them. There are four major currencies, and only about 34 second tier currencies, to consider in the Forex. Brokerage firms do not stand between you and profit in the Forex. Not only are the brokerage and commission fees almost non-existent, but analysts in the Forex tend to actually analyze in the currency market and not dictate or control the rise and fall of the market. When the two markets are compared, the Forex certainly looks like the better investment choice. This is where Forex Miracle comes in, to take the load off of the investor. Using a simple but extremely effective software tool, takes all of the guess work out of the equation. You almost can't lose with this system.

Forex Miracle because even the experts need a little help

Although most people outside of the financial world consider the New York Stock exchange to be the pinnacle of financial trading, it is the Foreign Exchange Market that is the true leader. The Forex Market, as this currency exchange is known, has a volume of around 1.5 trillion United States dollars daily. This staggering amount is over one hundred times larger than the volume of the NYSE. The market is world wide. It is what is known as an “interbank” market where trades are conducted OTC (over the counter), which means they take place directly between the parties involved in the trade rather than through a central exchange. The main centers for the Forex market are located in Sydney, New York, Tokyo, Frankfurt and London. This allows the market to operate virtually 24 hours a day. Put simply, the Forex market is based on trading the currency of one country for the currency of another country. The ratio of the value of one currency to the other rises and falls, and this ratio is what fuels the market. The trades consist of the simultaneous buying of one currency, for example, United States Dollars (USD), and the selling of another, i.e. The European Euro (EUR). The most important market in Forex trading is called the “spot market” because trades are executed at once, or "on the spot". There are other elements of Forex trading, such as futures trading, and Forward Outrights, which are slightly more complex than spot trading. This is where Forex Miracle comes in, to take the load off of the investor. Using a simple but extremely effective software tool, takes all of the guess work out of the equation. You almost can't lose with this system.

MetaTrader 4 is an online trading complex designed to provide broker services to customers at Forex, Futures and CFD markets.This is a whole-cycle complex, which means that you will not need any other software to organize your broker services when using MetaTrader 4.
Data Center is a proxy server and designed as connecting-link between the system server and clients' terminals. It is designed as a Microsoft Windows NT/2000/XP/2003 service and can serve queries of client terminals without carrying them to the real server. Thus, using data centers allows you to eliminate the connection from client terminal to main server.
Enhance the system's ability to change scope and efficiencyData centers can accumulate historical data which can automatically be accessed by traders. Thus, the Data Center processes a historical data query without carrying it to the system server. This reduces the load on MetaTrader 4 Server and so it can attend more traders.Increase the resistance to DDoS (Distributed Deny of Service) attacksData Centers can perform as connecting server hiding the real IP-address of MetaTrader 4 Server. In this case, if one of the Data Centers is downed as a result of DDoD attack, the main system server will continue working in regular mode. At the same time client terminals that are linked to the address of the downed server, will be automatically redirected to reserve Data Centers.Saving of trafficUsing Data Centers you minimize incoming dealing hall traffic. The program downloads data that are common for all traders in the hall: quotations, news and historic data. In this case, the amount of Internet traffic is independent to the number of traders connected to the Data Center
Technical analysis is research of market dynamics that is done mainly with the help of charts and with the purpose of forecasting future price development. Technical analysis comprises several approaches to the study of price movement which are interconnected in the framework of one harmonious theory. This type of analysis studies the price movement on the market by means of analyzing three market factors: price, volumes, and, in case of study of futures contracts’ market, of an open interest (number of open positions). Of these three factors the primary one for technical analysis is the prices, while the alterations in other factors are studies mainly in order to confirm the correctness of the identified price trend. This technical theory, just like any theory, has its core postulates.Technical analysts base their research on the following three axioms:Market movement considers everythingThis is the most important postulate of technical analysis. It is crucial to understand it in order to grasp rightly the procedures of analysis. The gist of it is that any factor that influences the price of securities, whether economic, political, or psychological, has already been taken into account and reflected in the price chart. In other words, every price change is accompanied by a change in external factors. The main inference of this premise is the necessity to follow closely the price movements and analyze them. By means of analyzing price charts and multiple other indicators, a technical analyst comes to the point that the market itself shows to her/him the trend it will most likely follow.This premise is in conflict with fundamental analysis where the attention is primarily paid to the study of factors, and later on, after the analysis of the factors, to conclusions as to the market trends are made. Thus, if the demand is higher than the supply, a fundamental analyst will come to the conclusion that the price will grow. Technical analyst, however, makes her/his conclusions in the opposite sequence: since the price has grown, it means the demand is higher than the supply.The prices move with the trendThis assumption is the basis for all methods of technical analysis, as a market that moves in accordance with trends can be analyzed, unlike a chaotic market. The postulate that the price movement is a result of a trend has two effects. The first one implies that the current trend will most likely continue and will not reverse itself, thus, excluding disorderly chaotic movement of the market. The second one implies that the current trend will go on until the opposite trend sets in.The history repeats itselfTechnical analysis and studies of market dynamics are closely related to the studies of human psychology. Thus, the graphical price models identified and classified within the last hundred years depict core characteristics of the psychological state of the market. First of all, they show the moods currently prevailing in the market, whether bullish or bearish. Since these models worked in the past, we have reasons to suppose that they will work in the future, for they are based on human psychology which remains almost unchaged over years. We can reword the last postulate — the story repeats itself — in a slightly different way: the key to understanding the future lies in the studies of the past.

Secured Credit Card Marketing Scams

One of the biggest questions investors face is, "what do I do with my cash when I'm in-between investments?". This article seeks to examine two of the most popular choices - certificates of deposits and money markets - and weighs the pros and cons of each. In the left corner: certificates of depositCertificates of deposit (or CDs for short) are debt instruments issued by banks and other financial institutions to investors. In exchange for lending the institution money for a predetermined length of time, the investor is paid a set rate of interest. Maturities on certificates of deposit can range from only a few weeks to several years with the interest rate earned by the investor increasing in proportion to the time his capital is tied up in the investment.
Pros: The investor can calculate his expected earnings at the outset of the investment. Certificates of deposited are FDIC insured for up to $100,000 and offer an easy solution for the elderly who desire only to maintain their capital for the remainder of their life. Cons: If the investor opts for a longer maturity and, thus, higher rate of interest, he will lose access to his funds and forgo alternative uses of his capital. In the right corner: money marketsMoney markets, on the other hand, offer many of the same benefits as certificates of deposit with the added features of a checking account. Technically speaking, a money market is more or less a mutual fund that attempts to keep its share price at a constant $1. Professional money managers will take the funds deposited in the money market and invest them in government t-bills, savings bonds, certificates of deposit, and other safe and conservative financial instruments. This income is then paid out to the owners of the money market. Investors can open a money market account at most financial institutions. They generally receive a checkbook with which they can draw upon funds in the account. Pros: Depositing money in a money market is as easy as depositing cash into a savings or checking account. Cash is immediately available for alternative investments. Cons: Some financial institutions place a limit on the number of checks that can be drawn against the account in any given month. The rate of interest is directly proportional to the investor's level of deposited assets, not to maturity as is the case with certificates of deposit. Hence, money markets are disproportionately beneficial to wealthier investors. The verdictAlthough both can be useful, for those who need access to their capital, money markets are far superior. Many brokerage houses automatically sweep their customer’s uninvested cash into money markets to earn interest between investments. This is the ideal solution if you regularly invest because the funds can be used immediately to purchase stocks, bonds, or mutual funds.

Money Market vs. Certificate of Deposit

One of the biggest questions investors face is, "what do I do with my cash when I'm in-between investments?". This article seeks to examine two of the most popular choices - certificates of deposits and money markets - and weighs the pros and cons of each. In the left corner: certificates of depositCertificates of deposit (or CDs for short) are debt instruments issued by banks and other financial institutions to investors. In exchange for lending the institution money for a predetermined length of time, the investor is paid a set rate of interest. Maturities on certificates of deposit can range from only a few weeks to several years with the interest rate earned by the investor increasing in proportion to the time his capital is tied up in the investment.
Pros: The investor can calculate his expected earnings at the outset of the investment. Certificates of deposited are FDIC insured for up to $100,000 and offer an easy solution for the elderly who desire only to maintain their capital for the remainder of their life. Cons: If the investor opts for a longer maturity and, thus, higher rate of interest, he will lose access to his funds and forgo alternative uses of his capital. In the right corner: money marketsMoney markets, on the other hand, offer many of the same benefits as certificates of deposit with the added features of a checking account. Technically speaking, a money market is more or less a mutual fund that attempts to keep its share price at a constant $1. Professional money managers will take the funds deposited in the money market and invest them in government t-bills, savings bonds, certificates of deposit, and other safe and conservative financial instruments. This income is then paid out to the owners of the money market. Investors can open a money market account at most financial institutions. They generally receive a checkbook with which they can draw upon funds in the account. Pros: Depositing money in a money market is as easy as depositing cash into a savings or checking account. Cash is immediately available for alternative investments. Cons: Some financial institutions place a limit on the number of checks that can be drawn against the account in any given month. The rate of interest is directly proportional to the investor's level of deposited assets, not to maturity as is the case with certificates of deposit. Hence, money markets are disproportionately beneficial to wealthier investors. The verdictAlthough both can be useful, for those who need access to their capital, money markets are far superior. Many brokerage houses automatically sweep their customer’s uninvested cash into money markets to earn interest between investments. This is the ideal solution if you regularly invest because the funds can be used immediately to purchase stocks, bonds, or mutual funds

Killer secrets of Forex........

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Short Introduction to forex

FOREX is the world’s largest and most liquid trading market. Many consider FOREX as the best home business you can ever venture in. Even though regular people have had the opportunity to take part in trading foreign currencies for profit (in the same way banks and large corporations do) since 1998, it is just now becoming the cool, hip, new "thing" to talk about at parties, business events, and other social gatherings.

Even though it has been somewhat of a loosely guarded secret, every day more and more investors are turning to the all-electronic world of FOREX trading for income and profit because of its numerous benefits & advantages over traditional trading vehicles, like stocks, bonds and commodities.

But, still, whenever something seems new or is just becoming a part of social conversation, news articles, and water cooler gossip, misconceptions have to be overcome, the mind 
has to be open and the slate has to be clear for starting out fresh with the CORRECT information.

So, in this article, it is my attempt to give you some solid, but not over-detailed, information on just what the heck "FX" (FOREX) means, what it is, and why it exists.

As a successful trader said, Trading FOREX is like picking money up off the floor. Not trading FOREX is like leaving it there for someone else to pick up." Others in the industry 
have also said, Trading FOREX is like having an ATM machine on your own computer.

Here's an explanation (one I feel you'll appreciate) of what FOREX is and how a bunch of traders, profit from it:

The Foreign Exchange Market, also referred to the "FOREX" or "FX" market, is the spot (cash) market for currency.

But, don't mistake FX as trading the futures market, where you buy a contract to purchase a particular currency at a future price in time.

What FX traders do is much less risky than trading currencies on the futures market, much more profitable, and a lot easier, than trading stocks.

So, you're probably wondering where it's at ... or ... how to access the FX market?

The answer is: FX Trading is not bound to any one trading floor and is not centralized on an exchange, as with the stock and futures markets. The FX market is considered an Over-the-Counter (OTC) or 'Interbank' market, due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.

Yes, if that's the first time you've heard about an all-electronic market, I know this may sound somewhat intriguing to you.

Here's what you are actually trading when you participate in the Foreign Exchange (FOREX) market:

Essentially, like the large banks who use the FX market to protect themselves from the fluctuating exchange rate of different currencies, as an investor, what a FX trader is doing is 
simultaneously exchanging one countries currency for another. So, in actuality, they're electronically trading a currency-pair and the price that is quoted to us is the exchange rate 
between the two currencies.

In other words, simply the quoted price is how many of the one currency is worth 1 of the other currency.

Trading Strategies

There are almost as many trading strategies used in the forex market as there are traders. But there is some commonality shared by most forex market participants.

The majority of forex traders choose to adopt a trading strategy based on either technical or fundamental analysis, or a combination of both. The description below outlines some of the defining features of both these approaches.
Technical Analysis  
Fundamental Analysis

Technical Analysis concentrates on the simple fact that history repeats itself as well as a graphical representation of the market price action. This type of analysis is ideal for long-term to short-term strategies, depending on the timeframe used during the analysis process. Use the technical analysis to develop a trading plan and define the target and stop loss for any trade.  
Fundamental Analysis focuses mainly on the economic, social and political forces that drive the supply and demand, hence the market price. This type of analysis concentrates on macroeconomic indicators such as economic growth rates, interest rates, monetary policy, inflation and unemployment.


Technical and fundamental analysis are both closely linked but they are independent and complementary. Fundamentals assess general market trends while technical analysis is more refined, providing specific entry and exit points for a trade. It is recommended to use a combination of both when defining your trading plan.

Any trading strategy in foreign exchange is based on the following assumptions:
The state of the market  
Timeframe for trades  
Time your trade properly  
Gauge sentiment

First of all you take an overall view of where the market is going.  
Determine if the position you want to take is long term or short term.  
Don’t jump on the first price available, wait until YOUR price is available.  
Review technical analysts' consensus and political conditions.

Forex Product List

Trading forex with City Credit Capital gives you access to a wealth of foreign exchange products to trade regardless of whether you download the CCC Trader, trade on the web-based version or conduct your trading over the telephone.

The list below details the currency pairs you can trade, the reference market for each and the market opening hours.
Major Currency Pairs

AUD/USD 
GBP/USD 
 

EUR/CHF 
NZD/USD 
 

EUR/GBP 
USD/CAD 
 

EUR/JPY 
USD/CHF 
 

EUR/USD 
USD/JPY 
 

GBP/CHF 
AUD/JPY 
 

GBP/JPY 
CHF/JPY  

Spot FX

Reference Market: INTERBANK

Trading Hours: Sun 22:00 to Fri 21:00 - Time Break 22:00-22:05 (London Time)
Product Names 
Contract Value 
Min Pip 
Tick Value 
Margin Requirement

EUR/USD 
100,000 EUR 
0,0001 
10 USD 
$1,000

USD/JPY 
100,000 USD 
0,01 
1,000 JPY 
$1,000

GBP/USD 
100,000 GBP 
0,0001 
10 USD 
$1,000

USD/CHF 
100,000 USD 
0,0001 
10 CHF 
$1,000

USD/CAD 
100,000 USD 
0,0001 
10 CAD 
$1,000

AUD/USD 
100,000 AUD 
0,0001 
10 USD 
$1,000

NZD/USD 
100,000 NZD 
0,0001 
10 USD 
$1,000

EUR/JPY 
100,000 EUR 
0,01 
1,000 JPY 
$1,000

GBP/JPY 
100,000 GBP 
0,01 
1,000 JPY 
$1,000

CHF/JPY 
100,000 CHF 
0,01 
1,000 JPY 
$1,000

AUD/JPY 
100,000 AUD 
0,01 
1,000 JPY 
$1,000

EUR/GBP 
100,000 EUR 
0,0001 
10 GBP 
$1,000

EUR/CHF 
100,000 EUR 
0,0001 
10 CHF 
$1,000

GBP/CHF 
100,000 GBP 
0,0001 
10 CHF 
$1,000

Why Trade Forex?

The foreign exchange market, also referred to as the "Forex" or "FX" market, is the largest and most liquid, financial market in the world.

Three countries (UK, USA and Japan) continue to dominate the forex market. With a turnover of just under 3 trillion US dollars a day, the forex market dwarfs the London, New York and Tokyo stock exchanges combined. Forex provides several advantages when compared with traditional investments. 

Below are several examples of these advantages:
Traditional Marketplace 
Forex Market

Limited trading hours; trading times restricted to “local” market which decreases the attractiveness of the market for overseas investors.  
The forex market is open 24 hours a day, 5 days a week. Because of the decentralised clearing of trades and overlap of major markets in Asia, London and the United States, the market remains open and liquid throughout the day and overnight. 

Threat of limited liquidity, stocks are particularly vulnerable to large price fluctuations in after-hour markets or when trading smaller corporate issues.  
The foreign exchange market is the most liquid market in the world eclipsing all others. In comparative terms, daily volumes are more than 40 times that of the Dow Jones Index. 

Large capital requirements, high margin rates, restrictions on shorting, very little autonomy.  
One consistent margin rate 24-hours a day allows forex traders to leverage their capital more efficiently. 

Short selling and stop order restrictions.  
No restrictions on type (market, limit or stop orders) or timing of trades. 

Pattern day traders subject to restrictions requiring a substantial amount of cash on account prior to trading.  
No restrictions. Very low account balances, due to leverage/margin strategy. Lower client account requirements.

Forex Market Introduction

Forex Market Introduction
Money or currency is the ultimate commodity. Every time a company or government buys or sells products and services in a foreign country, they are subject to a foreign currency trade; the exchanging of one currency for another. Many individuals and organizations also trade currencies for speculative purposes. With all of these currency transactions going on daily, it is no wonder that the foreign currency exchange market, also known as "forex" or "fx" market, has such a huge global reach and has become extremely popular among traders.
Trillions of dollars of foreign exchange activity takes place every day. From 1997 to the end of 2000, daily forex trading volume surged from US$5 billion to US$1.5 trillion. The forex market continues to grow at a phenomenal rate.
Before the internet came along, only corporations and wealthy individuals could trade currencies in the forex market through the use of the proprietary trading systems of banks. These systems required as much as US$1 million to open an account. Thanks to advancements in online technology, today investors with only a few thousand dollars can have access to the forex market 24 hours a day.
For traders, forex trading provides an alternative to stock market trading. While there are thousands of stocks to choose from, there are only a few major currencies to trade (the Dollar, Yen, British Pound, Swiss Franc, and the Euro are the most popular). Forex trading also provides a lot more leverage* than stock trading, and the minimum investment to get started is a lot lower. Add to that the ability to choose flexible trading hours (forex trading goes on 24 hours a day) and you have the reason why so many stock traders have flocked to day trade currencies.

Forex Taxes

This applies to U.S. traders only. Foreign investors that are not residents or citizens of the United States of America do not have to pay any taxes on foreign exchange profits.
This information is for educational purposes only and should not be construed as tax or investment advice of any kind. Make sure that you consult with a tax professional about your forex taxes.
More and more investors from all over the world are accessing the largest financial markets online through their personal computers. As demand surges for foreign exchange trading, more and more U.S. Traders have to deal with taxation issues at the end of the year.
Forex: Taxed as Futures or Cash?
Currency traders involved in the forex spot (cash) market, can choose to be taxed under the same tax rules as regular commodities [IRC (Internal Revenue Code) Section 1256 contracts] or under the special rules of IRC Section 988 (Treatment of Certain Foreign Currency Transactions). IRC 988 applies to cash forex unless the trader elects to opt out.
The Advantage of Section 1256 for Currency Traders
Under Section 1256, forex traders can have a significant advantage over stock traders. By reporting capital gains on IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles), forex traders are allowed to split their capital gains on Schedule D using a 60% / 40% split. This means that 60% of the capital gains are taxed at the lower, long-term capital gains rate (currently 15%) and the remaining 40% at the ordinary or short-term capital gains rate, which depends on the tax bracket the trader falls under (as high as 35%). This results in an average rate of 23%, which is 12% less than the regular (short-term) rate.
If cash forex is subject to the Section 988 rules, how can a trader elect the more beneficial Section 1256 split? Please read on to find out more.
To Opt Out or Not to Opt Out of Section 988
Companies that profit from the fluctuation in foreign exchange rates as part of their normal course of business, fall under Section 988. This means their gains and losses from foreign exchange (such as buying and selling of foreign goods) are treated as interest income or expense and get taxed accordingly. Consequently, they do not receive the beneficial 60/40 split.
Since forex traders are also exposed to daily exchange rate fluctuations, their trading activity falls under the provisions of Section 988 too - but don't worry. The IRS wants to be nice to you (so far). Because these daily fluctuations can be considered part of a currency trader's assets in the normal course of his business, the IRS gives the trader the option of rejecting (opting out) of Section 988 and electing that the gains be taxed under the favorable 60/40 split of Section 1256.
What do you have to do to opt out of Section 988? Even though you don't have to file anything with the IRS to opt out, you are required to do so "internally" before starting to trade; i.e., you must keep records in your own books about the fact that you are opting out of Section 988.
Many currency traders bend the rules by waiting after the year is over to see if they have any gains from their trading activities. If they do, they claim that they elected out of IRC 988 to enjoy the beneficial Section 1256 treatment. On the other hand, if the sum of the trades from cash forex is not positive, they stick with the traditional Section 988. Since (under the current tax law) it becomes very difficult to disprove whether the trader made the election at the beginning or at the end of the year, IRS has not yet begun to crack down on this activity.
What does a Forex Trader do When Tax Time Comes?
Forex traders should receive 1099 forms from their US-based broker at the end of the year like stock and futures traders do. No matter in what country your forex broker is based or what tax-related reports they provide, you could pull up reports online from your accounts and seek the help of a tax professional. No matter what you decide to do, don't fall into the temptation of lumping your trades with your section 1256 activity (if any). Forex transactions need to be separated into Section 988 reporting.
Given the fact that the forex market is one of the fastest-growing financial markets around, it might eventually come under closer IRS regulation. In the meantime, traders continue to enjoy tax advantages by trading foreign currencies.

Forex Charts

Forex Charts - How to Read a Currency Chart
Forex charts are easy to interpret, especially for someone that has invested in or day traded stocks before. When looking at a real time chart of a stock, the trader has to select the chart period (1 day, 5 minutes, 15 minutes, etc.) and the ticker symbol of the desired stock. The concept is the same for a currency chart. The trader would select the specific currency pair (U.S. Dollar versus the Japanese Yen, the Euro versus the Dollar, etc.) and the desired time period for each bar of the forex chart. The example below shows a snapshot of a real time 15-minute candlestick chart of the Euro versus the U.S. Dollar (EUR/USD) currency pair taken from our forex day trading system (this system can be used to obtain free forex charts for 30 days and also to practice day trading).
NOTE: Information on FX charting will be provided during our free, live forex training.
On the day above (December 2, 2002), the forex chart shows a strong move in the Euro versus the dollar, from a low of 0.9869 (about 8:30AM EST) to 0.9975. This is a difference of 0.0106 or 106 pips (in forex trading, a "pip" is the smallest tick in the price of a currency, which is similar to a "tick" in stocks). In dollars, this move is equivalent to an amount of US$1,060 per lot. In our forex trading system, currencies are traded in lots of 100,000 (100,000 x 0.0106 = $1,060). With a margin requirement of only $1,000 per lot, this corresponds to a return of over 100%. In other words, while a move from 0.9869 to 0.9975 is only about 1%, with 100 to 1 margin this return becomes over 100% (Please Note: Increasing leverage increases risk; in this example, a move of 1% in the other direction could have resulted in a loss of the same magnitude). In our forex education section we also explain how to read a forex quote and other currency trading basics.

Forex Simulated Trading
Forex Simulated Trading
Forex simulated trading helps investors practice their forex trading before risking any money. For that reason, taking part in an online forex trading simulation is essential for the long-term success of any trader. The lower the experience level of a trader, the longer that trader should be actively involved in online simulated forex trading.
Before using a simulated forex trading system, it is important that the system is a live simulation program that provides lifelike results. The forex trading simulation system should allow the trader to execute practice trades at prevailing market prices using real time, streaming data.
Our simulated forex trading program meets all these requirements and more. Before putting real money to day trade currencies, a trader can sign up for a 30-day demo that provides lifelike executions, streaming charts, technical analysis, news, market commentaries and other features. The program could also be used to simulate day trading. A snap shot of the forex trading system running in simulation mode is provided below.
The example above of the forex trading simulator shows three currency pairs that consist of four of the major foreign currencies: the US Dollar (USD), the Swiss Franc (CHF), the Euro (EUR), and the Japanese Yen (JPY). The real-time, streaming graph shown is a candlestick graph of the Dollar / Yen (USD/JPY) exchange rate in 10-minute periods. The graph is enhanced with a technical analysis study consisting of 10-period and 20-period Simple Moving Averages and a horizontal channel between 120.2906 Yen and 119.9100 Yen.
Whether you are an experienced stock day trader or a novice to the trading world, you could benefit from taking our online forex simulated trading program for a test drive. See how good you are at forex trading by using our online currency trading simulation. If you have any questions about simulated forex trading or any other of our services, don't hesitate to contact us about forex simulated trading.

Currency Trading Basics

Currency Trading Basics
All currency trades involve the buying of one currency and the selling of another, simultaneously. Currency quotes are given as exchange rates; that is, the value of one currency relative to another. The relative supply and demand of both currencies will determine the value of the exchange rate.
When a currency trader places a trade he wants the currency purchased to appreciate in value versus the currency sold. His ability to determine the direction that the exchange rate will move, will dictate his gain or loss in a trade. Let's do an example with a currency quote obtained from the forex trading system.
Hypothetical Example of a forex trade
The current bid-ask price for EUR/USD is 1.0120/1.0126, meaning you can buy 1 euro (EUR) for 1.0126 US dollars (USD). [If you need help understanding how to interpret forex quotes, click on this link.]
Suppose you feel that the EUR is undervalued against the dollar. To execute this strategy, you would buy Euros (simultaneously selling Dollars) and then wait for the exchange rate to rise.
So you make the trade: purchasing 100,000 EUR (1 lot) and selling 101,260 Dollars. (Remember, at 1% margin, your initial margin deposit would be 1,000 Euros.)
As you expected, EUR/USD rises to 1.0236/42. Since you bought Euros and sold Dollars in your previous trade, you must now sell Euros for Dollars to realize any profit. You can now sell 1 EUR for 1.0236 Dollars. When you sell the 100,000 Euros at the current EUR/USD rate of 1.0236, you will receive 102,360 USD.
Since you originally sold (paid) 101,260 USD, your profit is US $1100 (please note: if the price of the Euro against the US Dollar would have gone down instead of up by the same amount in the example above, there would have been a loss of $1100 instead of a profit. A possibility for profit is always accompanied by a risk of loss).
Total profit = US $1100.00

Forex Quote

Forex Quote - How to Read a Currency Quote
Before trading currencies an investor has to understand the basic terminology of the forex market, including how to interpret forex quotes. In every foreign exchange transaction an investor is simultaneously buying one currency and selling another. These two currencies make up a currency pair. This is an example of a foreign currency exchange rate of the dollar versus the yen:
USD/JPY = 119.72
NOTE: Information on forex quotes will be provided during our free, live FX training.
The currency to the left of the slash ("/") is called the base currency (in this example, the US dollar) and the one on the right is called the quote currency or counter currency (in this example, the Japanese Yen). This notation means that 1 unit of the base currency (that is, 1 dollar) is equal to 119.72 Japanese Yen. If buying, the exchange rate specifies how much you have to pay in units of the quote currency to buy one unit of the base currency; in the above example, you have to pay 119.72 yen to buy 1 US dollar. If selling, the foreign currency exchange rate specifies how much units of the quote currency you get for selling one unit of the base currency; in the above example, you will receive 119.72 Japanese Yen when you sell 1 US dollar.
As with stocks, a forex quote includes a bid price (or bid) and an ask price (or ask). This can be easily illustrated with an example of a currency quote taken from the forex trading software:
In the above example, the bid price is 119.68 yen and the ask price is 119.75 yen [notice that when the ask price is displayed, only the last two decimal places are displayed to the right of the slash (75 instead of 119.75)]. The bid price is the price at which dealers are willing to buy the base currency (in units of the quote currency) and users of our software can sell. Thus, if a trader presses the button "Sell USD," he/she would sell dollars at 119.68 yen. The ask price, on the other hand, is the price at which dealers are willing to sell the base currency and users of our system could buy it. By clicking "Buy USD," an investor would be buying dollars at 119.75 yen.
Even though there are many currencies all over the world, 85% of all daily transactions involve trading a group of currencies known as the "Majors." These currencies include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. The four most actively traded currency pairs are the US Dollar / Japanese Yen (USD/JPY), Euro / US Dollar (EUR/USD), British Pound / US Dollar (GBP/USD), and the US Dollar / Swiss Franc (USD/CHF). The US Dollar / Canadian Dollar (USD/CAD) and the Australian Dollar / US Dollar (AUD/USD) are also actively traded pairs. For traders, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies; i.e., the "Majors."
The examples below were taken from the currency dealing system which provides forex real time quotes. From left to right are the euro-dollar exchange rate, the british pound-dollar exchange rate, and the dollar-swiss franc exchange rate. All of these currency quotes are of major currency pairs.
Taking the example of the euro forex quote (first pair above), buying one euro would cost 1.0099 US dollars and selling would provide 1.0093 US dollars.

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Lesson one - Market Traders Institute is proud to offer free this Forex training video, Lesson One of sixteen, is an excellent beginner's forex tutorial. The CEO, President and founder of MTI, Jared Martinez, teaches the ins and outs of the Foreign Currency Exchange Market. There is absolutely no cost. This Instructional video is so informative and we are sure you will want to continue your education with us.
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The Levels of Forex Traders.
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A Vocabulary related to the currency exchange trading market.
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What Orders are and when and why to be cautious.
It is the mission of the Forex trader to become a financially successful long-term trader. This can be achieved when the trader adopts and accepts "The 10 Keys of Successful Trading". A Technical Analysis Applications manual for the Currency Exchange Markets. View the free online lesson (approx 1 hour), mid-way through the lesson you will be given the opportunity to register for our other free services. MTI's highly informative newsletters are also available on the same registration.

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Fed Turns on Printing Presses, Dollar Crashes

Having already lowered interest rates essentially to zero, the Fed has announced that it will now focus on ‘quantitative easing,’ a fancy way of saying that it intends to turn on the printing presses. It will purchase over $1 Trillion in credit instruments, split between Treasury securities and Mortgage-backed debt, expanding its balance sheet to $3 Trillion. This should (temporarily) put an end to speculation over whether foreign Central Banks are still willing to finance the US debt, as this question is now moot, since the Fed has demonstrated its willingness to fulfill that role. “The Fed is basically financing our deficit by buying the debt issued by the Treasury. If the Obama administration pushes through another stimulus package, the dollar is done.”
When the news was announced, the Dollar plummeted by 2.7%, the highest daily margin since 1971, as traders mulled the inflationary implications of printing over $1 Trillion and injecting it directly into the money supply, with the potential of more to come. Wrote one analyst, “Interest rates now are effectively negative across the board. The dollar is selling off because this may contribute to long-term weakness in the currency.”
Unfortunately for the Fed and the Dollar, the last few weeks have witnessed a slight pickup in risk tolerance, as investors began to focus more on fundamentals. If this development took place in the deepest chasm of the credit crisis, investors might have been willing to look the other way, but now they are very concerned that a huge expansion of the US monetary supply could trigger long-term inflation. A less pessimistic way of looking at the Dollar sell-off would be to attribute it to investor confidence that the Fed plan will help revive the global economy, decreasing the appeal of the US as a safe haven for investing.
Whether this will push the Dollar down further towards the $1.40 range depends on a couple factors. First of all, will other Central Banks follow suit? “All the major central banks may end up in the same position. The way we look to play it is to see which goes the first and which one lags, and try to explore the timing difference between the two,” explained one analyst. If this proves to be the case, investors will once again focus on the “least worst” currency, in which case the Dollar could once again come out on top.
It also depends on whether this action is intended as a quick fix, or as part of a series of purchases by the Fed. “Sell the dollar!” said…a portfolio manager. “This is huge, huge. It’s equivalent to the Plaza accord. This is the last thing theyhave in the closet, and they used it a bit early.”

China Maintains “Stable” Yuan, at Least Against USD

China seems to have fulfilled its promise of a stable currency, given that the Yuan/Dollar exchange rate is one of the few bastions of stability in forex markets. One Dollar trades for approximately 6.83 CNY, about the same as it did last summer. Futures prices, meanwhile, reflect a mean expectation that one year from now, the exchange rate will dip only slightly, to 6.86 CNY/USD. [The inverse is depicted in the chart below].
In fact, there is even evidence that China is fighting market forces by trying to prop up the value of the Yuan. “‘ If this were a market-determined exchange rate, it would now be weakening, because the overall balance of payments looks to be in deficit, but it is not weakening,’ said [one economist]. ‘The implication is that authorities must be selling their dollar reserves in order to stabilise the USD-CNY exchange rate.’ ” Of course, it’s difficult to determine for sure, since the decline in China’s forex reserves that constitutes the basis for this claim could also have been caused by paper-losses on depreciating investments.
Within China, there is a core group of academics that continues to insist that China should depreciate its currency in response to deteriorating economic conditions. After all, China’s trade “surplus narrowed in February to $4.8 billion from about $40 billion in each of the previous three months, and in all likelihood will fall for the first time in five years in 2009.” Meanwhile, economists estimate that GDP growth could slow to 6%, a far cry from the 13% chalked up in 2007, and well below the government’s goal of 8%.
Some Chinese analysts also take issue with the notion of a ’stable’ currency. ” ‘The stability we expect is not only stability against the USD, but against all currencies,’ said MoC researcher Li Jian. ‘What is stability? Now the RMB is stable against the USD, but is appreciating against the euro, Australian dollar and the yen, so RMB’s exchange rates against these currencies are not stable.’ ” This is an important distinction, since China’s trade rivals are mostly nearby Asian countries- not the US. “Since July, the yuan is up 33% against the Korean won and up 12% against the Singapore dollar, for example. This has made Chinese exports relatively less competitive while spurring more imports and thereby providing somewhat of a boost to other economies.”
In the US, meanwhile, there are still policymakers that insist that the Yuan is undervalued, and the Treasury Department may brand China as a “currency manipulator” in its next semi-annual report. In the end, “with China holding its currency stable against the dollar even as its trade position has weakened, Washington’s long-standing argument that Beijing is keeping the yuan unjustifiably low is losing weight.”

Despite Shrinking Forex Reserves, China will Continue to Hold US Treasuries

If you read analysts’ coverage of the Dollar decline (and consequent Euro rally), there is an even divide over whether it is sustainable. Economic data and technical indicators paint a nuanced picture, such that this kind of uncertainty is understandable.On the one hand are the the Dollar bears, who point to an economic recession that continues to deepen, and the seeming complacency of the Federal Reserve Bank towards inflation. If there is any doubt as to how the forex markets feel about the Fed’s plan to purchase over $1 Trillion in US government bonds, consider that the the Dollar just recorded its worst weekly performance in 24 years, while the Euro simultaneously recorded its strongest week since its inception in 1999. There’s not much nuance there.
Meanwhile, the economic picture is equally depressing. Summarized by Kathy Lien of GFT Forex:
The Empire state manufacturing survey plunged to a record low in the month of March while Industrial production fell 1.4 percent, driving capacity utilization back to its record lows. Foreign investors reduced their holdings of U.S. assets by the largest amount since August 2007. Homebuilder confidence held near its record lows in the month of March as the slump in the real estate sector shows no signs of easing.
Unfortunately, there is a contradiction in the argument that the Dollar is being plagued both by economic collapse and by the risk of inflation. Writes Marc Chandler, head of FX strategy at Brown Brothers Harriman, “The pessimist camp wants it both ways. The US is going down the same path as Japan, where the end of a real estate bubble led to a banking crisis and a deep economic contraction. And they want to caution that printing of money will boost interest rates, fuel inflation and debase the currency.” He points out that history, as well as common sense, contradict this line of thinking.Those that remain bullish on the Dollar argue that the Euro rally is a function of technical, rather than fundamental developments. First of all, we are approaching the end of a fiscal quarter. As evidenced by the Dollar decline which took place at the end of December, these periods are usually marked by portfolio rebalancing and hedging, such that it’s not uncommon to see large swings in forex markets. From a technical standpoint, when the Dollar failed to breach the $1.30 level against the Euro, many short sellers were probably forced to cover their positions, which accelerated the Dollar’s decline.
Bulls are confident that the pickup in risk-taking which catalyzed a 20% stock market rise is here to stay. “The move to the upside came after the government described a plan that will…generate $500 billion, and possibly $1 trillion over time, to buy hard-to-trade and badly deteriorated assets from banks.” The banks will be recapitalized, the financial system is being repaired, and everything will be okay, right?
The markets are certainly prone to false-starts. I can count numerous instances of government officials and market commentators insisting that “the worst is behind us.” Nevertheless, if this time proves to be different, it could be bearish for the Dollar, whose role as ’safe-haven’ currency would likely be eroded by a positive change in market sentiment.

USD/EUR: Conflicting Signals Make Predictions Difficult

If you read analysts’ coverage of the Dollar decline (and consequent Euro rally), there is an even divide over whether it is sustainable. Economic data and technical indicators paint a nuanced picture, such that this kind of uncertainty is understandable.On the one hand are the the Dollar bears, who point to an economic recession that continues to deepen, and the seeming complacency of the Federal Reserve Bank towards inflation. If there is any doubt as to how the forex markets feel about the Fed’s plan to purchase over $1 Trillion in US government bonds, consider that the the Dollar just recorded its worst weekly performance in 24 years, while the Euro simultaneously recorded its strongest week since its inception in 1999. There’s not much nuance there.
Meanwhile, the economic picture is equally depressing. Summarized by Kathy Lien of GFT Forex:
The Empire state manufacturing survey plunged to a record low in the month of March while Industrial production fell 1.4 percent, driving capacity utilization back to its record lows. Foreign investors reduced their holdings of U.S. assets by the largest amount since August 2007. Homebuilder confidence held near its record lows in the month of March as the slump in the real estate sector shows no signs of easing.
Unfortunately, there is a contradiction in the argument that the Dollar is being plagued both by economic collapse and by the risk of inflation. Writes Marc Chandler, head of FX strategy at Brown Brothers Harriman, “The pessimist camp wants it both ways. The US is going down the same path as Japan, where the end of a real estate bubble led to a banking crisis and a deep economic contraction. And they want to caution that printing of money will boost interest rates, fuel inflation and debase the currency.” He points out that history, as well as common sense, contradict this line of thinking.Those that remain bullish on the Dollar argue that the Euro rally is a function of technical, rather than fundamental developments. First of all, we are approaching the end of a fiscal quarter. As evidenced by the Dollar decline which took place at the end of December, these periods are usually marked by portfolio rebalancing and hedging, such that it’s not uncommon to see large swings in forex markets. From a technical standpoint, when the Dollar failed to breach the $1.30 level against the Euro, many short sellers were probably forced to cover their positions, which accelerated the Dollar’s decline.
Bulls are confident that the pickup in risk-taking which catalyzed a 20% stock market rise is here to stay. “The move to the upside came after the government described a plan that will…generate $500 billion, and possibly $1 trillion over time, to buy hard-to-trade and badly deteriorated assets from banks.” The banks will be recapitalized, the financial system is being repaired, and everything will be okay, right?
The markets are certainly prone to false-starts. I can count numerous instances of government officials and market commentators insisting that “the worst is behind us.” Nevertheless, if this time proves to be different, it could be bearish for the Dollar, whose role as ’safe-haven’ currency would likely be eroded by a positive change in market sentiment.

Led by China, Central Banks Seek Alternative to Dollar

“China is a hostage. China is America’s bank and America basically says there’s nothing you can do to me. If I go down you don’t get paid.”
While the Obama administration has pledged the kind of fiscal responsibility that would secure its government obligations, its actions haven’t been so responsible. The Fed recently announced purchases of $1 Trillion in government debt, while the government is set to rack up Trillion-Dollar deficits over the next decade, even by the most conservative estimates.
In other words, China is in a quandary; stop lending to the US, and you might see the value of your existing reserves plummet. Continue lending, and you risk the same result. Tired of participating in this apparent no-win situation, China is finally taking action.
First, it will petition the G20 at its upcoming meeting for some level of protection on its $1 Trillion+ “investment” in the US. Meanwhile, Zhou XiaoChuan, governor of the Central Bank of China, has authored a paper calling for a decline in the role that individual currencies play in international trade and finance. According to Mr. Zhou, “Most nations concentrate their assets in those reserve currencies [Dollar, Euro, Yen], which exaggerates the size of flows and makes financial systems overall more volatile.” His point is well-taken, since of the $4.5 Trillion in global foreign exchange reserves that can be identified, perhaps 85% are accounted for by Euros and Dollars alone. When crises occur, everyone flocks to these currencies.Mr. Zhou’s proposal is not without precedent. “His idea is to expand the use of ’special drawing rights,’ or SDRs — a kind of synthetic currency created by the IMF in the 1960s. Its value is determined by a basket of major currencies. Originally, the SDR was intended to serve as a shared currency for international reserves, though that aspect never really got off the ground.” It’s not clear exactly how such a system would work, but the idea is straightforward enough; instead of holding individual currencies, which are inherently volatile, Central Banks would be able to denominate reserves in a sort of universal currency. Instead of parking money in US Treasury securities, they would hold IMF bonds, or some equivalent.
Even before China starting becoming more vocal about its concerns, analysts had begun questioning the role of the US as reserve currency. I’m not just talking about the perennial pessimists. Within the context of the current credit crisis, a bubble may be forming in the market for Treasury bonds. “Foreign buying of American financial assets by both private investors and governments averaged $141 billion from September to December, Treasury data show…Demand was so strong that, for the first time, investors accepted rates below 0 percent on three-month Treasury bills to safeguard their capital.”
There is concern that a slight recovery in risk appetite (of which there is already evidence) could ignite a massive sell-off: “People are sitting there holding massive amounts of zero- yielding dollar assets. If there is any sort of good news, demand for dollars can drop off very, very quickly.”

A Guide to Forex Leverage, and Employing it Safely

You have probably seen the advertisements - “Trade Forex with 400:1 Leverage” - without being entirely clear as to what exactly these brokers are offering and/or wondering why someone would want to leverage trades to such an extent.
Simply put, forex leverage (also referred to as margin) “is a loan that is provided to an investor by the broker that is handling his or her forex account.” With leverage, you can effectively increase your purchasing power, and buy securities in excess of what you would otherwise be able to afford, with the goal of maximizing relative returns. For example, if you achieve a 25% return on a $2000 trade/investment that was carried out with 2:1 leverage, you actually achieved a 50% return on the $1000 of capital that you personally invested; the other half, by implication, was provided in the form of a loan by the broker. Of course, the inverse also holds, such that a 25% loss would be magnified into a 50% loss, under the same parameters. See the table below for further understand this “multiplier effect.”
While traders can theoretically use margin to trade any kind of financial instrument/security, leverage is especially common in forex. The reason is that currencies are typically bought and sold in units of 50,000 - 100,000, which is more than retail traders can afford, or are willing to commit. Moreover, currencies are not as volatile (outside of the credit crisis, that is) as other securities, and typically don’t fluctuate more than 1% in a given day. Changes are often so minuscule that 1/10000 of a unit (one Pip) has become the benchmark for measuring fluctuations. Accordingly, “currency transactions must be carried out in big amounts, allowing these minute price movements to be translated into decent profits when magnified through the use of leverage.”
Leverage allows traders to put up only a fraction of the capital required to make a given-sized trade ; with 200:1 leverage, for example, $500 would be enough to fund a $100,000 trade. Unfortunately, leverage always favors the broker, much the same way that casinos benefit on average from extending credit to gamblers. According to one especially cynical commentator: “The game basically works this way: The broker is the shark. The retail trader is the shark food. If you want to make money currency trading, give yourself a fair chance and our advice is not to go more than 10x.”
A browsing of forex chat rooms and message boards reveals a surplus of disaster stories involving leverage, such that one can safely conclude that excessive leverage almost invariably leads to excessive losses. This lesson even seems to apply to institutional investors, despite the perception that they have an edge when trading forex, and hence would seem to represent excellent candidates for making leveraged trades. In the context of the current economic quagmire, “Investment banks were trading with 40:1 leverage in some cases. The banking crisis in the US was caused by banks not buying based on solid fundamentals and using insane leverage to buy securities.”
When trading a strategy that is based on technical analysis, “Even though you find one with 80-90% successful system on the paper, when you trade it usually come down 60%. So if we are losing at 40% of the time it is essential that we control risk.” Accordingly, putting more than 3% of your capital at risk on a given trade would seem suicidal. Applying more than 20:1 leverage (which seems trivial compared to 400:1) is very dangerous when you consider that a relatively benign 25 pip decline would result in a 5% loss. You can use the matrix below to calculate a “worst-case” scenario and figure out how much leverage you can get away with in the event that your trading strategy fails on consecutive occasions. It is surely much lower than you expected!
To give you an idea as to how excessive forex leverage has become, consider that the Financial Industry Regulatory Authority (FINRA) recently submitted a proposal that would prevent retail forex brokers from offering customers more than 1.5:1 leverage. While it’s possible that “The FINRA proposal sadly appeals to the lowest common denominator: the people who over-leverage positions with inappropriate stop-losses,” it nonetheless serves as a testament both to the danger of excessive leverage and to the importance of adequate risk management.

ECB Prepares to Lower Rates, Euro Rally Fades

On Thursday, the European Central Bank will conduct its monthly monetary policy meeting. The consensus among analysts is that the meeting will lead to a 50 basis point cut, leaving the EU’s benchmark lending rate at 1%, a record low. Investors are also bracing for the ECB to announce certain unconventional steps, similar to the Fed’s program of quantitative easing, although not to such an extent. Analysts have speculated that the ECB “could intervene in bond markets to help ease companies’ financing problems.”
This marks an about-face from current policy and recent rhetoric, in which the ECB insisted that guarding against inflation was more important than providing economic stimulus. In fact, Jean-Claude Trichet, President of the ECB, has recently found himself on the defensive: “I don’t think it is justified to say we are doing less on this side of the Atlantic. We have automatic stabilizers,” he said during his quarterly testimony in front of European Parliament. In fact, the ECB had become an outcast among Central Banks for waiting a long time before finally agreeing to cut interest rates. Since embarking on a program of monetary easing, it has been playing catch-up by cutting rates at breakneck speed.
It appears that the ECB’s arm was twisted by the most recent economic data; a sudden drop in German manufacturing suggests that the recession is both spreading and deepening. Combined with a record drop in the EU economic sentiment, this “suggests that the euro zone economy will have contracted by roughly 2 percent quarter on quarter in the first three months of the year.” In addition, both producer and consumer prices have eased, such that inflation has fallen well below the 2% target level, and the ECB lost its last excuse for not dropping rates.
As a result both of the worsening economic situation, as well as the projected decline in yields, currency traders are once again questioning the Euro. The last couple weeks have been rife with commentary that the Dollar rally had come to an end as a result of the intensification of the Fed’s plan to use newly printed money to as a source of liquidity in the credit markets. “The dollar’s traditional trading patterns have been altered in the wake of new U.S. quantitative-easing measures. Risk appetite, stocks and funding currencies appear to hold lesser influence lately.”
This week, the narrative in forex markets favors the Dollar. It could be that the safe-haven trade has returned to lift the Greenback, but more likely is that investors are comparing economic fundamentals when making bets on currencies. One analyst summarized his firm’s position as follows: “We have argued that the leveraging-de-leveraging axis has been the key driver in the foreign exchange market. We expect a new driver, anticipated growth trajectories, to emerge…[and] for the dollar’s uptrend to resume in the second quarter.”

Is Gold a Hedge Against Inflation and Currency Weakness?

Until the Fed announced an expansion of its quantitative easing program two weeks ago, gold had begun to fade into relative obscurity. Sure, gold had risen in value from a low of $710/ounce back up to $900/ounce, but prices were still off 10% from the highs reached in 2008. Meanwhile, risk aversion had begun to decline and the stock market had begun to rise, such that pundits were talking more about stocks and less about gold.
Since the Fed’s announcement, however, gold has been thrust back into the spotlight. The same trading session that saw a record fall in the Dollar and a record rise in Treasury prices, also witnessed a 7% spike in gold futures prices. ” ‘Money is being pushed into the system and that’s creating the inflationary threats that the markets are contemplating…Commodities are a decent way to hedge against that potential threat,’ ” observed one trader.
Other analysts, however, caution that rising gold prices are a sign of the fear/crisis mentality, not inflation. “There are just not a lot of alternatives for global investors. You will see more and more investors moving into gold as a safe haven, and you will see more institutions putting money into commodities indexes.” In other words, gold is being driven by the safe-haven trade, which is evidenced by an increasing correlation with Treasury bonds. One commentator calls it a hedge against uncertainty: “The demand for gold is for gold coins, a massive flurry of bullion buying by ETF’s (and investors), and the institutions and traders buying the hell out of it. The reason is simple… pure fear.”
With the exception of the perennial gold bulls and conspiracy theorists, the short-term consensus is that due to “massive spare capacity now opening up in the global economy, soaring unemployment and a dysfunctional banking system – it would be very hard for central banks to generate a surge in inflation even if they wanted to.” This analyst further argues that the Fed is undertaking the expansionary program under the implicit assumption that it will have to siphon this money out of the financial system, if and when the economy recovers.
Of course, there is not even a consensus that gold is a good hedge against inflation. Mike Mish points out that the correlation between the US money supply and the price of gold is not very robust. When examined relative to a basket of currencies (rather than the Dollar), however, the relationship suddenly becomes much stronger. Especially when you filter out fluctuations in the value of the Dollar (which is affected by many factors unrelated to inflation), “gold is doing a reasonably good job of maintaining purchasing power parity on a worldwide basis.”