Monthly Archives: February 2008

What is a CFD or Contract For Difference (CFDs)

What is a CFD, we all here about CFDs and CFD trading, but what is a Contract for Difference, find out in this inrtoduction

Introduction to CFDs / Contract for Difference

What is a CFD?

CFD or Contract for Difference is an agreement between two parties to exchange, at the close of the contract, the difference between the opening price and the closing price, multiplied by the number ofreference shares specified within the contract.

The ‘reference shares’ are the underlying shares specified in the CFD. The economic performance of a CFD is determined by the performance of the underlying reference shares.

Although CFDs replicate the price movement of the underlying reference shares, they convey no right or requirement to acquire or deliver the physical shares. (i.e. you don’t actually own the shares)

The contract value of a CFD is defined as the number of reference shares specified in the contract, multiplied by the price of the underlying reference share. If you take a long position, you will make a profit if the contract value increases. Conversely, if you take a short position, you will benefit if the contract value falls.

You can, therefore, profit from both rising and falling share prices. It is important to note that CFDs are a margined product and as such are not suitable for all investors. Due to the leveraged nature of the product you may loose far in excess of your initial investment.

You can find out more about CFDs at www.StartTradingCFDs.co.uk

2008 – Recession, Bounce Back or something else…

As we enter the end of Q1 2008, the rumours of a coming recession are heating up, the Big Squeeze / Credit Crunch.. what will be next

So with all the bad news providing an element of fear amongst the general public, and “unexpected” losses appearing out of the blue.

So what will it be like trading in this environment?

Well no one knows for certain, and that leads to a general view that things will be more volatile, many people will be thinking defensively, but that also leads to others trying to take contrarian views to get larger gains.

Cost of Funding / Leverage?

In volatile markets, the need for greater resources to handle short term movements, margin calls, and cash needs is even greater. Couple this with good risk management and clear strategies.

If you want real world examples where this broke down look at Northern Rock (their funding model failed, and then all their leverage fell through), and SocGen’s “rogue trader”.. is really an example of risk controls failing at a catastrophic level.

Short Term / Long Term?

If you are a short term trader.. then you stay watching the news, markets and short term indicators, if you’re in it on fundamentals for the long term, then now is a good time to really think about what you know and what you know you don’t know.

Logic / Not Emotion..

And as one head of trading said the other week – “I want you all to be a bit more Vulcan.. that’s right.. I want a 100 Mr Spocks” – in short now is the time to be really on the ball, and then you can do well, but you have to be using your head. Many will be losing their shirts and as our favourite mentor says.. “Are you the rabbit?”

How to Trade without losing any money ever

Trade Online.. and never lose money they claim..How can this be possible? Let us show you the only way we know how..

We all read the stories of people losing millions trading the markets (or recently the Socgen losses in the billions) and in recent times (2007 Oct – the losses in the “Credit Crunch” are Billions of pounds.. it boggles the mind. Ok so it’s clear, you can lose a lot of money if you don’t know what you’re doing.

On the flip side, we hear of traders earning vast sums, and the excesses of the city. So what is reality? and how can you get the good without the risk. Well here’s one solution.

So are you ready now to let us show you the how you can learn to trade without losing any money.

The secret is simple: Don’t trade with real money!! We told you it was simple.

Most only trading companies have great free games and trials where you can trade, with all the fun, excitement, and experiences of the real world onlne trading platform. They are often a 100% free, and don’t usually require you to send in any paperwork or give you credit card details (if they do we’d recommend you check the fine print very very carefully – after all why would they need these details?) So then you can learn to trade and all without risking any real world money.

As with many things in life, you can only become better through hard work and practice, (unless you’re a natural genius, which many of us aren’t) so “Practice Makes Perfect”.

So what to to look for:

  • Using real world price feeds for the trading game
  • Ability to run a position for a long time, (weeks, months)
  • The ability to have multiple demo accounts
  • Don’t put in any bank details to play the game

There’s a great one here

Paddy Power Trading

Things we’ve found help when you’re learning/practicing:

  • Try and behave as if the money is real (losing £100k, shouldnt’ just mean you reset the account as if nothing went wrong, in the real world that would not be the case)
  • Come up with your strategy, and trial it over a steady piece of time. Test it, and re-test it.
  • Do research different markets
  • Do research trading strategy, regulations, laws and taxes.
  • Do enjoy learning.. it is a game, and you can’t lose any money as you’ll be trading in a simulation, also you learn better when the mind is stimulated and having fun. (for getting the mindset try nlp).

Summary: Learn to trade in a Game/Simulated Environment

So it’s fairly clear, that by learning to trade in a simulated “game” environment, where you use real market data and the same online platforms, you can build up experience and learn how to start online trading.

So just like when you learnt to pass your driving test, you didn’t first go onto the motorway in rush hour by yourself, so it is with learning to trade online.

How about winning real money.. without risking any

There are also competitions out there that pay real world money to the winners of their trading games. Now that is a great trade! You can find a list of current competitions here

Paddy Power Trading

Players in the FX Markets

To understand the Forex market, you need to understand the players in the market, the participants and their motivations. In this article we’ll give you a brief summary.

The main participants and players in the market are:

  • Banks
  • Reserve banks
  • Hedge funds
  • Individual traders
    • Speculators
    • Investors
  • Brokers

 

1) Banks

Banks comprise a large portion of the total turnover. They use the foreign exchange market to buy and sell currencies that are needed for foreign exchange for their customers, to hedge or protect against market movements on behalf of their customers (for example when an importer may wish to protect against adverse currency movements) as well as for trading purposes.

2) Reserve banks

These are government owned organisations that are responsible for managing the economy of their countries by setting interest rates and they also may take positions on foreign exchange in an attempt to regulate or smooth exchange rates. Examples include the Bank of England, the Bank of Japan, the Federal Reserve and the Reserve Bank of Australia.

For example, the Bank of Japan may enter the market to sell Japanese Yen and buy Euros if they believe that Japanese Yen are priced too high relative to Euros.

Reserve banks are typically active in their own currency. They may make enormous trades that can quickly result in significant short term market movements. Usually the actions of reserve banks can be seen when there are sudden spikes or dips in a currency.

In addition, reserve banks often manage the release of key economic statistics. This information is eagerly awaited by market participants and results in immediate price movements if the statistics differs from the consensus view.

3) Hedge funds

Hedge funds are professional investment firms that usually manage funds on behalf of high net worth investors. They may invest in a variety of financial instruments, including foreign currencies. Their motivation is speculative profit for their investors, as they earn their money from a percentage of profits earned.

4) Individual traders

Individual traders are increasingly active in the FX markets. This is driven by the ready access to the market through the Internet and the opportunities available to earn significant profits with a relatively low capital investment.

Individual traders are often unsuccessful. In fact, about 90% of individual traders lose money during their time in the FX markets. Individual traders often don’t have systems, and don’t manage risk well.

In addition, individual traders face higher transaction costs than professional traders as they don’t have direct access to the market and have to use a broker. Also, individual traders can’t watch the market all the time as they usually have other committments such as work or family life.

These factors are a disadvantage, but the advantage is that the individual trader can choose whether to participate in the market at any given point in time. Professional traders are pretty much obliged to trade all the time by the nature of their jobs which means that they may not be able to be as selective about the trades that they enter.

  • Speculators – They may be day trading, and not trading in a manner which seems to make sense to all the market. They tend to be short term in focus.
  • Investors – They are looking to trade fundamental market movements, often with a longer maturity

5) Brokers

Brokers provide access to the FX market to individual traders. Typically banks and hedge funds have direct access to the market as they are a part of the market.

A broker will provide account keeping services, execute trades and usually provides some software to place orders and allow you to look at current prices and charts.

Brokers earn their profit by charging a spread. This is a difference between the buying and selling price. For example to buy EUR/USD, the price may be quoted 15/19, which means that the broker makes a spread of 4 basis points per trade. A trade is either buying or selling a foreign currency position.

Glossary of Forex Trading Terms

Glossary of FX trading terms. Highlighting the main ones used with the currency markets. If in doubt, double check or ask questions. It’s the wise man who knows what he doesn’t know.

  • American Option – An option that may be exercised at any time prior to its expiration date.
  • Ask – The price at which a currency pair may be purchased. Also called the offer, ask price or ask rate. (also see Bid – e.g. Bid/Ask Spread)
  • Base Currency – The first currency in a trading pair. In the case of a trade involving the U.S. and the Australian Dollar (USD/AUD), the U.S. Dollar would be the Base Currency. Also called the primary currency. The U.S. Dollar is the most common base currency
  • Bearish – Defines a market where prices are declining. Also known as a Bear Market.
  • Bid – The price that a currency pair can be sold at. Also known as a bid price or bid rate. (see Offer)
  • Bid/Ask Spread – The difference in points between the bid and ask price. Also called the Bid/Offer Spread.
  • Bullish – Defines a market where prices are rising. Also known as a Bull Market.
  • Call – A call option gives the buyer the right, but not the obligation, to purchase a specific currency pair at a pre-agreed price. An option to Buy.
  • Cross-rate – The exchange rate between two currencies, neither of which are the U.S. dollar.
  • Currency Pair – The two currencies comprising the FX rate. The USD/AUD represents a currency pair.
  • Dealer – A trading firm that is the other party in a FX transaction.
  • Euro – The official currency of many European countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain. The Euro is also the official currency of Montenegro and Kosovo, Andorra, Monaco, San Marino, the Vatican, and these French territories: Martinique, Guadalupe, Reunion.
  • European Option – An option that can only be exercised on the date it expires.
  • Expiration – The date on which an option must be exercised or offset. (or maturity)
  • Forward Transaction – An agreement for actual delivery and payment for currency to occur at a specific date in the future.
  • Interbank Market – Currency transactions that are negotiated between banks or between large financial organizations. An individual can not trade on the Interbank Market directly.
  • Leverage (or Gearing) – A trader’s ability to control a large amount of currency with a relatively small amount of capital invested.
  • Long – A position that is expected to appreciate in value as the market increases. (compare with Short)
  • Limit Order – An order which is placed with some pre-condition, usually the maximum price the trader is willing to pay.
  • Margin – The amount of money required before anyone can open or maintain a position. Also called a Security Deposit.
  • Offer – The price at which a currency pair may be purchased. Also called the ask price or ask rate.
  • Open position – Any transaction which has not been closed out by an opposite transaction. This is a position at “risk”
  • Pip – The smallest FX currency unit of price movement.
  • Premium – The priced paid by an option buyer. Does not include commissions.
  • Profit – The difference between the selling and the buying price. Not a profit may be realised (ie safe), and unrealised (i.e. exposed to risk – e.g. on an open position)
  • Put – A Put option gives the buyer the right, but not the obligation, to sell a specific currency pair at a pre-agreed price. The opposite of a Put is a Call.
  • Quote Currency – The second currency in a trading pair. In the case of a trade involving the U.S. and the Australian Dollar (USD/AUD), the AUD would be the Quote Currency Also called the secondary or counter currency.
  • Rollover – The act of extending the settlement date for an open position until the next settlement date.
  • Resistance – A price level beyond which the currency finds it difficult to move.
  • Settlement – The delivery of the currency upon the trade’s maturity date. Trades can settle 1,2,3,or x days after trade date.
  • Short – The act of selling a currency that the trader believes will decline in value. The trader need not actually own the currency being sold. It can be borrowed from the broker and repaid at a future date when the price is more advantageous. (Short Selling)
  • Spot Market – A transaction where payment and delivery of currency is immediate.
  • Spread – The pip difference between the ask and bid price of a currency pair. The smaller the spread the better, when you are trading as otherwise any profits are reduced by trading costs.
  • Stop Loss – A standing order which instructs the broker to liquidate an open position if the price falls to a pre-specified level. In essence “Stopping any further losses”
  • Strike Price – The exchange rate at which the buyer of a call or the seller of a put can exercise a trade. Also called the exercise price.
  • Support – The price level at which traders feel comfortable enough to buy.
  • Trend – The direction in which the market is heading. The three categories of trends are: major, intermediate and short-term. Trends move in one of three directions: up, down, sideways.
  • Turning point – The point where a market ceases being though of as being bullish or bearish and moves in the opposite direction.

FX Rates and Graphs

There are lots of FX rates available online and free graphing of “live” fx rates.

Many of these come from trading platforms, others via exchanges, and other information providers.

Consider the source of your data

It’s important to consider:

  • Why they are providing the data
  • The cost of the data
  • Whether the data is live, delayed, indicative, tradeable
  • The display of the data
  • The currency of the prices
  • The timezone of the data (London, Paris, Tokyo, New York – what is 9am?)

Also consider why you are looking at the currency

  • Are you doing a short term trade
  • A long term currency play
  • Ensure you review both the short term (mins, hours) and long term (weeks, months, years) trends

What’s the base currency?

Currency rates are usually displayed with the USD cuurency as the base currency. It’s important to know what the currency you are looking at is being quoted against.

Example of Graphs

This is an example of a Candle Graph showing the GBPUSD at 15minute intervals, and below 1 minute intervals. Notice the difference in the graphs.

Essential News and Information Sources

Keeping up to date, with the latest news in general, currency movements, economic indicators and other factors which can impact the markets, and traders views is essential.

General News Sources

The BBC website is very useful, and is a well established news source. This covers a large variety of content, the business section is more specialised.

The Financial Times is a good website for financial and general news, as well as assessing sentiment.

Reuters and Bloomberg are good information sources but to get up to date information you need to pay for a feed, which isn’t practical for most traders.

Forex , FX, Currency News

Forex News Macroeconomic views how the the economic calendar and central banks can affect the currency markets.

FX Street – daily listing of major daily currency analysis and forecasts with support and trading suggestion forecasts.

Currency Pro – A Forex Portal with strong analysis on the Major Currency pairs.

Euromoney – Lottery – you could win millions

It may not be an fx trade, but a possible £95million seems to good an opportunity to miss. In this article we’ll highlight a key question to ask yourself.. are you gambling or trading?

Play EuroMillions Online


Play EuroMillions Online

So did you gamble, did you trade, did you bet? There is a question of when a trade becomes a gamble, when logic gives way to sentiment, and when the idea of something becomes more attractive than the real statistical probability would suggest it should be.

Me personally I like the lottery from time to time, ensure I only play a small amount that I really am prepared to lose, and look at it as entertainment. Where as my fx trading, well that is something much more serious.

The Dangers of FX trading and Forex for Beginners And How To Remove Them

When you begin trading fx, you have new dangers to face. Learn about some of these dangers and what you can do about them.

When trading forex, it’s important to remember that there are dangers.

When you start trading forex, those dangers are at their greatest. You lack experience, your understanding of the forex market, forex trading strategies and the factors that influence currencies might be relatively small… and mistakes can be very expensive!

When you’re just starting out in the forex markets then, bear in mind the following:

The danger — The forex market moves fast and you can lose your money just as quickly. And because it moves constantly, 24 hours a day, you can even lose it while you sleep, waking up to a giant loss.

The solution — Prepare well before you start trading forex. Take a forex trading course, make dummy trades using the sort of amounts that you’ll be investing and make sure before you create your first position that you know exactly how the forex market works.

The danger — Because forex trading by the public is relatively new, a number of unscrupulous traders have sprung up who operate illegally or scam their clients. There aren’t many of them, but they do exist and you do want to avoid them.

The solution — Make sure that your trading firm is accredited and legal, and read the small print in the website terms or contract carefully. They might not be the most interesting read in the world, but they should be read.

The danger — Place a bet on a roulette wheel or on a horse and the amount you put down is the amount you stand to lose. Take a position in the forex market, and it’s might not be completely clear how much you’re risking. Leverage, in which small amounts of money control large units of currency, make those risks even greater.

The solution — Use strategically placed stop-losses to minimize your risks and ensure that a losing position is ended before the losses grow too large.

There are risks in any form of investment. Understand the risks of the forex market — and how to reduce them — and while you won’t be able to remove them entirely, you should be able to protect yourself.

Don’t be too scared though.. try this in practice in a demo account for example at paddypowertrader.com

Protect your trades – Stop Loss Orders and Take Profit Orders

Protecting Yourself When Trading Forex by Knowing the risks and preparing for them

Like any investment system, trading in the forex markets carries risks. It is possible to suffer losses as well as gains. Lose more than you can afford and it’s unlikely that you’ll get a second chance. Those risks are particularly acute when you’re starting to trade forex and have yet to gain experience.

Fortunately, there are a number of tools that you can use to reduce your risks and minimize any losses that you might suffer.

You can’t watch the markets all the time, what if even if you worked out correclty what the market was going to do.. you’re waiting to trade.. then the phone rings.. oops.. well .. you can set up automated orders to keet you safe.. Stop Loss Orders and Take Profit Orders.

Use Stop Loss Orders (Stop Losses)

The first is a stop-loss. A stop-loss automatically closes your position in the forex market when the bid or offer price of a currency you’re holding reaches a set level. For example, you might place a stop-loss just below the purchase price of your currency. If that currency were to fall dramatically, you would only lose up to the amount of the stop-loss.

For people just starting to trade forex, stop-losses can be very useful ways to remove the confusion that can slow a decision — and increase losses — when a currency suddenly drops.

Guaranteed stop-losses are similar to stop-losses but provide an extra level of protection. Occasionally, a currency can fall so fast that it skips past the price set for the stop-loss. A guaranteed stop-loss ensures that your currency will be sold at the price you have set, even if the market has fallen beneath that level.

Take Profit Orders

Profit caps are similar to stop-losses in that they also trigger an automatic sell. In this case though, they’ll trigger a sale intended to guarantee a profit rather than to protect against a loss.

You can think of profit caps as tools to snatch opportunities at times when you’re not alert to them. If a currency you’re holding spikes at some time on the 24-hour forex market when you’re not watching it, you’ll still be able to benefit.

So you can protect yourself against a free-falling currency, and you can earn from a suddenly rising currency. But the best way to protect yourself when trading forex is to manage your money carefully. Place no more than 10 percent of your available funds in any one trade and never invest more than you can afford to lose

You can find out more at paddypowertrader.com