There has been a lot of information about Forex recently, and it seems, just as many claims that there is no risk involved with Forex trading. This is absolutely not true. As with any type of investment, there is the possibility of your investment, or trade, not working out in your favor. There are, however, numerous tools that traders use to help reduce the risks. But you must also educate yourself concerning the Forex as well.
Just as there are risks, there are also scams when it comes to Forex claims. Fortunately, most of these scams have been uncovered, but you must still use caution and good sense before you choose a Forex broker. Make sure that your broker is registered with the CFTC (Commodities Futures Trading Commission), or that they are a member of the National Futures Association (NFA). Check the broker out with your local Better Business Bureau as well, and insure that the broker has the backing of one or more large financial institutions.
Even if you have a good broker, there are still risks that you must consider. The Forex market can be volatile, and can change very quickly. The fluctuations in currency prices over a trading period, known as the Exchange Rate Risk, can literally ruin you in a matter of minutes if you don’t have a stop loss order in place. With a stop loss order, you can basically instruct your broker, ahead of time, to close an open position if the currency price drops to a certain level. You can also use limit orders to determine when an open position should be closed.
You must also be aware of other risks, such as the interest rate risk, the credit risk, and the country risk. The interest rate risks exists when there is a large difference between the interest rates in a currency pair. This difference can have a huge impact on expected profit or loss.
With the credit risk, you must be aware that when you are buying a currency, someone else is selling you that currency, and vice versa. There is always the possibility that the other party won’t honor the debt. The country risks relates to a situation when a government may try to control the available currency. Ideally, the major currencies are not at this type of risk, but the minor ones are.
Never doubt that Forex trading has risks, but also understand that there are ways that you can minimize your risk. Start by developing a trading strategy. Your strategy should tell you when to enter and exit the market. Of course, research and analysis are needed to develop a strategy. Also, as with any type of gamble – and investing is gambling – don’t invest money that you aren’t willing to lose.
You need to know how to read financial charts and quotes, and understand fundamental and technical analysis. Before you start investing, you need to learn these things, and learn as much about Forex as possible. Remember that even the best trader can only guess at what the market is going to do – there are no guarantees that all will go as you expect it to.
Learn to use risk minimizing tools, such as stop loss orders and limit orders. These types of orders are issued at the time that you make a trade, and it basically automates that trading. Your stop order can close your position when the price falls to a certain amount. A limit order can hold a buy until the price reaches a certain point.
Fundamental Analysis of Forex and Why It Is Important To Understand
When choosing stock investments, savvy investors rely on analysis and research to determine how stocks will perform in the future. When trading on the Forex market, traders must also rely on analysis to plan trading strategies. In the Forex market, there are two types of analysis: Technical analysis and Fundamental analysis.
Fundamental analysis basically comes from political and economical conditions that may affect currency rates. This analysis may come from a variety of sources, such as news reports, unemployment rates, policies, interest rates, inflation, growth rates, and economic policies.
With fundamental analysis, a trader is able to see a big picture concerning the economic conditions of a currency, and how that currency may move in the market. Fundamental analysis are then supported with technical analysis so that a trader is able to determine entry and exit points.
The Forex market currencies are greatly affected by the supply and demand of those currencies. This supply and demand also has an effect on the economic conditions around the world. Supply and demand is affected by interest rates, as well as how strong the economy is. The economy, in turn, is determined by the Gross Domestic Product, Foreign Investment, and Trade Balance.
Governments and academic sources release indicators. Indicators are measures of the health of the economy. These indicators are typically released monthly, but there are some that are weekly. Interest rates and International trade are the two most important indicators, although other indicators are the Consumer Price Index (CPI), Durable Goods Orders, Purchasing Manager’s Index (PMI), Producer Price Index (PPI), and of course retail sales.
Interest rates can affect the economy in two ways: they can either make the economy stronger, or make it weaker, and this in turn makes that currency stronger or weaker. If the interest rates are high, there are more foreign investments, which makes the currency stronger. However, high interest rates can be bad as well, causing stock investors to sell their stocks, which in turn has an impact on the stock market, and the overall national economical condition.
The trade balance can show a positive or negative balance. If there are more imports than exports, the trade balance will be negative. This is a good indication that the currency value will drop, as this means that money is leaving the country, instead of coming into the country.
The cost of living (CPI) also matters, as does the PPI, which is the cost of producing goods. The value of services and goods in a country is measured by the GDP, and the amount of currency available is measured by the M2 Money Supply. In fact, in the United States, there are 28 indicators that are used. Forex traders must make themselves aware of these indicators if they hope to be successful, as these indicators will help plan strategies.
GBP Retreats From 7 Month High Price
Sterling lost ground against a number of its peers on Monday as investors engaged in a spot of profit-taking and a dearth of UK data gave the Pound little opportunity to move upward. The GBP/USD currency pair moved away from its recent seven-month high and GBP/EUR dipped back below 1.40 amid hopes that Greece is close to reaching an agreement with its creditors. However, the Pound managed to move back above 1.40 on Tuesday in spite of French Services and Manufacturing PMI printing above expected levels. Today’s CBI reports could cause a little Pound movement.
News that the latest reform proposals submitted by Greece to its creditors were found to be more acceptable than previous drafts gave the Euro a bit of a boost at the beginning of the week. However, later reports that the Greek PM has been given just 48 hours to finalise an agreement put the common currency under pressure and it softened against rivals like the Pound and US Dollar in spite of the publication of positive ecostats for the Eurozone’s second largest economy.
Risk aversion lent the US Dollar support on Monday, as did the US Exiting Home Sales report. Sales were believed to have increased by 4.8% on a month-on-month basis in May, but they actually climbed by 5.1%. ‘Greenback’ gains were limited however as the Chicago Fed Net Activity Index disappointed expectations. If today’s US Durable Goods Orders figure shows the -1.0% decline anticipated the US Dollar could edge lower in the hours ahead.
The Australian Dollar posted a modest gain against the Pound during the local session in spite of both the Westpac Leading Index and the Australian House Price Index printing poorly. ‘Aussie’ support came in the form of China’s HSBC Manufacturing PMI, which advanced from 49.2 to 49.6. The measure had only been expected to edge to 49.4.
New Zealand Dollar
The New Zealand Dollar put on a fairly mixed performance on Tuesday, gaining on the Pound and Euro but falling against the US Dollar and Australian Dollar following the publication of China’s Manufacturing PMI. Ecostats for New Zealand are in short supply until Thursday when the nation is set to publish its trade balance figures.
Yesterday morning saw the GBP/CAD exchange rate soften by more than a cent as traders took advantage of the pairing’s recent four-month high. With no Canadian data scheduled for release this week ‘Loonie’ volatility will be the result of global economic developments and commodity price shifts.
GBP Slides As Dollar Hits a New 12 Year High vs Yen
The Pound Sterling fell against the Euro to trade in the region of 1.38 as it came under pressure from Monday’s softer-than-expected UK Manufacturing PMI data and optimism that a deal will be reached between Greece and its creditors. Against the US Dollar, Sterling was trading close to a three-week low. The currency rate could make gains for those looking for money transfers if the upcoming UK Construction PMI comes in positively.
The US Dollar advanced to a new 12-and-a-half year high against the Japanese Yen and firmed against other major peers following the release of upbeat US manufacturing activity and construction spending data, which bolstered expectations for higher interest rates. The ISM index of manufacturing activity came in at 52.8, up from 51.5 in April and ahead of forecasts for a print of 52.0.
The Euro advanced against the Pound and other major peers as speculation increased that European creditors are close to offering a new deal to Greece. German chancellor Angela Merkel held an unscheduled emergency meeting to discuss the situation. The Euro could make further gains if data out of Germany and inflation data out of the Eurozone comes in positively.
The ‘Aussie’ rallied by more than 1% against both the US Dollar and Pound Sterling after the Reserve Bank of Australia left interest rates on hold but hinted that a rate cut could occur later in the year. RBA governor Glenn Stevens said in his statement that the Dollar had further to fall, yet avoided reinstating an explicit bias towards lower interest rates given the full impact of last month’s quarter of a percentage point cut was yet to be felt in the economy.
New Zealand Dollar
The New Zealand Dollar firmed against a number of peers as investors took profits on the US Dollar following the release of Monday’s positive ISM data. With no domestic market moving data due out of New Zealand until next week, the ‘Kiwi’ is set to be influenced by external factors.
The ‘Loonie’ tumbled to a six-week low against the ‘Greenback’ on Monday but managed to regain ground today as investors took profits on the US currency. The Canadian Dollar did find some support from oil prices, which stabilised due to firm demand.
Euro Continues to Slide Despite Recent Bounce
The euro continues to sink against the dollar to 1.226 dollar against 1,228 dollars on Friday night, and even recorded a lowest in more than two years to 1,225 dollar, continuing the subsequent stall the publication of figures from the employment in the United States.
For the record, the euro-dollar fell Friday in announcing the creation of 321,000 non-farm jobs in the United States in November, while economists had expected that approximately 225,000 and an unemployment rate stable at 5.8%.
In light of this report, Natixis said he expected that “wage growth moderate returns in the medium term ‘, so that’ the Fed normalizes its interest rate policy from the mid 2015 ‘.
‘Many analysts expect the Fed to be stronger at the end of its meeting next week, which would enhance the prospect of mid-2015 for a first rate hike’ adds-on that Monday at IG.
The single currency suffers also from lower by Standard & Poor’s lowered its rating of Italy from ‘BBB’ to ‘BBB-‘, arguing that the weakness of the country’s economic performance undermining its ability to cope with its debt.
More bad news from the eurozone, German industrial production rose by only 0.2% in October, a rate two times less than that expected by the consensus, marking a slowdown from the previous month (+ 1.1%).
Always compared to Friday, the euro and the dollar will depreciate against the Japanese currency by 0.7% to 148.5 yen and 0.5% to 121 yen, while the return from Japan into recession was confirmed with a decline of 0.5% of GDP in the third quarter.