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Monday, February 22, 2010

FX and Central Banks

FX - Forex. An over-the-counter market where buyers and sellers conduct foreign exchange transactions. also called foreign exchange market.

Is that what FX is to traders who attempt to take pips from the market everyday?

That particular definition seems a bit over-simplified huh?

To me FX market movements seem perfectly choreographed...

Choreographed by whom? You might ask...

From Who Are the Major Players in the Forex Market?
Central Banks and Governments- Monetary Policies such as Interest Rate that are implemented by central banks or governments can play a major and critical role in the Forex market. Central banks provide financial stability by controlling a country's money supply.

Banks- A major portion of the Forex market turnover is from banks. Large banks literally trade billion and billion of currency every working day. This could be in the form of hedging or speculative purposes.

Hedge Funds- By now, you should know that the Forex market has high liquidity, hence it is a major attraction for trading. Hedge Fund managers have increasingly allocated big portions of their portfolios to speculate on the Forex market. Another advantage is a higher degree of leverage available to them as compared to the stock or equity market.

Large Multinational Corporation (MNCs)- The reason why Forex market is in existence is due primarily to global trade. With the highly interrelated global market place, goods are imported or exported to many countries. Payment for these goods and services may be made and received in different currencies. Billion and billions of dollars are exchanges every day for global trade transaction.

Retail Investors and Speculators- In reality, there isn't much difference between the two. Both are in the market hoping to make money by exploiting the movement of a currency pair. Each has their reason to believe why a currency will move up or down and in turn long or short a currency accordingly. According to a survey conducted by the Bank for International Settlements (BIS) in April 2007, average daily trading volume for the Forex market reached an all-time record high of US$3.2 Trillion. A 71% increase from US$1.9 Trillion that was traded in April 2004. This increase is due mainly to the participation of retail investors utilizing broker's electronic trading platform.

You and Me- When we have our holiday aboard or traveling overseas on business trips, we would naturally need to buy that country's currency and upon return, revert back to our own nation's currency. When we are using our credit cards to make overseas purchases, our credit card company has to convert our purchases into out home currency in order to bill us. Not knowingly, we are already trading currencies.

When it comes to 'moving the markets' in FX we can immediately throw out vacationers, Retail Investors and Speculators and I would say likely Large Multinational Corporation (hedgers etc...).

That just leaves Central Banks, Banks and Hedge Funds...


Teeny tiny pimple on their butt FX traders...

We all know, have heard, the number that frequently floats around everywhere... That 90% of ALL FX traders lose money! Or maybe some more upbeat estimates of 80% 'losers' or maybe we could even find somewhere that says ONLY 70% of all speculators lose money in forex... Nice...

I like to ask myself not only WHY is this the case but HOW is such a thing even possible?!

If it is in fact true, which I believe it is, then by now shouldn't everyone be flipping a coin to make trade entry/exit decisions?!

I mean come on... everyone KNOWS that flipping a coin will produce BETTER results than the 10%, 20% or even 30% winners that seem to afflict all, or almost all, forex speculators...

So??? What is it really that causes so many forex traders to be... well... losers?

A combination of things...

We can't move the market

-Try as we might, with our tiny little accounts of a few thousand dollars US here and a few thousand euros there, it's not going to be independent FX traders who move the market... If we are smart we are trying to figure out (guess if you prefer) the direction that the major players WILL move the market. Our 'job' is to see into the future... To have the ability to 'see' in our mind where currency prices may be 5 minutes from now, 5 hours, 5 days, 5 weeks, 5 months... Our 'job' is to see into the future. Not with a crystal ball but with the 'tools' of our trade... All of our wonderful charts and indicators but mostly the power of our own brain and intelligence.

But how can we claim to have any 'intelligence' at all when/if as many as 90% of us are losers?!

We are set up to lose...

-leverage & volatility- These are the very things that attract us TO forex trading... These are the 'hooks', the 'drugs' that get into our veins, as traders, and give us the high (or low) that we are seeking... These two things, taken TOGETHER are tremendous weapons of mass destruction when it comes to forex accounts... Traders have incredible leverage available in forex. Leverage that is found NO WHERE ELSE!

Your credit score can be the worst out there BUT the Central Banks & brokers are still dying to give you an INCREDIBLE amount of credit with which to buy/sell currencies!

Some micro accounts have leverage equal to 400:1 !!! There is NO application process... NO ONE is turned down for an account due to a bad credit history. Because it is all a cash based business. You cannot lose more cash than you have in your account because of the wonderful mechanism of a margin call... When your money is gone it is just gone... At least until you add more money to your account and the process repeats... For as many as 90% of us!

Volatility is so incredible that it can take your breath away... Obviously because when we trade currencies we are looking for pips...

What are pips... here's a decent definition from easyforexonlinetrading.com
Pip is short for "percentage in point" and you may sometimes hear people refer to pips as points.

Put simply, a pip is the smallest unit of price for a currency. It's the last decimal point in exchange rates or currency pairs.

For most currencies its 0.0001. So if you bought USD/CHF 1.2475 and sold at 1.2489 you made 14 pips.

One common exception is USD/JPY. In this currency pair there are only two decimal places so a pip is equal to 0.01.

The reason pips are so important is because they are the basis for calculating profit or loss in forex trading.

Pip Value.

With all these different currency pairs to deal with and with prices fluctuating all the time, how do you know the value of a pip?

It's a simple calculation.

For currency pairs in which USD is the base currency, just divide a pip (usually 0.0001) by the exchange rate.

For currency pairs in which USD is the quote currency, its even simpler. The pip value is always one pip (for example, 0.0001).

So in our example above, when the exchange rate for USD/CHF is 1.2489:

0.0001 / 1.2489 = 0.0000800704

That's a pretty tiny number.

But remember that in forex trading you are able to leverage small sums of money to move large quantities of currency.

In other words, you can use leverage to make big profits off of that tiny number.

Let's say your forex broker allows you to trade with leverage of 100:1. This means that in order to buy a standard lot of $100,000, you only need to put up $1,000.

You can see how trading in larger lots affects the pip value, and therefore your profit or loss:

If you are only trading $1,000 in currency, the pip value is calculated as follows:

0.0000800704 X 1000 = $0.08 per pip.

The price would have to go up by a whole lot of pips in order to make a significant profit at that rate. That 14 pip profit only made you $1.12.

But by using leverage to buy a lot size of $100,000 your profit increases.

0.0000800704 X 100,000 = $8.01 per pip.

That's a profit of $112.14. Now you're talking!

"Now you're talking"?! VERY flippant... This little definition completely leaves out the fact that you can just as easily LOSE that 112.14... And not ONLY that but you can lose 14 pips about as fast as you can blink your eyes! That is volatility... and when combined with leverage it is capable of destroying an entire account with just one bad mistake. ONE mistake... We all live or die by the grace of our stop losses...

My worst is not fear or greed... Though I do experience those... My single biggest emotional problem with FX is ANGER! I get SO MAD when I understand how the Central Banks have duped me into handing my money over to them... once again! It seems to me that they set the most wonderfully elaborate traps for us traders! Here we all are TRYING to follow all the rules, trying to correctly read all the indicators, worrying forever over the placement of our stops and profit targets, trying to convince ourselves that we truly ARE the great forex trader that we think we are...

All the while KNOWING, somewhere in our collective heads, that flipping a coin would likely yield better results for most of us...

Central Bank / Bank market manipulation and cheating...

So what IS the real deal with forex trading?

It is WAR!

And you MUST arm yourself not with SOME of the knowledge but with ALL of the knowledge! If you are serious about taking money out of the forex market you should be prepared to work harder and smarter than you have ever worked before. And that doesn't mean 'confusing' yourself with news and indicators...

We, as serious forex traders, must understand, in addition to everything technical, not only our own emotions but also the emotions and intentions of the major players in the market. Their 'job' is to take YOUR money! Sure the banks trade against each other... We forex traders are considered to be insignificantly small time. We can't 'move the market'. But the Central Banks, IMO, have devised a master 'system' of controlling market movement in all time frames and combining that control with remarkable volatility and leverage. The sole purpose of this market manipulation/choreography being to suck the money out of the accounts of anyone brave enough (or foolish enough) to enter the forex market.

So what must WE do?

I believe being the best technical analyst in the world is not enough. I believe staying on top of every single news event in the world is not enough.

To me the main key to successful FX trading is anticipating the market manipulation designed to take your money and acting upon that information! I suggest that it is the extreme HEAD GAMES brought on by Central Bank market manipulation, leverage and volatility that sink most FX traders.

NEVER forget WHO your opponents are! They are Central Banks and governments around the world! Very formidable opponents indeed! Never take trading the forex market lightly... If you do you will quickly be eaten alive by it's gyrations.

In reality FX is simple and easy to trade!

Want proof?

Try this experiment for awhile... Rather than trading $EURUSD for awhile switch to trading $FXE. Stop trading $AUDUSD for awhile and instead trade $FXA. Don't trade $GBPUSD, instead trade $FXB. These ETFs are priced in pennies... not pips... The average movement in a days time is very small by comparison to their FX counterparts. Leverage your account by buying more of these ETFs. Use all the same technicals that you use now, trend lines, bollinger bands, stochastics, whatever but use them on these ETFs rather than actual currency pairs and see what happens. See how much better you are able to guage market direction when you are not scared to death by leverage and volatility...

That's what I'm going to try for awhile...

But I'll probably continue giving some money to Central Banks too... Just for fun ;)


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