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It is an agreed fact that the foreign exchange (Forex) market offers opportunities to make good money. But, at the same time, the market is equally a very risky one to dabble into unprepared. This is the reason why novice traders in the forex market are usually advised to start their currency trading journey with these accounts. Still not convinced? Read on to find out why you should always start on a demo account as forex trader. It helps to compliment materials while learning The first importance that will be talked about has to do with learning how to trade. It is likely that you have read so many materials on forex trading and the different techniques and strategies. Perhaps, you have actually participated in seminars or webinars also. One thing missing in all these is practice. A forex demo account will give you an opportunity to put into practice all those things that you might have read or watched, so that you can have a feel of what the actual trading process is usually like. Forex demo accounts are risk-free It is said that the forex market has an element of risk attached to it. That statement is true about the market, but not about demo accounts. These accounts are totally free without any commitment at all on the part of the traders using them. In essence, it means that you do not really lose any money of yours when using demo accounts. This is very helpful because it allows traders, especially beginners, to trade without fear and try out all techniques as well as strategies they might have fashioned out or been considering to use for trading. A demo account helps with time management Time is a resource that has to be used judiciously because, once lost, it cannot be regained. This fact also holds in the forex market. If care is not taken, you may find yourself staring at monitors for hours without really getting anything done. The forex market operates round the clock, five days in a week, but with different trading zones. A forex demo account can help you to sharpen your time management skills for you to be more productive by being familiar with these zones and their different times. It probably helps to note that the busiest trading hours are usually when the markets in North American and Europe are both open. The accounts help to test different platforms It should be noted that forex brokers do not operate the same trading platform. These brokers have different platforms, sometimes with differing interfaces. Demo accounts give you the opportunity to test the platforms of all forex brokers that you may be considering and who do allow such accounts to be opened. This way, you are able to easily reach a decision on the trading software that you consider simple and effective to use before opening a live account. You will most likely agree with me that it would be disappointing to realize after you must have deposited your hard-earned money that you cannot effectively use a trading platform.
For a trader to be profitable in currency trading, they must be very adept in identifying opportunities in the market and know how to utilize such to the fullest when identified. This is why it is highly important to be able to find the major trend in the market and go with the trend. It is also possible to trade against the major trend, but this is a riskier way to making profits in forex trading. In the attempt to find out the direction of the market, moving averages are very useful. What are moving averages? A moving average is an indicator, which shows the average price of a security or currency over a given period of time. Moving averages are one of the very popular indicators relied upon by traders and the oldest means of technical analysis. They are quite useful in measuring momentum and determining possible areas of support and resistance. Moving averages help traders identify the direction of the market. When the average price over a particular period rises, it is indicative of an uptrend in the market. Moving averages are seen as lines, which rise and fall to show the overall direction of prices of currency pairs. There are different types of moving averages, with each meeting different needs. The most common types include simple moving average, weighted moving average and exponential moving average. Simple moving average is the most basic form, calculated by adding a number of prices together and dividing the total by amount of data points. Weighted moving average is calculated the same way as the simple one, except with the values used linearly weighted so that most recent rates have more impact. An exponential moving average is also analogous to a simple moving average; except that it goes further to include all historical price ranges. How traders can benefit from using moving averages The most important benefit that traders get from moving averages has to do with the issue of "noise," or rate fluctuations. One fact that all experienced traders would attest to is that rate fluctuations make it very hard to use real-time data on exchange rate effectively. Moving averages help to reduce or "smooth out" this potentially problematic rate fluctuations, thereby making it a lot easier to make out the right trend of exchange rates associated with currency pairs. It is common knowledge that when traders assess pricing data their main interest is in identifying trends. At the same time, effort is being made when using moving averages to find out the points at which exchange rate trend reversals occur. Traders are able to determine the perfect time, based on the identified rate trend reversal point, at which to make buys or sells in the market so as to make appreciable profits on trades. There are always opportunities of making money on the various currency pairs in the forex market, but you cannot make money if you are unable to find them out. Moving averages can be of immense help in the effort to do that.
There are different styles that a trader can utilize to execute trades. Day trading, swing trading and scalping are just some of these styles that can be used. What may be good for a particular trader may not be considered adequate by another. Therefore, we are going to have a look into day trading, swing trading and scalping in order to help traders determine the one they find most suitable. Day Trading This trading style is the most popular one among many forex traders. It is the same thing as intraday trading. Day trading involves holding a trading position for just few hours or a day; so it is possible for several trades to be completed in a single day. One of the benefits of day trading is that the risk involved is somehow low and traders can get up to 100 pips in a day. Also, a trader with only a small amount of capital can open a trade and there is room for using low stop loss. On the downside, day trading allows lower margin for error than some of its alternatives. The trading style is more appropriate for those who like starting and completing tasks in timely fashion. Swing Trading People differ in their ability to be patient in certain conditions. Swing trading is a fitting style for traders with patience to wait for a trade to be as profitable as possible before exiting a position. Those using this style most of the times have to hold trade positions overnight. It is essential for traders aiming to use this style to be able to keep a calm mind when trends in the market are not going as desired. Stop losses are usually larger than they are for day trading. Using swing trading style, gains as much as 250 pips can be made. Less time is also required for monitoring trades, freeing up time to do other essential tasks; swing traders mostly monitor the market once daily when the new candle or bar starts. However, using this style means fewer trades can be made over a period of time. Another issue is that any unfavorable change in the market while swing traders are not monitoring could wipe off their investments. Scalping This trading style requires the shortest time for executing trades. It involves carrying out trades rapidly. Traders who favor this style (scalpers) sometimes execute different trades just seconds apart, all in a bid to reduce their exposure to risk while trading. Also, these trades are often done in opposite direction; short one now and long the next one. Scalping does not yield much gain for each successful trade and is suitable for traders who are very good in quickly making and executing decisions. In order to be successful using this trading style, it is required for a trader to be highly focused. It is not a good one for those who gets easily distracted. The fact that the style does not require holding a position for long means less knowledge of the market is needed to be a scalper. However, it is not all forex brokers that allow the use of scalping on their platforms.
Prior to 2008, a great number of investors in the United States perceived the real estate market as far better than the stock market in ensuring the value of investments made. Not many of the home buyers then thought a reversal in the value of their property was possible because the housing market is not as speculative in nature as other asset markets. They were right; at least, until the US real estate market collapsed, catching everyone napping. But what really went wrong along the line? We are going to have a look at some causes of the US Housing Bubble in 2008. Granting of high-risk loans Ideally, when lending to a customer, a bank is expected to first of all assess the level of risk that is associated to such a loan. The lender has to be sure that the borrower has the means of repaying loans that is to be obtained. But in the lead up to the US Housing Bubble, this due diligence in granting loans was not observed by banks. High-risk borrowers were given loans, which they expectedly defaulted in repaying. Government incentive for homeowners Aside being a cause of the bubble in itself, this also contributed to defaults on high-risk loans. As part of an attempt to make more of its citizens homeowners, the U.S. government, through Fannie Mae and Freddie Mac, offered to buy mortgages from lenders, effectively enabling banks to make unsafe loans. Thus, lenders were able to give loans to ineligible borrowers since they could sell off such risky loans to the government. The demand for homes increased as desired by the government, but so also did the number of borrowers who defaulted on loans. Speculation in the housing market It has been observed that some buyers did not enter the real estate market to acquire homes they personally wanted to live in, but property that can be used for speculation purposes. About 22 percent of homes bought in 2006 were said to have been for investment purposes, while another 14 percent were meant as vacation properties. In the years leading to the US Housing Bubble of 2008, it was not uncommon to hear of house flippers. These individuals bought properties with low interest rate mortgages, did little facelifts and sold same for significant profits. Speculative borrowing by this type of buyers played a role in bringing about the housing market collapse. Faulty credit ratings Giving of high ratings to securitization transactions like CDOs and MBSs, which were based on subprime mortgage loans also played their part in the real estate market problem. These high ratings tricked investors into buying these securities thereby encouraging the housing boom by providing financing. Low interest rates The Federal Reserve also contributed to the US Housing Bubble issue by keeping interest rates too low. In order to help lessen the impact of the dot.com crash and fight off a problem of deflation, the Fed cut its short-term rate from 6.5% to 1% by 2003, ignoring other vital factors aside perceived low inflation.
It is highly essential to be able to predict what will happen next in the market when trading forex. Therefore, a trader needs to be familiar with all key relationships that affect the currency market. Among such relationships is the one between gold price movement or fluctuation and the forex market. It is an accepted fact among fundamental forex traders that economic factors (Gross Domestic Product, unemployment rate etc) as well as political factors (government policies, election etc), in one way or the other, have impact on the currency market. But aside these factors, movements or fluctuations in commodity prices have influence on currency exchange rates. The two most important of these commodities whose prices affect the exchange rate are oil and gold; focus is on the later. Situation of the gold market The interplay of supply and demand determines the price of any economic good so that when supply is higher relative to demand the price of the commodity is driven down, and the reverse is true when supply is low. Drops have been noticed in recent years in gold supply as producers invest less in exploring for new mines, even when the existing ones are becoming more costly to operate. On the other hand, demand has been on the rise, especially with the upward trend in such economies as those of China and India. The relationship between gold prices and the forex market As previously stated, price movements in the gold market have impact on currency exchange rates. These commodity price movements are unlikely to affect the currencies of all countries equally. The fluctuations in the price of a particular commodity affect the currencies of countries that have the commodity in a significant quantity, with their economies somehow heavily dependent on it. The Australian dollar is one of three currencies that are estimated to have the highest correlations with commodity prices; the other being the Canadian dollar and New Zealand dollar. As a result of its position as the third-leading producer of gold, Australia has its currency tightly tied to gold. The correlation between gold prices and the AUD was estimated at around .85. What this tells us is that the fortune of the Australian currency is better relative to other currencies when gold prices rise and vice versa when prices fall. Gold price movements also have significant effect on the New Zealand dollar, although not in a direct manner as on the Australian dollar. The effect on the New Zealand dollar comes from the fact that Australia is the country's major trading partner. Therefore, any unfavorable movement in gold prices will make Australia demand for less imports, thereby hurting New Zealand's economy and its currency. In the United States, however, there is a negative relationship between the dollar and the price of gold since investors buy gold when they are not confident in dollar-denominated assets. On the other hand, they opt for the dollar when it appreciates in value.
Anyone with sufficient knowledge of the forex market will tell you that it definitely helps to have an idea of the trend in the market at any given time. This is a reason why technical analysis is done by traders, as they attempt to gauge market sentiment, which could be described as the mindset or psychology of participants in the forex market. In order to help traders, especially the novices, here are five forex indicators that show market sentiment. Futures Open Interest Most forex traders carry out spot trades, with no central market anywhere in the world. This "over-the-counter" nature of the market then makes it hard to keep a record of volume or interest, much unlike in the case of a currency futures exchange. Although some brokers track the volume resulting from orders by their customers, this cannot be compared to what is obtainable from a centralized exchanges such as the Chicago IMM. The futures exchange provides data on volume and open interest for the forex market. Open interest refers to the number of futures contracts that remain as open positions due to the fact that they have not been settled. The open interest help to measure market sentiment. If the open interest rises with the price of a currency pair, it indicates the possibility of the trend continuing; it is otherwise when the open interest is declining. Commitment of Traders (COT) Report The Commitment of Traders (COT) report, which is released on Friday every week by the Commodity Futures Trading Commission (CFTC), is useful to both futures and spot forex traders. It usually contains information on all leading market participants and their positions held in currency futures contracts as of the preceding Tuesday. Although the data is usually not real-time, it is still useful in gauging market sentiment when plotted on charts. Traders can also use the COT report data to detect possible market reversals. The Volatility Index (VIX) This forex sentiment indicator is used to measure implied volatility. The VIX helps to gauge the implied volatility, not the historical volatility, of all options traded on the S&P 500 Index. Higher implied volatility indicates sentiment among traders following a trend that the market is nearing an extreme such as a top or bottom. SWFX Sentiment Index The index, which is published every 30 minutes by the Swiss bank Dukascopy, is based on orders from their clients. It is a percentile ratio of long orders against short orders of its customers (retail traders) and rate providers. The consumers are assumed to be uninformed and should be traded against. It helps to approve or disapprove signals from a moving average crossover. Broker Position Summaries In addition, some forex brokers do publish the overall proportion of trades currently short or long for a specific currency pair. This gives an idea of market sentiment, though not a significant view of all traders due to the size of data, which is often gathered from only the clients of a broker.
Among the novice traders in the forex market, how to trade non-farm payroll report might seem like a new one. But with almost all certainty, non-farm payrolls should not sound like a new phenomenon to experienced traders in the market, especially among those who use fundamental analysis for developing their trading strategy. For the benefit of those who do not know yet, let us shed some light on how to trade the non-farm payroll report. What is the non-farm payroll (NFP) report? All fundamental forex traders are aware of the fact that several economic and political factors exert some level of influence on the currency market. One of these factors is the employment, or the unemployment, situation in a particular economy. The number of jobs that are available in an economy serves as an indication of its health, and this is where the non-farm payroll report becomes relevant. The non-farm payroll report is a very important indicator of the health of the United States' economy. It contains statistics of the total number of workers in paid employment in the country, excluding the ones that work on farms, for the government, in private households and for nonprofit organizations. It is believed to cover up to 80 percent of workers in the economy. The non-farm payroll report contains not only the number of the employed, but also their work hours and salary levels. The information contained in the report helps investors to assess the safety and profit potential of their investments in the economy, since the data provided is assumed to capture the health of the overall economy. If the non-farm payroll report indicates a rise in the number of jobs, it could make the currency market to become bullish. The high importance placed on the non-farm payroll report means that its release is keenly watched by all parties in the forex market looking to see what opportunities exist for profit making at such a time. As a result, significant swings in exchange rate are noticed whenever the report is released every first Friday of the month. How to trade non-farm payroll report It helps to know how to trade the non-farm payroll report because failure in that regard could make a trader to fall a victim of the wild volatility that is usually created in the aftermath of the report's release. The advisable way to trade the non-farm payroll report is not to engage in any trade immediately it is released. Some traders, especially the beginners, may think such large price movements present an opportunity for quick profits. But, dabbling into the market at such a time could prove very costly. The experienced traders will tell you that the right thing to do in the aftermath of the non-farm payroll report's release to stay pat and allow the wild swings in exchange rate to subside. This way, time can be bought to analyze the market and find out its real direction after the early speculators may have taken their losses or profits from the volatility.
Currency crisis is just one of the several phenomena that have something to do with the forex market. Professional traders are known to always stay abreast of global happenings and are usually very quick in taking actions to ensure that their investment is protected against loss. Currency crisis, for example, could prove very costly to an investor when caught off guard. What does a currency crisis mean? It is a type of financial crisis and refers to a sudden drop in the value of the currency of a country. A currency crisis could have dire implication on the exchange rates by causing it to experience irregular and unfavorable changes, which could make the economy less attractive to investors. The negative impact of a currency crisis is felt more in an economy with a fixed exchange rate system than one operating a floating exchange rate system. The impact of this currency problem differs according to the sizes of economy; the impact is greater on small, open economies than their bigger counterparts. What Causes a Currency Crisis? Perhaps, the leading cause of a currency crisis is current account deficits. The current account is one of the two parts of a balance of payments, with the other part being capital account. It is the sum of net exports, factor income and cash transfers. When there is a current account deficit, the country's net foreign assets is reduced by the amount of the deficit. This phenomenon points to the fact that a country is spending more than it earns, and this is capable of having a negative impact on its currency. This is because the current account deficit will reduce the attractiveness of such an economy to investors, as the deficit could likely be a result of slow growth. A currency crisis could also result from doubt in the ability of a government to support its currency. This is especially so in a country with a fixed exchange rate regime, which requires the use of the country's foreign currency reserve to maintain. In such a country, for example, if the price of the domestic currency drops too low in the market for the liking of the government, it buys domestic currency with its reserves; vice versa when the price is high. But once the confidence in the ability of the government to back its country's currency is shaken, investors may quickly do away with assets denominated in the domestic currency and take their money elsewhere. This is what is referred to as capital flight. Combating a currency crisis? In order to fend off a currency crisis, the government, through the central bank, will often step in to shore up the value of the domestic currency using the foreign reserves in hand. It is able to do this by buying its currency with the foreign reserves thereby reducing money supply. This move will push up interest rates, attracting investors and increasing demand for the domestic currency. This is what interests an experienced forex trader during a currency crisis.
In order to be successful as a forex trader, you need to be on top of the performance of the major currencies being traded in the market. This demands being familiar with all the factors that drive these currencies. One of such major currencies that should be properly monitored by forex traders is the Japanese Yen. The Japanese economy and the Yen There are some things about the economy of Japan that all serious traders must be familiar with to make profitable trades. The economy is one of the leaders in the world with adequately educated labor force and this can be seen in the nature of its output, which includes automobiles, consumer electronics and some other technological products. The gross domestic product (GDP) and export market of the Asian country are among the largest in the world. In spite of the size of Japan's economy, however, it has experienced slow growth for much of the last several years and has struggled with deflation at the same time. As previously stated, the Yen is among the top currencies in the forex market. It is the third currency that is traded most by traders in the market. As a matter of fact, the yen is one of only seven currencies that make up about 80 percent of the currency market. The position of the Japanese currency then means that forex traders should always monitor anything that could affect its performance. It is a duty of and common practice among central banks of major economies to support the performance of their currencies. The Bank of Japan is charged with the responsibility of doing same to the yen. And as stated earlier, Japan has been battling with deflation for the last several years. The country's central bank, therefore, has been pursuing an aggressive devaluation policy in a bid to stimulate demand and the economy as a whole. This is particularly essential since Japan is highly dependent on its export market. Trading the Yen It has already been said that Japan is a leading exporting country. Devaluation is a key monetary tool that the country has been relying on heavily to make its exports such as autos, consumer electronics and technological items attractive to buyers in other countries of the world. Honda, Toyota and Sony Electronics are just some of the top brands in Japan. When products from these and other domestic companies are not selling well due to cost consideration, the BOJ devalues the yen thereby making Japanese products cheaper for foreign buyers. Whenever Japan's central bank detects appreciation in the value of the domestic currency, it quickly moves by buying foreign currencies with the yen. This behavior of the bank is useful to forex traders in forecasting the movement of the currency. It should also be noted that the yen appreciates when there is a dip in the value of Japanese stocks. The value of the currency also depends on developments in the United States, which is the largest consumer of Japan's products.