Forex risks

Any company or person that conducts some portion of its business in a different currency is suspect to some currency forex risk (or exchange rate risk or foreign exchange risk, ). This potential risk is only possible if the company's cost currency is not the same as the company's sale currency. Alternately if a company has revenues and expenses in the same currency, there no foreign exchange risk exists.

Two types of currency risk exist: transaction risk and translation risk. Transaction risk is the risk involved with the actual switching of cash flows from different currencies, and how much the exchange rate changes will impact a company's cash flow. Translation risk has more to do with accounting. It involves the impact of exchange rates on earnings and balance sheet items when merging financial statements from foreign subsidiaries. Transaction risk is the more relevant than translation risk from a business viewpoint.

Five general types of risk exist that threaten all businesses: 1) market risk (unanticipated fluctuations in interest rates, stock prices, exchange rates, or commodity prices). 2) Credit risk also known as default risk. 3) Operational risk (this includes both equipment failure and fraud). 4) liquidity risk (an inability to buy or sell goods at quoted prices). 5) Political risk (such as new regulations and expropriation). Any business that operates in industries such as petroleum, natural gas, and electricity are especially prone to market risk-or more specifically, price risk- due to the extreme fickleness of energy commodity prices. Electricity prices are significantly the most of all commodity prices.

What is known as country risk can be further divided into two parts, economic and political risk. Economic risk is put simply the stability of a country's economy. It depends individual industries or markets, the country's ability to maintain a substantial level of activity and its ability to grow, as well as its supply of natural resources and other important inputs.

Political risk is more tied to the stability of the government that operates the economy. It is related to the ability to move capital into and out of the country, the probability of power transferring easily following elections, and the government's overall feelings toward foreign firms. Clearly, these two parts of country risk display significant overlap. A variety of services exist which can provide in-depth assessments of country risk for virtually every country; Multinational firms frequently use these services to better make decisions with regard to international projects.

Ways to pro-actively protect against transaction exposure include:

- clauses of price adjustment

- forward contracts

- borrowing and lending money in a foreign currency

- currency options

- invoice in ones home currency

One problem that frequently comes up in managing currency risk is that it only occurs to companies that they are exposed to risk once the exposure has been spawned. Currency risk management however should commence well before exposure risks have been spawned. If this has not occurred then fundamental decisions have been taken on the basis of incomplete information. The way a company may approach exposure seem to vary significantly, perhaps by the culture of the company or by the character of the business or the competition. On the one hand a company could be willing to accept a large amount of risk and expect corresponding returns or on the other hand it could not like risk and may be prepared to pay a rather high price for certainty and peace of mind. Another option is that it may have no solid stance on currency and may use a take things as they come/roll with the punches approach.

Forex rules

- The following examine some rules to take into consideration when trading forex.

- Good Execution vs. Good Anticipation

- When trading it is important to keep in mind that the results of the last spefic trade made are not important. It is a waste of time to draw any conclusions over one or even a few specific trades. Anticipation skills can only be honed from experience and the overall results of many completed trades over a long period of time. When trading the only goal should be to execute trades with disciplined calculated efficiency. Losing money is usually comes as a result of poor execution rather than poor anticipation.

- Suppose you find yourself in a slump and start to experience loses. Supposing it is only temporary you continue trading and digging yourself deeper into a hole of lost money. Here are some tips to pull youself out.

- Do not let your profits run. Ensure this by cutting your loses as soon as possible.

- Do not "go on tilt" and overtrade. One extremely common mistake traders make when they are losing is trading too much or at larger sizes in order to gain back what they have lost.

- Upon losing a significant amount or all of your income, stop and search for answers about what went wrong.

- It may be helpful to conduct some research and obtain help. An seasoned expert would be able to teach you skills he has accumulated.

- In addition to giving you the skills to become more successful, a mentor could teach you how to handle bad times helping you develop your mental and emotional skills to help you with your trading.

- When comfortable it is possible to start back on your own. Seek out peers who are on even keel with you. They can be friends or co-workers but most importantly they will be there to learn from and to act as a support system with which you can talk to and compare notes with.

- While continuing to learn from mistakes it may be wise to seek out another mentor who can help you get accustomed to higher levels of trading which may require you to learn different skills that are valuable at higher more expensive levels of trading.

- Lastly it is important not to be attached to your trades.

Forex trading system

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• Forex Trading - Forex Trading Platform provides the essential skills and knowledge to be able to master forex investment and make plenty of cash in the Forex market.

Forex trading is amazingly easy. Despite this it is favorable for one to have his own trading system put firmly in place. Creating a trading system involves three independent yet crucial elements; Firstly one must produce signals. Secondly one must establish some sort of decision making procedures. Lastly one must be sure to include risk management into the system. An effective system should not be subjective or based on any emotion but rather it should be objective and mechanical where the investor should look to produce a combination of time tested and proven trading rules. Generally, effective technical analysis indicators are the mortar that will eventually lead to effective trading systems. It is important to exert sufficient caution however because as previously noted, even effective technical analysis indicators can become ineffective when incorporated into a trading system. Therefore it is advantageous to forward test any chosen system in real time in addition to back testing it.

The downside of Trading Systems

In theory, trading systems are meant to be mechanical and objective meaning that they should remove any shred of intuition from trading. One should follow a set out system by buying and selling when the system dictates to do so. The only problem with this logic is that there are only a few good trading systems that exist. Furthermore, some systems which were created are only advantageous for specific institutions in order to capitalize on opportunities, or include complicated derivative strategies. These specific strategies are not tailor made for an average trader.

Two different types of Forex trading systems exist. They are mechanical and discretionary systems. Trading signals generated from mechanical systems come from the systematic application of technical analysis, whereas experience intuition and judgment on when to enter and exit are more prominent in discretionary systems. Lets take a closer look and describe the fine points of each system.

Mechanical systems

-Can be efficiently back tested and automated.

-Adheres to unbreakable rules

-A trade either exists or does not exist.

-Traders who use mechanical systems are usually far less vulnerable to emotion than traders who use a discretionary system.

-Surprisingly, the backtesting of forex systems is done incorrectly by most traders.

-Trick data is essential in order to produce proper results.

-The Forex market is volatile

-A random component exists in The Forex market and all markets for that matter.

-Although market conditions may appear to be similar they are never identical.

-Thus a system that achieved results a year ago may not be successful the following year.

Discretionary systems

-One benefit of Discretionary systems is that are flexible to adapt to quickly changing market conditions.

-Rather than a mechanical system, Trading decisions are done according to intuition and experience.

-Experience allows traders to learn from experience and discover which trading signals are more likely to succeed.

-Backtesting and automated systems are not applicable since tough manual decisions need to be made.

-Time and experience are needed in order to gain the appropriate experience necessary to make successful trades and keep cautionary track of them.

-This is a dangerous strategy for rookie traders.

There is not necessarily one better approach for Forex traders. Traders should stick with whatever system feels more comfortable for them. If you are a trader who finds it difficult to stay disciplined and follow your trading signals, then a mechanical system would probably be a better fit for you because your intuition will be eliminated in that system, instead only taking the signals that the mechanic system dictates. In order to be a successful trader, one's goals and objectives should include the following features. They should be very specific. Also, they should be significant and reflect the amount of work and time involved. Finally, they should be measurable within the given time frame one gives himself.

Here is a sample outline of possible objectives one could have for himself for a given year

1. Generate two fresh positive-expectancy trading systems that are effective each year of operation

2. Attempt to commit fewer mistakes with each passing year when implementing the trading systems

3. Attempt to obtain a specific percentage (your discretion) of maximum return each year

4. Each year one should take at least two weeks vacation time away from trading.

FOREX (Foreign Exchange Market)

FOREX (Foreign Exchange Market) is a global currency market that exchanges currency from one country to the currency of another at a changing rate, subject to the date of exchange.

FOREX is a virtual network of currency dealers connected among themselves by means of telecommunications. FOREX currency dealers are connected to leading world financial centres, and round the clock workers. As a result, FOREX forms a united and very efficient system.

The foreign exchange market owes its existence to the 1971 abandonment of the Bretton Woods accord and the subsequent unwinding of the regime of universal fixed exchange rates.

The history of stock exchanges can be traced to 12th century France, when the first brokers are believed to have developed, trading in debt and government securities. Unofficial stock markets existed across Europe through the 1600s, where brokers would meet outside or in coffee houses to make trades. The Amsterdam Stock Exchange, created in 1602, became the first official stock exchange when it began trading shares of the Dutch East India Company. These were the first company shares ever issued.

The main participants of a foreign exchange market are:

• Commercial banks
• Exchange markets
• Central banks
• Firms that conduct foreign trade transactions
• Investment funds
• Broker companies
• Private persons

Access to foreign exchange (forex), the most extensive market on the planet, is generally through an intermediary known as a forex broker. Similar to a stock broker, these agents can also provide advice on forex trading strategies. This advice to clients often extends to technical analysis and research approaches designed to improve client forex trading performance.

Any company that conducts its business in another currency is exposed to currency risk (or foreign exchange risk, or exchange rate risk). However, this risk is present only if the company's sales currency differs from the company's cost currency – if a company's revenues and expenses are both denominated in the same foreign currency, there is no foreign exchange risk.

The most important forex market is the spot market as it has the largest volume. The market is called the spot market because trades are settled "immediately" or on the spot. In practice this means within two banking days.

There are some other types of Forex along with spot-market: swap contracts, forwards and futures. These called derivatives. Derivatives are powerful tools that can be used to hedge the risks normally associated with production, commerce and finance. Derivatives facilitate risk management by allowing a person to reduce his exposure to certain kinds of risk by transferring those risks to another person that is more willing and able to bear such risks.

But Forex offers a number of advantages over other types of forex trading, including:

• Powerful forex leverage
• Zero forex commissions
• Limited risk
• Guaranteed prices and Instantaneous Fills
• 24-hour market

As every successful Forex trader knows, it is not enough just to have the technical knowhow of the actual mechanics of trading the Forex (foreign currency exchange) market, but to recognise that to be a winner relies also on the psychology of trading.

A forex currency trade is the simultaneous buying of one currency and selling of another one. The currency combination used in the trade is called a cross (for example, the Euro/US Dollar, or the GB Pound/Japanese Yen.). The most commonly traded currencies are the so-called "majors" - EURUSD, USDJPY, USDCHF and GBPUSD.

Currencies are traded in dollar amounts called a "lot". One lot is equal to $1,000, which controls $100,000 in currency. This is what is known as the "margin". You can control $100,000 worth of currency for only 1,000 dollars. This is what is called High Leverage.

Currencies are always traded in pairs in the FOREX. The pairs have a unique notation that expresses what currencies are being traded. The symbol for a currency pair will always be in the form ABC/DEF. ABC/DEF is not a real currency pair, it is an example of a symbol for a currency pair. In this example ABC is the symbol for one countries currency and DEF is the symbol for another countries currency.

We know that the FX market is the largest in the world and that your broker or institution that you are trading with is collecting quotes from a centralized feed or individual quotes comprising of interbank rates.

So how are these quotes made up? Well, as we previously mentioned currencies are traded in pairs and are each assigned a symbol. For the Japanese Yen it is JPY, for the Pounds Sterling it is GBP, for Euro it is EUR and for the Swiss Frank it is CHF. So, EUR/USD would be Euro-Dollar pair. GBP/USD would be pounds Sterling-Dollar pair and USD/CHF would be Dollar-Swiss Franc pair and so on.

You will always see the USD quoted first with few exceptions such as Pounds Sterling, Euro Dollar, Australia Dollar and New Zealand Dollar. The first currency quoted is called the base currency. Have a look below for some example.

When you see FX quotes you will actually see two numbers. The first number is called the BID and the second number is called the offer (sometimes called the ASK).

When we trade currencies we open or close short or long position. A short position is where we have a greater outflow than inflow of a given currency. In FX short positions arise when the amount of a given currency sold is greater than the amount purchased. A long position is where we have greater inflows than outflows of a given currency. In FX long positions arise when the amount of a given currency purchased is greater than the amount sold.

Forex trading strategy begins with fundamental and technical analysis.

Fundamental analysis refers to political and economic conditions that may affect currency prices. FOREX traders using fundamental analysis rely on news reports to gather information about unemployment rates, economic policies, inflation, and growth rates.

Fundamental analysis is often used to get an overview of currency movements and to provide a broad picture of economic conditions affecting a specific currency. Most traders rely on technical analysis for plotting entry and exit points into the market and supplement their findings with fundamental analysis.

Currency prices on the FOREX are affected by the forces of supply and demand, which in turn are affected by economic conditions. The two most important economic factors affecting supply and demand are interest rates and the strength of the economy. The strength of the economy is affected by the Gross Domestic Product (GDP), foreign investment and trade balance.

Economic indicators are reports released by the government or a private organization that detail a country's economic performance. Economic reports are the means by which a country's economic health is directly measured, but do remember that a great deal of factors and policies will affect a nation's economic performance.

These reports are released at scheduled times, providing the market with an indication of whether a nation's economy has improved or declined. The effects of these reports are comparable to how earnings reports, SEC filings and other releases may affect securities. In forex, as in the stock market, any deviation from the norm can cause large price and volume movements.

Central banks as Forex participants play a great role in the economy of every country. Central bank is the principal monetary authority of a nation, controlled by the national government. It is responsible for issuing currency, setting monetary policy, interest rates, exchange rate policy and the regulation and supervision of the private banking sector. The Federal Reserve is the central bank of the United States. Others include the European Central Bank, Bank of England, and the Bank of Japan.

Other type of analysis is technical analysis. A technical analysis is founded on three suppositions:

• Movement of the market considers everything
• Movement of prices is purposeful
• History repeats itself

That is, technical analysis is a statistical and mathematical analysis of previous quotes and a prognosis of coming prices. A number of technical indicators have been installed into the PRO-CHARTS trading system. Analyzing the indicators one can come to the conclusion about further movements of the quoted currencies.

Categories of the technical analysis theory:

• Indicators (Oscillators, eg: Relative Strength Index RSI)
• Number theory (Fibonacci numbers, Gann numbers)
• Waves (Elliot wave theory)
• Gaps (High-Low, Open-Closing)
• Trends (Following Moving Average)
• Chart formations (Triangles, Head & Shoulders, Channels, Japanese candlesticks)

The Candlestick chart was actually created by a Japanese Rice merchant, named Munehisa Homma, in the middle ages. If you remember our history, Technical Analysis didn’t become popular until the 1900’s, however, Homma has to be considered one of the “Fathers” for his early work in tracking rice prices through charting. Homma created his candlesticks as “clear” and “shaded” to denote strength and weakness respectively. Today we use “green” (clear) and “red” (shaded) to represent the buying pressure and selling pressure respectively.

(AFX UK Focus) 2009-11-10 08:26 RPT-FX COLUMN-Yen bears may need history lesson

They may have a point. The IMF said last week it expected Japan's gross public debt to reach 218 percent of GDP in 2009. At the same time, the new government has ambitious spending plans despite falling tax revenues.
On the currency markets, some analysts are talking about the yen weakening. Dollar/yen targets of 95.00 have been mooted. This level was seen in August 2009, but the pair has since mainly been confined to an 88.00-92.00 range.
But is this slide in the yen inevitable?
Old Japan hands argue for a different outcome. If Japan is in trouble, the yen should strengthen as the Japanese bring money home, they say.
And if the old hands are right, dollar/yen would more likely hit 85. Below that, the market would look at the all-time low of 79.80.
This alternative scenario is partly based on historical experience. During the bubble era of the 1980s, a confident Japan bought Hollywood movie studios, U.S. real estate and Van Gogh's "Sunflowers" (bought for a then record $39.9 million by the Yasuda Fire and Marine Insurance Company in 1987).
The yen weakened and the dollar in December 1989 was still above 140 yen even though the Nikkei stock index had peaked.
Once the bubble burst, Japan turned in on itself. Faced with an impaired banking system, investors repatriated the "mother currency".
The yen duly reached its strongest point of 79.80 against the dollar just months after the Kobe earthquake of January 1995 had inflicted another cruel blow on the struggling economy.
What was bad for Japan was good for the yen.
Yen bears argue that today is different. Japan no longer has the bunker mentality that drove the repatriation of capital. Nor, after years of economic drift, do Japanese investors feel home turf is necessarily safer. They may just stay offshore.
This time it's different. This time the yen should weaken, the bears say.
Yet has so much changed?
In the world of finance, Sumitomo Trust & Banking and Chuo Mitsui said on Friday they planned to merge to create Japan's largest trust bank.
This recalled the mergers of the 17 city banks in the post 1989 period that left Japan with three megabanks.
Even Toyota's withdrawal from Formula One is an introspective move..
Yen bears should also note the consumerist stance of the new Democratic Party-led government. Finance Minister Hirohisa Fujii's comments on the yen have been variously interpreted but the consensus is he does not oppose a stronger yen.
Indeed Fujii told parliament on Monday he expects U.S. Treasury Secretary Timothy Geithner, visiting this week, to urge Japan not to focus so much on exports. This would imply less need for a weak yen.
The CDS move reflects market disquiet about Japan. The currency market has arguably been slow to note the widening of the spread. But having noticed it, the knee-jerk Western reaction has been to sell the yen.
Yet history points to a different conclusion. Traders who want to sell Japan may have to learn to love the yen.

Importance of Forex News in Forex Trading

You are not going to trade based on speculations arising out of news from foreign exchange markets. In fact it is not even necessary to guess the exact outcome of major forex news. All you need to do is to keep informed about the major events and financial reports that are due to be announced so that you can stay away from trading at those times when the market is highly volatile. You see, people with a gamblers mind set try to speculate the outcome of major financial news and trade (gamble) accordingly. You might get lucky in some cases, but in the long run all the traders who are gambling according to the forex news will eventually suffer losses. Successful forex traders always rely on technical analysis and do not gamble in forex market. However even if you are a technical analysis expert, relying on forex charts and custom indicators for your trading signals, you should not overlook the forex news entirely, since it is absolutely important to know when to stay away from the market.

What type of Forex News Should I pay attention to?
Since forex market is open round the clock during the business days, there is always something happening around the world which affects the foreign exchange rates. However you don’t have to keep track of each and every forex news or events. If you take a look at the financial calendar you can learn the important dates of the regular financial announcements and reports in the countries that are of most significant to your trades.

US Economy and Dollar Value
Since US dollar has the highest traded volume compared to any currency in Fx market, any major forex news that affects the United States economy will reverberate throughout the foreign exchange markets. Hence if there is slow down in insurance sector, mortgage or housing market in US, which may not seem to have an influence on the foreign exchange directly, actually affects the forex market. Factors such as these will have a substantial effect on other financial indicators such as mortgage futures values and this will result a change in the dollar value which subsequently will affect the forex market world wide.

Currency Pair
While the US dollar can impact the world economy, you should always look for forex news which affects your main currency pair. For instance if you are mainly trading in EUR/USD then you need to stay aware of events in Europe and the USA. Developments such as very strong or poor financial results in other powerful countries like as Japan will still affect Euro and USD in due course, but not immediately and most probably you will have enough time to take appropriate action. However if you are trading in USD/JPY currency pair a change in Japanese economy can possibly result in devastating effect on your trading.

Not just Financial News
Many people have a misconception that forex news is all about financial news. Of course the financial and economy related news is the major concern but political events will have an impact as well. The election of a new government will affect foreign exchange values according to what the world speculates about the possible actions that will be taken by the new government in the financial sector.

Where to find Forex News?
As a trader you must be definitely interested in the world economy and when you access to information media such as television (CNBC), newspaper (FT) , India Forex News and internet, it is not difficult to keep yourself informed about the news that affect fore markets. With internet you don’t have to wait since there are hundreds of websites, online newspapers and forex sites which will provide you with live updates. However be careful not to get addicted to these sites since it is to get carried away with exciting forex news and you might spending way too much time searching for more forex news. In fact the best way is join a Forex Trading membership site like Pip Mavens Inner circle where you will get up to date forex news and trading advice. So that you don’t have to spend your valuable time for foreign exchange news research and instead concentrate on actual trades.

Forex overview

What is Forex? Forex is an abbreviation of Foreign Exchange (also referred to as FX) and it is the largest financial market in the world.

The Forex market is the place where currencies are traded (currencies are money that is used as an exchange medium). In other words, it is the place where currencies are being sold and bought. In the Forex market all currencies are traded in real time.

Trading with currencies always means that there are two simultaneous transactions taking place. If a currency is being bought, it is also being sold. To better understand this notion, think of currencies as both the goods you are buying AND the method with which you're paying for the goods.

Since the Forex market is the place where currencies are traded in real time, people may trade one currency for another and make a profit off of this transaction. Profits are made when one is able to determine which currency's value will increase by the end of a pre-determined time period (such time periods may be short or long). The Forex market is open 24 hours a day, five days a week and it is based in four major cities: New York, London, Sydney, and Tokyo. The Forex market is open to individuals over the age of eighteen.

While Forex trading may sound daunting, it really isn’t. It can be easily comprehended and understood without prior experience in finance or economy. It is challenging and exciting, thought provoking and manageable, stimulating and filled with opportunities.

Some Forex Basics:

• The first currency listed in a currency pair is called the "base currency".
• The “base currency” is usually the U.S. Dollar. Traders will generally trade the U.S. Dollar against another currency, which is called the “counter currency”.
• Currencies are quoted in pairs. For example: The pair U.S. Dollar and JPY will be quoted in the following way: USD/JPY equals to 2.5 (This means that 1 U.S. Dollar can buy 2.5 JPY).
• When a quote increases, it means that the “base currency” has risen in value and the “counter currency” has weakened in value. For example: If the USD/JPY quote used to be equal to 2.5 but is now equal to 2.6, then this means that the dollar has strengthened (because 1 U.S. Dollar can now buy 2.6 JPY as opposed to the mere 2.5 JPY it could buy beforehand.)

Now that you know a thing or two about the Foreign Exchange market, we invite you to explore eToro—the Revolutionary Forex Trading Platform. You too can make your mark in the Foreign Exchange market. Use eToro as your gateway to the ever-growing world of Forex trading.