Forex: The recipe of success
Everyone, who wishes to achieve a lot in his life, clearly understands, that it is impossible to make your dreams alive without constant improving your skills and widening your outlook. You must always discover something new and be prepared to fast and unpredictable changes. Due to that it is usually said:
"A man, who doesn't risk, doesn't drink champagne".
Today there are so many possibilities of becoming a success, that it's unwise not to use even one of them. Let's take Forex market as an example. That's the real place, where you have a great chance of earning with the use of your mental skills, logics and analytical abilities.
At the same time you should know, that Forex is not a simple game like virtual one called "Monopoly". That's very serious thing and it isn't right place for playing games. The main thing, which success on Forex depends on, is the trader himself. Yes, you are the main part of your trading.
Remember, that you can't achieve any good result if you treat this process not serious. Before beginning the work in the market, you are to ask yourself what do you want to achieve and whether you are ready to risk. There are a lot of people, who are trading on the currency market quite successfully. For some of them Forex trading is the only thing the do for living.
When you are ready with your decision, it's the right time for going to the send step - careful and diligent study. You have to get to know as much as possible. Read books on the topic of Forex (there are o lot of ones nowadays), study the market analysis, analyze the situation on your own and of course, feel free to aks for an advice from more experienced and professional traders.
Be sure, they'll help you. There are a lot of different forums, where you can talk to skilled Forex traders and get answers to all your questions. You can also use Forex Signals. That will help you in working out your own trading system in the future. But notice, that you shouldn't stop your study after achieving some success. Only constant improving your knowledge will keep you up to the mark.
Another important thing to think about before starting is money. Forex is a method of earning money with the use of money. It's some kind of investment. So, with an account of $100 you won't get profits of $1000 in a week.
And finally I'd like to say, that the success on Forex completely depends on the trader's desire to win and his ability to make changes in strategy according to the situation. So, be diligent, efficient and flexible in your trading in order to have big profits.
Friday, July 31, 2009
Wednesday, July 15, 2009
Forex Trading
Structured Freedom For Success In Forex Trading
It's kind of strange in a world with no rule (like forex trading) that it's so important to have a specific set of rules that you follow religiously. I mean let's be honest, trading really doesn't have any rules. You can get in whenever you want. You can get out whenever you want. You can add and subtract to your existing position, and you can obviously decide simply not to trade.
The only thing that could prevent you from participating is the lack of required money to trade. Other than that, you get to decide what you want to do and when you want to do it. If you decide to trade without any rules, I promise you will not be successful. Freedom is good but you need to have what I call a "structured Freedom." Basically, that means you should be able to trade when you want to, but the trades you do need to fall under your set rules.
Rules will help you be more consistent with your trading. They'll help you avoid mental mistakes that can drain your account. About once every six months I write a new set of trading rules for myself. These rules help me to be structured with my trading. And you know, it's the strangest thing, when I have a bad day, it's because I didn't follow one or more of my rules. And of course, the opposite is usually true.
If I've had a good day trading, it is because I did follow my rules. No matter what type of trading you are doing (swing trading, day trading, long-term trading), you'll need to come up with your own set of rules to keep your trading structured. The problem is most people don't want to make up their own rules, because if they if they did they would have to take responsibility for their results. And as we all know, most people don't want to take responsibility for their action.
But as we all know, the only way to be successful in trading is to take 100% responsibility and act in our own best interest.
Examples of my trading rules are as follow;
(1 ).Always use a stop order.
(2.) After 3 losing trades in one day, stop trading.
(3.) If I get 25pips + profits in a trade, I will move my stop to break-even.
(4.) Only use a signal to get into the market. Don't just take a shot.
(5.) Do not trade on holiday type volume. Too slow bad opportunities. Go outside, watch a movie, whatever.
(6.) Always act with your best interest in mind.
(7.) Relax with your trades. If it's not fun and enjoyable, it's not worth doing.
(8.) You don't have to trade everyday.
Those are some of my rules that I use each and everyday, and it's almost automatic. After a bad day trading, I will look at my rules and see that I did not follow them like I should have. And again, the opposite is true. After a good day, I'll look at them and see that I followed them very well. Avoid at all costs getting caught in the trap.
Doing a trade because you are afraid of missing out on a big move is not acting in your best interest. I've got news for you, there are big moves almost everyday.. The more you follow your rules, the more you'll trust yourself and the better your results will be.
Remember, only you are responsible for your trading results, good or bad. Having a set of rules will help you get more good than bad.
By: Timothy Kolawle
It's kind of strange in a world with no rule (like forex trading) that it's so important to have a specific set of rules that you follow religiously. I mean let's be honest, trading really doesn't have any rules. You can get in whenever you want. You can get out whenever you want. You can add and subtract to your existing position, and you can obviously decide simply not to trade.
The only thing that could prevent you from participating is the lack of required money to trade. Other than that, you get to decide what you want to do and when you want to do it. If you decide to trade without any rules, I promise you will not be successful. Freedom is good but you need to have what I call a "structured Freedom." Basically, that means you should be able to trade when you want to, but the trades you do need to fall under your set rules.
Rules will help you be more consistent with your trading. They'll help you avoid mental mistakes that can drain your account. About once every six months I write a new set of trading rules for myself. These rules help me to be structured with my trading. And you know, it's the strangest thing, when I have a bad day, it's because I didn't follow one or more of my rules. And of course, the opposite is usually true.
If I've had a good day trading, it is because I did follow my rules. No matter what type of trading you are doing (swing trading, day trading, long-term trading), you'll need to come up with your own set of rules to keep your trading structured. The problem is most people don't want to make up their own rules, because if they if they did they would have to take responsibility for their results. And as we all know, most people don't want to take responsibility for their action.
But as we all know, the only way to be successful in trading is to take 100% responsibility and act in our own best interest.
Examples of my trading rules are as follow;
(1 ).Always use a stop order.
(2.) After 3 losing trades in one day, stop trading.
(3.) If I get 25pips + profits in a trade, I will move my stop to break-even.
(4.) Only use a signal to get into the market. Don't just take a shot.
(5.) Do not trade on holiday type volume. Too slow bad opportunities. Go outside, watch a movie, whatever.
(6.) Always act with your best interest in mind.
(7.) Relax with your trades. If it's not fun and enjoyable, it's not worth doing.
(8.) You don't have to trade everyday.
Those are some of my rules that I use each and everyday, and it's almost automatic. After a bad day trading, I will look at my rules and see that I did not follow them like I should have. And again, the opposite is true. After a good day, I'll look at them and see that I followed them very well. Avoid at all costs getting caught in the trap.
Doing a trade because you are afraid of missing out on a big move is not acting in your best interest. I've got news for you, there are big moves almost everyday.. The more you follow your rules, the more you'll trust yourself and the better your results will be.
Remember, only you are responsible for your trading results, good or bad. Having a set of rules will help you get more good than bad.
By: Timothy Kolawle
Tuesday, June 2, 2009
ETNs Prospect and Conclusion
As a new product, ETN has a very short history. However, it has been growing very rapidly. The ETN represents a nifty product structure that is gaining respect and funding in the market. By 18 July 2006, just one month after the launch of first two ETNs, GSP and DJP, GSP had attracted more than $40 million in assets, and DJP had pulled in more than $130 million for Barclays. Investments in iPath ETNs surpassed $2 billion by late April 2007.
In just over a year Barclays has gathered close to $3 billion in eight funds. Encouraged by the good performance of the ETNs launched by Barclays, other financial institutions have either launched their own products or are drawing plans to partake of the ETN space. We believe more ETNs will be launched to raise more equity for financial institutions. For the customers, the advantages such as tax-efficiency and good liquidity of ETNs will attract more investors to this innovative structured product. All of these imply that ETN is becoming more and more popular.
However, now the question is whether this trend is going to last long. Several industry gurus point to factors that may well dampen the initial euphoria surrounding this product of financial engineering. The lack of historical record – upon which to base their decision to make ETN a part of their portfolio or not – could be keep potential investors at bay.
More importantly, the issuing banks advertise tax-efficiency as ETNs USP. If the IRS rules in the issuers’ favor, the implications of which have been discussed at length in Chapter 3, ETN sales could explode. But what if the IRS delivers an unfavorable word-or never rules? A line of thought that is doing rounds is that even if the IRS delivers an unfavorable word-or never rules at all-the ETNs could still be enormously successful.
The reason is that ETNs provide efficient access to segments of the market that would otherwise be difficult for retail investors to reach. But how could we expect that the investors would still prefer ETNs to ETFs, or any of the multitudes of other structured products out in the market, if there is no tax-efficiency for ETNs. Drawing a comparison to ETFs, another structured product, which suffers from only market risk, ETNs face both counter party risk and market risk. ETNs, bereft of their tax advantage, may lose their shine in the eyes of an entire class of investors.
To conclude, ETNs have performed very well so far as a new kind of structured product with lower fees, better liquidity and tax-efficiency. However, both financial institutes and investors should keep an eye the status of the tax opinion from the IRS on ETNs while seeking ETNs as business or investment possibility.
In just over a year Barclays has gathered close to $3 billion in eight funds. Encouraged by the good performance of the ETNs launched by Barclays, other financial institutions have either launched their own products or are drawing plans to partake of the ETN space. We believe more ETNs will be launched to raise more equity for financial institutions. For the customers, the advantages such as tax-efficiency and good liquidity of ETNs will attract more investors to this innovative structured product. All of these imply that ETN is becoming more and more popular.
However, now the question is whether this trend is going to last long. Several industry gurus point to factors that may well dampen the initial euphoria surrounding this product of financial engineering. The lack of historical record – upon which to base their decision to make ETN a part of their portfolio or not – could be keep potential investors at bay.
More importantly, the issuing banks advertise tax-efficiency as ETNs USP. If the IRS rules in the issuers’ favor, the implications of which have been discussed at length in Chapter 3, ETN sales could explode. But what if the IRS delivers an unfavorable word-or never rules? A line of thought that is doing rounds is that even if the IRS delivers an unfavorable word-or never rules at all-the ETNs could still be enormously successful.
The reason is that ETNs provide efficient access to segments of the market that would otherwise be difficult for retail investors to reach. But how could we expect that the investors would still prefer ETNs to ETFs, or any of the multitudes of other structured products out in the market, if there is no tax-efficiency for ETNs. Drawing a comparison to ETFs, another structured product, which suffers from only market risk, ETNs face both counter party risk and market risk. ETNs, bereft of their tax advantage, may lose their shine in the eyes of an entire class of investors.
To conclude, ETNs have performed very well so far as a new kind of structured product with lower fees, better liquidity and tax-efficiency. However, both financial institutes and investors should keep an eye the status of the tax opinion from the IRS on ETNs while seeking ETNs as business or investment possibility.
Structure of ETNs
The returns of ETNs are linked to the performance of a market benchmark or strategy, less investor fees. Currently, there are four types of ETNs, Commodity ETNs, Emerging Market ETNs, Currency ETNs and Strategies ETNs available in the market. (Please refer to Appendix A for a list of available products in each category.)
As discussed previously, ETNs are debt notes. When held to maturity, the investor will receive a cash payment that is linked to the performance of the corresponding index during the period beginning on the trade date and ending at maturity, less investor fees. Typically, ETNs do not offer principal protection.
ETNs could also be liquidated before their maturity by trading them on the exchange or by redeeming a large block of securities directly to the issuing bank. The redemption is typically on a weekly basis and a redemption charge may apply, subjected to the procedures described in the relevant prospectus.
The investor fee is calculated cumulatively based on the yearly fee and the performance of the underlying index and increases each day based on the level of the index or currency exchange rate on that day. Because the investor fee reduces the amount of return at maturity or upon redemption, if the value of the underlying decreases or does not increase significantly, the investor may receive less than the principal amount of investment at maturity or upon redemption.
Since ETNs are unsecured, unsubordinated debts, they are not rated, but are backed by the credit of underwriting banks. Like other debt securities, ETNs do not have voting rights. But unlike other debt securities, interest will not be paid during the term of the most ETNs.
As discussed previously, ETNs are debt notes. When held to maturity, the investor will receive a cash payment that is linked to the performance of the corresponding index during the period beginning on the trade date and ending at maturity, less investor fees. Typically, ETNs do not offer principal protection.
ETNs could also be liquidated before their maturity by trading them on the exchange or by redeeming a large block of securities directly to the issuing bank. The redemption is typically on a weekly basis and a redemption charge may apply, subjected to the procedures described in the relevant prospectus.
The investor fee is calculated cumulatively based on the yearly fee and the performance of the underlying index and increases each day based on the level of the index or currency exchange rate on that day. Because the investor fee reduces the amount of return at maturity or upon redemption, if the value of the underlying decreases or does not increase significantly, the investor may receive less than the principal amount of investment at maturity or upon redemption.
Since ETNs are unsecured, unsubordinated debts, they are not rated, but are backed by the credit of underwriting banks. Like other debt securities, ETNs do not have voting rights. But unlike other debt securities, interest will not be paid during the term of the most ETNs.
Exchange-Traded Note ( ETN)
An exchange-traded note (or ETN) is a senior, unsecured, unsubordinated debt security issued by an underwriting bank. Similar to other debt securities, ETNs have a maturity date and are backed only by the credit of the issuer.
ETNs are designed to provide investors access to the returns of various market benchmarks. The returns of ETNs are usually linked to the performance of a market benchmark or strategy, less investor fees. When an investor buys an ETN, the underwriting bank promises to pay the amount reflected in the index, minus fees upon maturity. Thus ETN has an additional risk compared to an ETF - upon any reduction of credit ratings or if the underwriting bank goes bankrupt, the value of the ETN will be eroded.
Though linked to the performance of a market benchmark, ETNs are not equities or index funds, but they do share several characteristics of the latter. Similar to equities, they are traded on an exchange and can be shorted. Similar to index fund, they are linked to the return of a benchmark index. But as debt securities, ETNs don't actually own anything they are tracking.
The first ETN, marketed as the iPath Exchange-Traded Notes, was issued by Barclays Bank PLC on 12 June 2006. This was soon followed by Bear Stearns, Goldman Sachs & Swedish Export Credit Corp. In 2008, additional issuers entered the market with their own offerings; these include BNP Paribas, Deutsche Bank, UBS, Lehman Brothers, Morgan Stanley and Credit Suisse. As of April 2008, there were 56 ETNs from nine issuers tracking different indexes.
The popularity of ETNs is mainly due to the advantages that it offers to investors.
ETNs are designed to provide investors access to the returns of various market benchmarks. The returns of ETNs are usually linked to the performance of a market benchmark or strategy, less investor fees. When an investor buys an ETN, the underwriting bank promises to pay the amount reflected in the index, minus fees upon maturity. Thus ETN has an additional risk compared to an ETF - upon any reduction of credit ratings or if the underwriting bank goes bankrupt, the value of the ETN will be eroded.
Though linked to the performance of a market benchmark, ETNs are not equities or index funds, but they do share several characteristics of the latter. Similar to equities, they are traded on an exchange and can be shorted. Similar to index fund, they are linked to the return of a benchmark index. But as debt securities, ETNs don't actually own anything they are tracking.
The first ETN, marketed as the iPath Exchange-Traded Notes, was issued by Barclays Bank PLC on 12 June 2006. This was soon followed by Bear Stearns, Goldman Sachs & Swedish Export Credit Corp. In 2008, additional issuers entered the market with their own offerings; these include BNP Paribas, Deutsche Bank, UBS, Lehman Brothers, Morgan Stanley and Credit Suisse. As of April 2008, there were 56 ETNs from nine issuers tracking different indexes.
The popularity of ETNs is mainly due to the advantages that it offers to investors.
Spread Trade
A spread trade refers to the act of buying one security or futures contract and selling another related one, in an attempt to profit from the change in the price difference between the two.
As expiry of a long contract and delivery of the underlying physical commodity approaches, spread trades are used by Index Speculators in commodity futures markets to "roll" their positions out to a later delivery month. Thus, "extinguishing" their open interest in the expiry month while creating new open interest in the later delivery month.
Because they always defer delivery, Index Speculators never take possession of physical inventories and do not operate in the commodity markets with concern for supply and demand- only price movement
Common examples are:
- Crack spread, between crude oil and gasoline
- Spark spread, between natural gas and electricity (for gas-fired power stations)
- Option spread, between the price of two option contracts on the same underlying stock or commodity
- Calendar spread, between the price of an option or commodity with different expiration/delivery dates.
The margin requirement for a futures spread trade is usually less than the sum of the margin requirements for the two individual futures contracts. Sometimes the margin requirement is even less than the requirement for one of the contracts.
Bid/Offer Spread
The bid/offer spread (also known as bid/ask spread) for securities (such as stock, futures contracts, options, or currency pairs) is the difference between the price quoted by a market maker for an immediate sale (bid) and an immediate purchase (ask). The size of the bid-offer spread in a given commodity is a measure of the liquidity of the market and the size of the transaction cost.
The trader initiating the transaction is said to demand liquidity, and the other party (counterparty) to the transaction supplies liquidity. Liquidity demanders place market orders and liquidity suppliers place limit orders. For a round trip (a purchase and sale together) the liquidity demander pays the spread and the liquidity supplier earns the spread.
All limit orders outstanding at a given time (i.e., limit orders that have not been executed) are together called the Limit Order Book. In some markets such as NASDAQ, dealers supply liquidity. However, on most exchanges, such as the Australian Securities Exchange, there are no designated liquidity suppliers, and liquidity is supplied by other traders.
On these exchanges, and even on NASDAQ, institutions and individuals can supply liquidity by placing limit orders
The trader initiating the transaction is said to demand liquidity, and the other party (counterparty) to the transaction supplies liquidity. Liquidity demanders place market orders and liquidity suppliers place limit orders. For a round trip (a purchase and sale together) the liquidity demander pays the spread and the liquidity supplier earns the spread.
All limit orders outstanding at a given time (i.e., limit orders that have not been executed) are together called the Limit Order Book. In some markets such as NASDAQ, dealers supply liquidity. However, on most exchanges, such as the Australian Securities Exchange, there are no designated liquidity suppliers, and liquidity is supplied by other traders.
On these exchanges, and even on NASDAQ, institutions and individuals can supply liquidity by placing limit orders
Roll -- Yield
The roll yield is the yield that a futures investor captures when their futures contract converges (or rolls up) to the spot price in a backwardated futures market. The spot price can stay constant, but the investor will still earn returns from buying discounted futures contracts, which continuously roll up to the constant spot price.
For example, suppose the spot price of oil is $58 and the market is inverted because inventories are relatively low. This means the first futures price might be at $57 and the next contract at $56. You go long the front contract as described above. Now suppose a few weeks pass and nothing happens to the spot price.
The futures contract you own moves toward the spot price as delivery approaches, and we can assume the spread between the futures stays at a dollar. You sell your maturing futures near the $58 spot price and buy the next future for around $57.
Note that in an inverted market you make money from what is called "the roll yield" even if commodity prices remain unchanged.
For example, suppose the spot price of oil is $58 and the market is inverted because inventories are relatively low. This means the first futures price might be at $57 and the next contract at $56. You go long the front contract as described above. Now suppose a few weeks pass and nothing happens to the spot price.
The futures contract you own moves toward the spot price as delivery approaches, and we can assume the spread between the futures stays at a dollar. You sell your maturing futures near the $58 spot price and buy the next future for around $57.
Note that in an inverted market you make money from what is called "the roll yield" even if commodity prices remain unchanged.
Commodity Price Index
A commodity price index is a fixed Mandan weight index or (weighted) average of selected commodity prices, which may be spot or futures prices. It is designed to be representative of the broad commodity asset class or a specific subset of commodities, such as energy or metals.
The constituents in a commodity price index can be broadly grouped into the following categories:
- Energy
- Metals
- Base Metals
- Precious Metals
- Agriculture
- Grains
- Softs
- Livestock
Investors can choose to obtain a passive exposure to these commodity price indices through a total return swap. The advantages of a passive commodity index exposure include negative correlation with other asset classes such as equities and bonds, as well as protection against inflation.
The disadvantages include a negative roll yield due to contango in certain commodities, although this can be reduced by active management techniques, such as reducing the weights of certain constituents (e.g. precious and base metals) in the index.
Commodity
A commodity is something for which there is demand, but which is supplied without qualitative differentiation across a market. It is a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk.
In other words, copper is copper. The price of copper is universal, and fluctuates daily based on global supply and demand. Stereos, on the other hand, have many levels of quality. And, the better a stereo is [perceived to be], the more it will cost.
One of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, salt, sugar, coffee beans, soybeans, aluminum, rice, wheat, gold and silver.
Commoditization occurs as a goods or services market loses differentiation across its supply base, often by the diffusion of the intellectual capital necessary to acquire or produce it efficiently. As such, goods that formerly carried premium margins for market participants have become commodities, such as generic pharmaceuticals and silicon chips.
In other words, copper is copper. The price of copper is universal, and fluctuates daily based on global supply and demand. Stereos, on the other hand, have many levels of quality. And, the better a stereo is [perceived to be], the more it will cost.
One of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, salt, sugar, coffee beans, soybeans, aluminum, rice, wheat, gold and silver.
Commoditization occurs as a goods or services market loses differentiation across its supply base, often by the diffusion of the intellectual capital necessary to acquire or produce it efficiently. As such, goods that formerly carried premium margins for market participants have become commodities, such as generic pharmaceuticals and silicon chips.
Monday, June 1, 2009
ETNs access to Markets and Strategies
ETNs have provided access to hard-to-reach exposures, such as commodity futures and the Indian stock market. Certain asset classes and strategies are not easily accessible to individual investors.
For example, the “momentum investing” strategy, which is used in SPECTRUM Large Cap U.S. Sector Momentum Index, is to take advantage of the varied performances of the 10 sub-indexes of the S&P 500 Total Return IndexSM (SPTR) relative to each other and to the SPTR.
The weights of the 10 sub-indexes are computed each day based on performance and correlation. This makes SPECTRUM Large Cap U.S. Sector Momentum Index difficult to track through ETF. On the contrary, ETN provides opportunities to gain exposure to these types of investment strategies in a cost-efficient way.
For example, the “momentum investing” strategy, which is used in SPECTRUM Large Cap U.S. Sector Momentum Index, is to take advantage of the varied performances of the 10 sub-indexes of the S&P 500 Total Return IndexSM (SPTR) relative to each other and to the SPTR.
The weights of the 10 sub-indexes are computed each day based on performance and correlation. This makes SPECTRUM Large Cap U.S. Sector Momentum Index difficult to track through ETF. On the contrary, ETN provides opportunities to gain exposure to these types of investment strategies in a cost-efficient way.
Monday, May 4, 2009
Trading profit
The profit gained from a position held for less than one year. The profit is taxed at ordinary income rates rather than the long-term capital gains rate.
Sample Graph
source: www.rzb.at/eBusiness/rzb
Sample Graph
source: www.rzb.at/eBusiness/rzb
Spot Market
The spot market or cash market is a commodities or securities market in which goods are sold for cash and delivered immediately.
Contracts bought and sold on these markets are immediately effective.
Spot markets can operate wherever the infrastructure exists to conduct the transaction.
The spot market for most securities exists primarily on the Internet.
Contracts bought and sold on these markets are immediately effective.
Spot markets can operate wherever the infrastructure exists to conduct the transaction.
The spot market for most securities exists primarily on the Internet.
Trading Volume
The quantity of shares, bonds or contracts traded during a designated time period for a security or an entire exchange.
Triple witching hour is the last hour of the stock market trading session (3:00-4:00 P.M., New York Time) on the third Friday of every March, June, September, and December. Those days are the expiration of three kinds of securities:
Stock index futures.
Stock market index options.
Stock options.
The simultaneous expirations generally increases the trading volume of options, futures and the underlying stocks, and occasionally increases volatility of prices of related securities.
Triple witching hour is the last hour of the stock market trading session (3:00-4:00 P.M., New York Time) on the third Friday of every March, June, September, and December. Those days are the expiration of three kinds of securities:
Stock index futures.
Stock market index options.
Stock options.
The simultaneous expirations generally increases the trading volume of options, futures and the underlying stocks, and occasionally increases volatility of prices of related securities.
Trading Range
Range refers to the area between high and low prices a currency pair tends to trade during a given period of time.
With ranging markets, traders tend to use indicators that are better at identifying overbought & oversold levels as well as reversals signals. Indicators such as MACD, RSI, and other moving average derivatives are common - as well as Japanese Candlesticks for reversal and continuation signals.
With ranging markets, traders tend to use indicators that are better at identifying overbought & oversold levels as well as reversals signals. Indicators such as MACD, RSI, and other moving average derivatives are common - as well as Japanese Candlesticks for reversal and continuation signals.
Sunday, April 5, 2009
Trading Index
TRIN. A market indicator calculated by the following:
Arms Index = [(# of advancing issues / # of declining issues) / (Total up volume / Total down volume)].
A value of less than 1.0 is termed bullish, and greater than 1.0 is bearish. Also called Arms Index.
Arms Index = [(# of advancing issues / # of declining issues) / (Total up volume / Total down volume)].
A value of less than 1.0 is termed bullish, and greater than 1.0 is bearish. Also called Arms Index.
Trade Secret
In most states, a formula, pattern, physical device, idea, process, compilation of information or other information that
1) provides a business with a competitive advantage.
2) is treated in a way that can reasonably be expected to prevent the public or competitors from learning about it, absent improper acquisition or theft.
1) provides a business with a competitive advantage.
2) is treated in a way that can reasonably be expected to prevent the public or competitors from learning about it, absent improper acquisition or theft.
Saturday, March 14, 2009
Trade Date
The date on which the transaction occurs.
The trade date ranges from one to five days before the settlement date, depending on the type of transaction.
The trade date ranges from one to five days before the settlement date, depending on the type of transaction.
Factors
There are a number of factors that work to diminish the market impact of US Trade Balance. The report is not very timely, coming some time after the reporting period.
Developments in many of the figure's components are also typically well anticipated. Lastly, since the report reflects data for a specific reporting month, any significant changes in the Trade Balance should plausibly have already been felt during that month and not during the release of data.
However, because of the overall significance of Trade Balance data in forecasting trends in the Forex Market, the release has historically been one of the more important reports out of the US .
Developments in many of the figure's components are also typically well anticipated. Lastly, since the report reflects data for a specific reporting month, any significant changes in the Trade Balance should plausibly have already been felt during that month and not during the release of data.
However, because of the overall significance of Trade Balance data in forecasting trends in the Forex Market, the release has historically been one of the more important reports out of the US .
Trade Balance
A positive Trade Balance (surplus) indicates that exports are greater than imports. When imports exceed exports, the US experiences a trade deficit. Because foreign goods are usually purchased using foreign currency, trade deficits usually reflect dollars leaking out of the country.
Such currency outflows may lead to a natural depreciation of a dollar, unless countered by comparable capital inflows (US Net Foreign Security Purchases, or TICs data reports on such capital flows). At a bare minimum, deficits fundamentally weigh down the value of the currency.
Such currency outflows may lead to a natural depreciation of a dollar, unless countered by comparable capital inflows (US Net Foreign Security Purchases, or TICs data reports on such capital flows). At a bare minimum, deficits fundamentally weigh down the value of the currency.
Wednesday, February 25, 2009
Modern Portfolio Theory
Modern portfolio theory (MPT) proposes how rational investors will use diversification to optimize their portfolios, and how a risky asset should be priced. The basic concepts of the theory are Markowitz diversification, the efficient frontier, capital asset pricing model, the alpha and beta coefficients, the Capital Market Line and the Securities Market Line.
MPT models an asset's return as a random variable, and models a portfolio as a weighted combination of assets so that the return of a portfolio is the weighted combination of the assets' returns. Moreover, a portfolio's return is a random variable, and consequently has an expected value and a variance. Risk, in this model, is the standard deviation of return.
MPT models an asset's return as a random variable, and models a portfolio as a weighted combination of assets so that the return of a portfolio is the weighted combination of the assets' returns. Moreover, a portfolio's return is a random variable, and consequently has an expected value and a variance. Risk, in this model, is the standard deviation of return.
Mosaic theory
In finance is the method used in security analysis to gather information about a corporation. Mosaic theory involves collecting information from different sources, public and private, to calculate the value of security. Applying the mosaic theory is as much art as it is science. An analyst gleans as many pieces of information as possible, see if they tell a story that makes sense, and decide whether to do a trade.
Using mosaic theory requires substantial experience and logic to put together the various pieces of information, for some of them may be pure speculation.
Technical Analysis
Technical analysis is a security analysis technique that claims the ability to forecast the future direction of prices through the study of past market data, primarily price and volume. In its purest form, technical analysis considers only the actual price and volume behavior of the market or instrument. Technical analysts, sometimes called "chartists", may employ models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, cycles or, classically, through recognition of chart patterns.
Technical analysis stands in distinction to fundamental analysis. Technical analysis "ignores" the actual nature of the company, market, currency or commodity and is based solely on "the charts," that is to say price and volume information, whereas fundamental analysis does look at the actual facts of the company, market, currency or commodity. For example, any large brokerage, trading group, or financial institution will typically have both a technical analysis and fundamental analysis team.
Technical analysis is widely used among traders and financial professionals, and is very often used by active day traders, market makers, and pit traders. In the 1960s and 1970s it was widely discredited by academic mathematics. In a recent review, Irwin and Park reported that 56 of 95 modern studies found it produces positive results, but noted that many of the positive results were rendered dubious by issues such as data snooping so that the evidence in support of technical analysis was inconclusive; it is still considered by many academics to be pseudoscience.
Academics such as Eugene Fama say the evidence for technical analysis is sparse and is inconsistent with the weak form of the efficient market hypothesis. Users hold that even if technical analysis cannot predict the future, it helps to identify trading opportunities.
Technical analysis stands in distinction to fundamental analysis. Technical analysis "ignores" the actual nature of the company, market, currency or commodity and is based solely on "the charts," that is to say price and volume information, whereas fundamental analysis does look at the actual facts of the company, market, currency or commodity. For example, any large brokerage, trading group, or financial institution will typically have both a technical analysis and fundamental analysis team.
Technical analysis is widely used among traders and financial professionals, and is very often used by active day traders, market makers, and pit traders. In the 1960s and 1970s it was widely discredited by academic mathematics. In a recent review, Irwin and Park reported that 56 of 95 modern studies found it produces positive results, but noted that many of the positive results were rendered dubious by issues such as data snooping so that the evidence in support of technical analysis was inconclusive; it is still considered by many academics to be pseudoscience.
Academics such as Eugene Fama say the evidence for technical analysis is sparse and is inconsistent with the weak form of the efficient market hypothesis. Users hold that even if technical analysis cannot predict the future, it helps to identify trading opportunities.
Fundamental Analysis
Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis.Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts.
There are several possible objectives:
a. to conduct a company stock valuation and predict its probable price evolution,
b. to make a projection on its business performance,
c. to evaluate its management and make internal business decisions,
d. to calculate its credit risk.
Efficient-market hypothesis
In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient", or that prices on traded assets, e.g., stocks, bonds, or property, already reflect all known information. The efficient-market hypothesis states that it is impossible to consistently outperform the market by using any information that the market already knows, except through luck.
Information or news in the EMH is defined as anything that may affect prices that is unknowable in the present and thus appears randomly in the future.
The EMH was developed by Professor Eugene Fama at the University of Chicago Booth School of Business as an academic concept of study through his published Ph.D. thesis in the early 1960s at the same school.
It was widely accepted up until the 1990s, when behavioral finance economists, who were a fringe element, became mainstream. Empirical analyses have consistently found problems with the efficient markets hypothesis, the most consistent being that stocks with low price to earnings (and similarly, low price to cash-flow or book value) outperform other stocks.
Alternative theories have proposed that cognitive biases cause these inefficiencies, leading investors to purchase overpriced growth stocks rather than value stocks. Although the efficient markets hypothesis has become controversial because substantial and lasting inefficiencies are observed, it remains a worthwhile starting point.
Information or news in the EMH is defined as anything that may affect prices that is unknowable in the present and thus appears randomly in the future.
The EMH was developed by Professor Eugene Fama at the University of Chicago Booth School of Business as an academic concept of study through his published Ph.D. thesis in the early 1960s at the same school.
It was widely accepted up until the 1990s, when behavioral finance economists, who were a fringe element, became mainstream. Empirical analyses have consistently found problems with the efficient markets hypothesis, the most consistent being that stocks with low price to earnings (and similarly, low price to cash-flow or book value) outperform other stocks.
Alternative theories have proposed that cognitive biases cause these inefficiencies, leading investors to purchase overpriced growth stocks rather than value stocks. Although the efficient markets hypothesis has become controversial because substantial and lasting inefficiencies are observed, it remains a worthwhile starting point.
Signal Processing
The MACD is a filtered measure of the velocity. The velocity has been passed through two first order linear low pass filters. The "signal line" is that resulting velocity, filtered again. The difference between those two, the histogram, is a measure of the acceleration, with all three filters applied. The "MACD crossing the signal line" suggests that the direction of the acceleration is changing. "MACD line crossing zero" suggests that the average velocity is changing direction.
Trading Signals
MACD, which stands for Moving Average Convergence / Divergence, is a technical analysis indicator created by Gerald Appel in the 1960s. It shows the difference between a fast and slow exponential moving average (EMA) of closing prices. During the 1980s MACD proved to be a valuable tool for any trader. The standard periods recommended back in the 1960s by Gerald Appel are 12 and 26 days:
A signal line (or trigger line) is then formed by smoothing this with a further EMA. The standard period for this is 9 days,
The difference between the MACD and the signal line is often calculated and shown not as a line, but a solid block histogram style. This construction was made by Thomas Aspray in 1986. The calculation is simply
histogram = MACD − signal
A signal line (or trigger line) is then formed by smoothing this with a further EMA. The standard period for this is 9 days,
The difference between the MACD and the signal line is often calculated and shown not as a line, but a solid block histogram style. This construction was made by Thomas Aspray in 1986. The calculation is simply
histogram = MACD − signal
The example graph above shows all three of these together. The upper graph is the prices. The lower graph has the MACD line in blue and the signal line in red. The solid white histogram style is the difference between them.
The set of periods for the averages, often written as say 12,26,9, can be varied. Appel and others have experimented with various
Thursday, February 12, 2009
Trade Strategy
Carry Trade
The carry trade is a popular trading strategy used in the FX market. It guarantees traders at least some return on their medium and longer term positions. In the Carry Trade, speculators buy high interest currencies and sell currencies with low interest rates. These positions ensure that each trading day rollover-interest will be posted to the trader's account. Thus the Carry Trade has the potential to significantly enhance a trader's return.
Setting Up The Carry Trade
To become a successful carry trader, understanding the role that interest rates play in the FX market is a crucial task. A country offering high interest rates will attract more capital as investors seek to capitalize higher returns. As interest rates rise, investment will follow, which can in turn increase the value of the currency.
Carry trader's main focus becomes the expectation on the direction of a country's interest rate, to ensure their high rate of return.
Generally, traders seek to buy countries with high interest rates, and seek to short currencies who offer low interest rates.The carry trade works best under certain market conditions, and the selection of the currency pair can make the difference between a losing and a profitable trade.
When selecting the currency pair, traders want to observe two things. On the one hand, the trader wants to make sure he is buying the currency that has the higher interest rate and is selling the currency that has a lower interest rate in comparison. On the other hand, the trader also wants to view the health of the economy for the currency pair to ensure the market will move to his/her favor.
Essentially, the trader will be buying a currency with a stronger economy and selling the currency with a weaker economy. Some currency pairs that are usually selected to apply the carry trade strategy are: GBP/JPY, GBP/CHF, AUD/JPY, EUR/JPY, CAD/JPY, and USD/JPY.
The carry trade is a popular trading strategy used in the FX market. It guarantees traders at least some return on their medium and longer term positions. In the Carry Trade, speculators buy high interest currencies and sell currencies with low interest rates. These positions ensure that each trading day rollover-interest will be posted to the trader's account. Thus the Carry Trade has the potential to significantly enhance a trader's return.
Setting Up The Carry Trade
To become a successful carry trader, understanding the role that interest rates play in the FX market is a crucial task. A country offering high interest rates will attract more capital as investors seek to capitalize higher returns. As interest rates rise, investment will follow, which can in turn increase the value of the currency.
Carry trader's main focus becomes the expectation on the direction of a country's interest rate, to ensure their high rate of return.
Generally, traders seek to buy countries with high interest rates, and seek to short currencies who offer low interest rates.The carry trade works best under certain market conditions, and the selection of the currency pair can make the difference between a losing and a profitable trade.
When selecting the currency pair, traders want to observe two things. On the one hand, the trader wants to make sure he is buying the currency that has the higher interest rate and is selling the currency that has a lower interest rate in comparison. On the other hand, the trader also wants to view the health of the economy for the currency pair to ensure the market will move to his/her favor.
Essentially, the trader will be buying a currency with a stronger economy and selling the currency with a weaker economy. Some currency pairs that are usually selected to apply the carry trade strategy are: GBP/JPY, GBP/CHF, AUD/JPY, EUR/JPY, CAD/JPY, and USD/JPY.
Monday, February 9, 2009
Seasonal commodities Tendencies
How can we take advantage of seasonal tendencies?
It is no secret that true commodities such as the grains and energies have distinct seasonal patterns. These seasonal tendencies are often the result of annual harvest cycles or product demand cycles. Accordingly, you may have heard the term "harvest lows" used in reference to markets such as soybeans or corn. Likewise, the media refers to the summer driving season as a catalyst for energy prices.
Beginning traders often assume that making money is as easy as buying unleaded futures at the end of May. Yet it is important to realize that the markets (in the long run) are efficient.
For example, the seasonal price fluctuation relating to the increased traffic on the road during the summer months actually occurs in the spring, and timing the move isn't as obvious as we would think. Similarly, heating oil futures rally well before the winter weather ever becomes a reality. Hence, don't presume that buying a heating oil call in September is a sure thing. Too many beginning traders allow themselves to buy into media hype without fully understanding the big picture of seasonality, the markets and, most important, the challenges of profiting from them.
Similar to the way that fear and greed dictate futures market speculators, these emotions play a large part in the cash value of a commodity. The price of grown commodities undergoes cycles of peaks and valleys based on recurring events. This cycle is often referred to in terms of "risk premium." Simply, risk premium is the product of fear of shortage on the consumer end and monetary motivation for producers to withhold supply from the marketplace. Field crops, energies, and the softs often succumb to phases in which risk premium is built into market pricing, then subsequently removed.
For example, in the case of grown commodities, until the seeds are in the ground there is no telling how much of the available farmland will be dedicated to corn, soybeans, cotton, and so forth, leaving the next crop yield (supply) uncertain. Farmers will opt to grow crops that they consider to be more profitable. As a result, consumers begin to bid prices higher out of fear of a shortage. Consumers also know it isn't necessarily important what farmers claim that they will plant but rather what they actually put in the ground that counts, and the market knows that. Therefore, the risk premium typically remains until the seeds are actually in the ground. If you are interested in researching this topic, I recommend Commodity Trader's Almanac, written by Scott Barrie.
The market's tendency to build and remove risk premium is the basis of grain market seasonality. However, expecting seasonality to be your holy grail may result in financial peril. Using seasonal tendencies as a guide rather than a rule may be best.
It is no secret that true commodities such as the grains and energies have distinct seasonal patterns. These seasonal tendencies are often the result of annual harvest cycles or product demand cycles. Accordingly, you may have heard the term "harvest lows" used in reference to markets such as soybeans or corn. Likewise, the media refers to the summer driving season as a catalyst for energy prices.
Beginning traders often assume that making money is as easy as buying unleaded futures at the end of May. Yet it is important to realize that the markets (in the long run) are efficient.
For example, the seasonal price fluctuation relating to the increased traffic on the road during the summer months actually occurs in the spring, and timing the move isn't as obvious as we would think. Similarly, heating oil futures rally well before the winter weather ever becomes a reality. Hence, don't presume that buying a heating oil call in September is a sure thing. Too many beginning traders allow themselves to buy into media hype without fully understanding the big picture of seasonality, the markets and, most important, the challenges of profiting from them.
Similar to the way that fear and greed dictate futures market speculators, these emotions play a large part in the cash value of a commodity. The price of grown commodities undergoes cycles of peaks and valleys based on recurring events. This cycle is often referred to in terms of "risk premium." Simply, risk premium is the product of fear of shortage on the consumer end and monetary motivation for producers to withhold supply from the marketplace. Field crops, energies, and the softs often succumb to phases in which risk premium is built into market pricing, then subsequently removed.
For example, in the case of grown commodities, until the seeds are in the ground there is no telling how much of the available farmland will be dedicated to corn, soybeans, cotton, and so forth, leaving the next crop yield (supply) uncertain. Farmers will opt to grow crops that they consider to be more profitable. As a result, consumers begin to bid prices higher out of fear of a shortage. Consumers also know it isn't necessarily important what farmers claim that they will plant but rather what they actually put in the ground that counts, and the market knows that. Therefore, the risk premium typically remains until the seeds are actually in the ground. If you are interested in researching this topic, I recommend Commodity Trader's Almanac, written by Scott Barrie.
The market's tendency to build and remove risk premium is the basis of grain market seasonality. However, expecting seasonality to be your holy grail may result in financial peril. Using seasonal tendencies as a guide rather than a rule may be best.
Technical analysis
Reach your full potential as a trader
by understanding your:psychological makeup.
Trading psychology plays an instrumental role in successful trading.
Traders who are successful realize they are not trading the markets but rather their own psychology.
But what does trading psychology really refer to?
How do you know if you have the proper psychological profile to be a trader?
What style of trading suits you best?
What specific type of trading vehicle would best fit your personality?
by understanding your:psychological makeup.
Trading psychology plays an instrumental role in successful trading.
Traders who are successful realize they are not trading the markets but rather their own psychology.
But what does trading psychology really refer to?
How do you know if you have the proper psychological profile to be a trader?
What style of trading suits you best?
What specific type of trading vehicle would best fit your personality?
Financial Futures
Commodities futures market
Even for the experts, the commodities futures market has always been a gamble. But now there are futures contracts for people who don't know beans about soybeans. The so-called commodities in this case are good old stocks and bonds, and they are trade in the fast and furious financial futures market.
The financial futures include contracts in treasury bills, bonds and notes, bank certificate of deposit and a variety of other interest -bearing securities. When you buy one of those contract,you are betting that, for example, interest rates will go down in the future and thus the prices of the bills, bonds or notes covered by the contract will go up.
You can buy financial futures trough commodity firms or through brokers who specialize in commodities at large stock brokerage houses. But if you are a would-be buccaneer in the financial futures market, take a tip from the experts and do your trading on paper for a while, until you get your sea legs. If and when you are ready to start wheeling and dealing for real, then pick active markets, such as those trading in Treasury bill and Treasury bond futures. The more trading that is going on, the more likely you are to find a buyer or a seller for your contract at a price you want. And to close out your position when the price reaches a certain level and they can help you limit any losses.
But anyway you play it, futures is a highly leveraged business. So this kind of investment--while increasingly popular-- is not for those who aren't prepare to take substantial risks.
Even for the experts, the commodities futures market has always been a gamble. But now there are futures contracts for people who don't know beans about soybeans. The so-called commodities in this case are good old stocks and bonds, and they are trade in the fast and furious financial futures market.
The financial futures include contracts in treasury bills, bonds and notes, bank certificate of deposit and a variety of other interest -bearing securities. When you buy one of those contract,you are betting that, for example, interest rates will go down in the future and thus the prices of the bills, bonds or notes covered by the contract will go up.
You can buy financial futures trough commodity firms or through brokers who specialize in commodities at large stock brokerage houses. But if you are a would-be buccaneer in the financial futures market, take a tip from the experts and do your trading on paper for a while, until you get your sea legs. If and when you are ready to start wheeling and dealing for real, then pick active markets, such as those trading in Treasury bill and Treasury bond futures. The more trading that is going on, the more likely you are to find a buyer or a seller for your contract at a price you want. And to close out your position when the price reaches a certain level and they can help you limit any losses.
But anyway you play it, futures is a highly leveraged business. So this kind of investment--while increasingly popular-- is not for those who aren't prepare to take substantial risks.
Commodities
Playing the Riskiest Game
The fastest, toughest, highest-risk financial game of all, there are commodities. As many as 90% of all amateur traders lose money and drop out within a year, and the only consistent winners are the brokers who charge your commissions. Still if you crave excitement and have a cast iron stomach, commodities trading can offer impressive gains for that tiny portion of your investable fund that you are willing to put completely at risk--your mad money. But unless you are an expert, never put more than a nickel or dime out of every investment dollar into commodities.
When you play the futures market, the contracts you deal in give the right to buy a specified commodity at a set price for limited time. Let's say the price of gold is $300 an ounce, and you think it will rise in the next six months. Then you can invest in a contract to buy 100 ounces of gold about $300 an ounce. That's $30,000 worth of gold. But speculating in gold futures cost less than 10% of the price of the metal. If gold goes up to, say $350 an ounce by the time you contract expires six months from now, you win. Your profit will be $50 an ounce, or $5,000---minus commissions.
But if prices move strongly against you, your broker will demand that you put up still more money. Unless you produce the cash immediately, the broker will sell out your position, at a potentially bone-chilling loss. To avoid that, give your broker a stop-loss order on each futures contract. That way, you can establish in advance a price at which you will automatically sell out a position rather than take further losses.
Small investors who speculate in commodities make two major mistakes. many of them operate on the basis of tips, thy are often wrong, and the amateurs cannot hope to match the professional traders for access to update, accurate information about markets. small investors also tend to be under capitalized. to stay in this game, you should have five dollars in reserve, ready to commit, for every dollar you put up.
You can make do with less money by buying mini-contracts. Mini contracts control smaller quantities of commodities than do regular futures, but thy are just as volatile as full-size contracts, and you will still get margin calls. But because you put up proportionately less money, you have less lose.
A reasonable way for small investors to get into the market is to buy one of the publicly traded commodity funds. The advantage is that the funds are professionally managed and diversify your investment among many types of commodities. More important, any losses are limited to the amount of money you put up; you are never subject to a margin call. but before you invest, be sure to check the fund's past performance.
The fastest, toughest, highest-risk financial game of all, there are commodities. As many as 90% of all amateur traders lose money and drop out within a year, and the only consistent winners are the brokers who charge your commissions. Still if you crave excitement and have a cast iron stomach, commodities trading can offer impressive gains for that tiny portion of your investable fund that you are willing to put completely at risk--your mad money. But unless you are an expert, never put more than a nickel or dime out of every investment dollar into commodities.
When you play the futures market, the contracts you deal in give the right to buy a specified commodity at a set price for limited time. Let's say the price of gold is $300 an ounce, and you think it will rise in the next six months. Then you can invest in a contract to buy 100 ounces of gold about $300 an ounce. That's $30,000 worth of gold. But speculating in gold futures cost less than 10% of the price of the metal. If gold goes up to, say $350 an ounce by the time you contract expires six months from now, you win. Your profit will be $50 an ounce, or $5,000---minus commissions.
But if prices move strongly against you, your broker will demand that you put up still more money. Unless you produce the cash immediately, the broker will sell out your position, at a potentially bone-chilling loss. To avoid that, give your broker a stop-loss order on each futures contract. That way, you can establish in advance a price at which you will automatically sell out a position rather than take further losses.
Small investors who speculate in commodities make two major mistakes. many of them operate on the basis of tips, thy are often wrong, and the amateurs cannot hope to match the professional traders for access to update, accurate information about markets. small investors also tend to be under capitalized. to stay in this game, you should have five dollars in reserve, ready to commit, for every dollar you put up.
You can make do with less money by buying mini-contracts. Mini contracts control smaller quantities of commodities than do regular futures, but thy are just as volatile as full-size contracts, and you will still get margin calls. But because you put up proportionately less money, you have less lose.
A reasonable way for small investors to get into the market is to buy one of the publicly traded commodity funds. The advantage is that the funds are professionally managed and diversify your investment among many types of commodities. More important, any losses are limited to the amount of money you put up; you are never subject to a margin call. but before you invest, be sure to check the fund's past performance.
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