The ancient art of trading
In essence
The essence of currency trading is exactly the same as that of any other speculation. The idea is to buy something cheap and sell it expensive.
Why do rates change?
Rates change for a myriad of reasons: economic, political, social and metrological. A tornado in Asia, the state of the UK’s balance of payments and the Japanese PM’s bow-tie could all have an effect on a rate of exchange. Why these things have an influence is another story and we will discuss that later. I just want to remind you that the rate of exchange is a very changeable and unstable thing. It’simportant to be on the alert for the sudden changes in mood, for the capriciousness as well as the warm generosity of the money market. We must remember though,
that it is only thanks to this inherent volatility that we are given the opportunity to
make money using only our wits and insight.
Setting out
So how do you begin? Dealing is not a lot more difficult than falling off a log and
it’s certainly more pleasant. Start up capital is minimal: a few hundred dollars if
you are setting out like Richard Dennis. If you’re planning to start like George
Soros, let’s get better acquainted: I’d also like to be happy all my life. We deposit
our hard-earned money with a brokerage firm (such as Forex Club Financial
Company (www.fxclub.com), which is licensed as a broker by National Futures
Association, ID 0358265). The brokerage firm organizes the entire process and
brings together sufficient clients to make it worthwhile for a bank to service them.
The bank is the buyer and the seller and grants the clients of the brokerage firm a
type of credit called leverage which allows the client to deal with sums up to 100
times the size of their account. This credit is a single purpose loan and can not be
used to buy anything else with.
Let’s take a trip in our imaginations. Congratulations! You are the client of a
brokerage firm. 500 USD sits in your account. At any time (except Saturdays and
Sundays: all work and no play make anyone a dull boy!) you can purchase any
currency up to the values of 50,000 dollars. Buying currency for trading purposes
is called opening a position. After you have bought, you sit and wait for the price
to rise. There is no time limit; you can maintain your position for a few minutes,
days or even months. It’s growing! It has grown!
Now is the time to sell, to close the position. Voila! You have earned thedifference in price. Everything that you have earned is entirely yours. Let me
emphasize that I’m talking about the profit. What the bank has given, the bank will
taketh away. The bank lent you 49500 and it keeps that but you get to keep your
initial 500 and the profit on the full 50000. And you made that money, not in a
month, but in a week, a day or even an hour…
A practical illustration
On the chart (fig 1.2.4) you can see the exchange rate of the US dollar against the
Swiss Franc (USD/CHF) for a period extending over several days in July 2005.
Fig 1.2.4 Chart USD/CHF
Let’s suppose you’ve got a hundred of your hard-earned dollars in your account.
Our leverage (100:1) means that you have 10000 USD to play with. At the
beginning of July 18th 2005 the dollar cost some 1.2945 Swiss francs. We monitor
price in the hope of identifying a good entry point in order to capitalize on a rise in
price. First we hope and then we act: we buy 10000 USD against Swiss francs, at
around 12 GMT when the rate is at 1.2930. We sell the 10000 USD about 24 hours
later when the price is 1.3030 for which we get 13030 Swiss francs, making 100
francs for us or 76.75 bucks. There’s no commission with Forex Club so that’s
around 75 greenbacks to you. Note that we used a pretty small sum (100 USD) for
clarity of calculation. But if you’d used $500 from your trading account, the profit
would have been five times higher, more than $350! There was nothing special
about the behaviour of those prices on July 18th – 19th. Hard currencies fluctuate
from between 0.5 – 3.0% over any 24 hour period. So an earning potential of
several hundred bucks a day is just sitting there for the taking. Another point: could
we have been wrong, could the dollar have fallen? What then?
Well anybody who does anything makes mistakes. David Beckham has missed far
more penalties than I have but there is no doubt who is the better player. If you
never make mistakes you are not doing anything. An analysis of our clients’ trade
decisions (and we have thousands of clients) shows us that 57% of their deals are
successful. 57%. The real nub of this problem is how to capitalize on your good
judgment and minimize the losses when you are wrong. Herd behavior is,
strangely, to minimize profits and to maximize losses. People hold on to losing
positions in the hope of an upturn and close down winning positions for fear of
losing what they’ve got. Our rallying cry should be ‘Maximize profits! Minimize
losses!’ and forward to the barricades… We’ve only started to crack the code of
success. Our journey will be long and arduous, but every step takes us ever closer
to the Holy Grail.
When and what to buy and sell.
Making informed trading decisions entails drawing on all available information.
As we have said, foreign exchange rates are influenced by many factors. Rich
grand masters, like George Soros, can play upon human weaknesses and they are
not, of course, in straitened circumstances. They can panic the market (or on the
contrary lull it into a false sense of security) and then suddenly hit you on the head.
Only a cold compress will help while they coin it. In brief, all the conclusions
about your and my behavior, about the movement of prices are drawn by them in
advance. As we are talking about ‘them’ it’s clear that it’s not about us so far. We
have got to have a method at our disposal.
First off, you can use intuition (if you are a player by nature). Alternatively, you
can study patterns (trends) to predict future price. For example, yesterday the
Swiss franc rose by one cent, and today it has risen by one cent, so tomorrow it
will, most likely, do the same. Finally, you can use your knowledge of the laws of
economics. This is all very well if you have an economics degree. If you haven’t,
don’t worry: our book will provide you with a basic knowledge of economics.
Certainly, you will not become a financial wizard overnight. I’m not promising
that: it would be an empty and false promise. We cannot become great in an
instant, but we can strive. ‘Consciousness of ignorance is the first giant leap
towards enlightenment’.
We will also show you how to use trading software and you will also be able to
convert changes in prices into charts using tools such as IDSystem and Rumus.
You can download Rumus and IDSystem from our website (www.fxclub.com) for
free. The final and most important ingredient is your greatest asset: your mind. It is
up to you. Have courage: ‘Fortune favors the Brave!’
