Forex: The ancient art of trading

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!’

The International Money Market

 
Do you remember the story of the sower?

Once there was a farmer who had some seeds to sow. He walked through his field

scattering seeds. Some were caught by the wind and were blown away or were

eaten by the birds. Others fell on stony ground, they quickly sprouted, but

unfortunately their roots weren’t deep enough and they were soon shriveled by the

sun. Others fell amongst the weeds where they could not find any light and they

died. Some, however fell on the good rich soil of the field, they put down strong

roots and grew well, giving a crop of fifty, sixty and even seventy times greater

than the original seeds.

The seed is the idea. The idea is to work for yourself on the international money

market – to become a successful trader. Just sit back for a moment and think about

working for yourself. What would it be like? You would never have to ask a boss

for a holiday or a pay rise again. You could set your own working hours. You

could work how and when you liked. Of course, if you talk to any self employed

person they will tell you that it’s hard work. Self employed people usually work

much harder than employees. But it is much more satisfying and much more

rewarding. Trading is not only a means to an independent income; it’s an

intellectual challenge too.

We want our idea to become real and develop well, just like the seeds that fall onto

the good rich soil of the field. This book has been written to help you make a

success out of this idea. I have tried to write in clear straight-forward English so

that people who have no trading experience can understand the ideas. I want you to

feel you can ask me questions about the content in this book. You can either

contact me on our website (www.fxclub.com) or you can e-mail me direct at

fxc@fxclub.com. I’ll always be glad to answer your questions and will appreciate

any comments, good or bad, that you make about this book or the website.

I’d like to lay down one guiding principle in our work together. From our point of

view any currency transaction has only possible outcome. Sure, you can make or

you can lose money on a transaction; you can feel happy or sad. But save the

emotional stuff for playtime. When we’re working, we’ve got to be objective.

Every deal, profit or loss should only be viewed as a learning opportunity. What

did I do right and what did I do wrong? Only by viewing our work in the way a

surgeon looks at his patient can we possibly make progress.

Let’s return to business. Like any other field of activity, trading has its own terms,

its own jargon. ‘FOREX’, ‘trends’, ‘indicators’, ‘base currency’, ‘instrument’ –

what does it all mean? You could of course blithely ignore all the ground work and

start speculating now. Why not? You’ll certainly have a lot of fun, buying and

selling currencies, winning and losing money. Why not indeed? I’ve nothing

against gambling and in fact I enjoy a flutter myself. One thing though, when I go

down to the horses, I’ve got a fixed budget of what I can play with. I even view

this money as gone before I lose it. I’m not gambling as a business, I’m gambling

for pleasure: it’s a kick, a buzz. I like the atmosphere on a racecourse; I like the

people and having a drink and a chat. I like putting my money down and if I come

out on top, then that is just the icing on the cake. You can view playing on the

currency market in the same way; something to add a little spice to life and this

book will be of interest to you and will help you put your money down in a more

organized way. However, it’s really aimed at people who want to study and at the

very least pick up the basic principles of how the market functions and how to

analyze it. For the second group it’s vital to build up a knowledge base before

going onto the market. Otherwise it’s like the seeds on stony ground, with no roots

they shrivel up and die.

To get down to basics, ‘FOREX’ means foreign exchange. Most of us have had

dealings on this market. Perhaps when we’ve gone abroad on holiday and needed

to buy the local currency or maybe we’ve saved our money in a more stable

currency than our own.

The foreign exchange market is entering the prime of its life now – it was born in

the mid-1970’s. Before this time different currencies could not change their rate

easily, that is their value did not depend on the correlations of bids and offers or

reflect the expectations of buyers and sellers as is the case today. This was because

of an international agreement called the Bretton Woods agreement. Bretton Woods

is a resort town in North Hampshire, USA and it was here, in 1944, that the Allies

in the Second World War met to discuss the economic future of the world after the

end of the war. The Allies realized that many countries were going to be in a bad

financial situation by the end of the war and that financial instability led to political

extremism which, in turn, led to war. So they knew that they had to make

preparations to ensure that the world’s nations got through the difficult post-war

period without triggering a global financial crisis. It was the Bretton Woods

Conference that gave birth to the IMF and the World Bank and it was here that the

agreement was made to peg currencies to the dollar, which in turn was pegged to

the price of gold (an ounce of gold was worth about thirty bucks). This made the

US dollar as ‘good as gold’ and the world’s reserve currency.

The early 70’s saw the demise of the Bretton Woods system. It had completed its

mission and the currencies of the major economic powers were ready to find there

own value on the market and started to ‘float’. That is they became selfdetermining.

Once this happened the Forex market became a natural consequence. The

exchange rate is determined by the consensus of buyers and sellers at any one point

in time. It’s very hard to talk about a specific end result because the rates float,

they are in a constant state of flux. Now there will be one rate, in a second there

could be another and in an hour something very different indeed. Foreign exchange

rates are dynamic. Don’t get me wrong, Forex is not only a market where prices

float, but it is the only market which works 24 hours every day in the working

week. At all times of the day be it morning, noon or night there is a brisk trade on

the market and this trade leads to constantly changing rates. Because the Earth is

round, constantly spinning, there’s no end to the countless volunteers, taking part

and making money. The sun never sets on the trade! A lot of people complain

about working from nine to five. But on Forex, you can freelance before work,

after work or instead of work, in the morning, during the day, in the evening, at

night, whenever you want.

This market is massive. There are not enough fingers and toes on the planet to

count how much money flows on the Forex market. The daily volume of

transactions on the foreign exchange market ranges between 1 – 3 trillion dollars.

That’s equal to 1 – 3 times the annual budget of the USA. It’s impressive, isn’t it?

While we are talking numbers, I’ll tell you that the international equities market

200 billion dollars a day. Shares are not sweet wrappers but even the equities

market can’t match Forex.

I nearly forgot the most important question about the foreign exchange market:

where does it live? Well it’s homeless; it’s everywhere and nowhere, NFA: No

Fixed Abode. It could be the only case in the world where being homeless is not

just the most comfortable and convenient option but when homelessness is the only

option. This party is just too big for any space other than cyberspace.

Flexibility is the key word. Whenever you want, wherever you are, the Forex

market is just a keyboard away.

Why do people trade? Well, that depends on who you are on the market. The main

groups of market participants are:

• Central banks

• Commercial banks

• Market makers

• Investment firms

• Brokerage firms

• Firms which perform foreign trade operations

• Private individuals

You are a member of the last group. Of course, you won’t usually be directly

involved in trading on the market, you’ll mainly leave that to your broker. It’s

always better to give orders than to receive them, isn’t it? In business, as in

everything else in life, it’s vital to know the ropes. If you don’t know the ropes,

you’ll wind up hanging yourself. A broker knows the ropes and you’ve simply got

to get acquainted with a broker. It’s he who will carry out your orders: “Sell now,

buy later and just hang on to this”. You will learn to love him and the more the

better. You will express your love in terms of money. Business is business. The

busker who plays sixties songs on my way to work has a sign which reads ‘I

appreciate your applause, but I appreciate your money more’. We all know where

he’s coming from. Don’t begrudge your broker the money he makes. Merely

having his services gives you a new source of profit. Look after him and he’ll look

after you. I wish you every happiness in the world together.