Types Of Brokers

The forex market is managed by the brokers. These brokers are divided into two main types depending upon the type of their work. Selecting a correct kind of broker helps make smooth business transactions in forex market.

1.  Dealing Desk Broker

A dealing desk broker is also called a market maker. They are called this because they control the market and they make the market. They are the ones that offer competition to the dealers and common clients.

A dealing desk broker works by making use of the spread sheets. He is not concerned by the inter bank rate of the currency. He simply gives his own quote for both buying and selling of the currency. In this way, he influences the money market. There is very little risk involved in their dealing.

2. No Dealing Desk Brokers

These are opposed to the dealing desk brokers because they do not involve themselves into trading. They just pass the details of one interested buyer to the interested sellers. They merely act as a bridge in the forex market.

A no dealing desk broker asks for the details of the currency to be sold and he forwards this data to the interested parties. He does not give a quotation of his own. In addition, he is not putting any thing to the risk as he himself is a bridge only.

These no dealing desk brokers are further divided into following types:-

a. STP Broker

This is the speediest method of dealing in forex. These brokers make use of a Straight Through Processing system. This system is automated software that speedily directs a client to the liquidity contacts of the brokers. Each broker has numerous liquidity contacts that offer their own particular share price and rates to choose from.

b. ECN Brokers

These are also called the true ECN type. These brokers connect the clients to the other stake holders and allow them to negotiate their own terms. They take no part in negotiations and make their profit in terms of the commission on the deals concluded. So they have nothing at stake in the forex trading.

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Spot Currency Trading

Many currencies are traded in the spot currency trading. There are four major pairs winch are traded by players. Four pairs are easy to watch than thousands of stocks. This is the main advantage a Forex market has over other stock markets. Forex market is the largest market of the world.

Offer services 24/7

Most of the brokers are usually available 24/7 and offer customer services. Individuals can customize their own trading schedules to trade during European, Asian and U.S market hours.

Charging Fees Or Commission

Currencies are traded on the phone or online. No commission or additional transaction fees is charged by brokers. Forex trading costs are lowers for consistent, combined and transparent spreads than other markets.  Bid and ask prices compensate the most brokers.

Executing Trade With Normal Market Conditions

Normal market conditions can be used to execute the trade. Investors get the same price for market order, which was executed by them.

Real time streaming prices can be directly executed. Under normal market conditions limit, stop and entry orders are guaranteed by many brokers. Fills are delayed during normal market conditions i.e. order execution, martin attacks.

Restrictions On Short Selling

Currency markets do not impose any restrictions on short selling unlike the equity market. Trading opportunities exit in the currency markets without considering short or long trader, or market behavior. Structural bias does not exist in the market; one currency is traded in currency trading. Individuals have full access to trade when market is rising or falling.

No Middlemen Costs or charges

Traders get many advantages from centralized exchanges. Middlemen involves in centralized exchanges. Hiring a middleman would cost money to any party involved in buying or selling of security.

Role Of Dealers

Different quotes are available from different dealers because spot currency trading is decentralized. Dealers attempt to provide the best deals. Cheaper trade and quicker access are provided by Forex traders.

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Bollinger Bands

Bollinger Bands is a market trending tool which gauges market volatility. Bollinger Bounce is a strategy which assumes that prices always attain the centre level of the Bollinger Bands. Hence, Bollinger Bounce works best in markets when prices are ranging rather than following a single trend.

Bollinger Squeeze is a strategy through which you can identify breakouts beforehand. It simplifies to understanding that breakout always follow subdues market activity.  After the breakout, however, one can trade on the side in which prices have made their breakout.

MACD

MACD helps in figuring out market trends early. It makes use of 2 moving averages and a histogram to calculate the distance between two moving averages.  The only problem with MACD is that it is too time consuming to use so many moving averages.

Parabolic SAR

Parabolic SAR stands for Parabolic Stop and Reversals. As the name suggests, it is a useful and easy indicator to indentify spot trend reversals. Understanding this indicator is easy because it clearly represents sell signals and buy signals through the movement of dots above or below the candles.

Stochastic

Stochastic is a useful technique through which one can make out overbought and oversold conditions. The movement of moving average lines above and below two values of 20 and 80 signal overbought and oversold conditions. When moving average lines are below 20, the market is oversold and should look towards buying. If the lines are above 80, the market is overbought and should focus on selling.

RSI

RSI stands for Relative Strength Index. RSI works in the same way as Stochastic to spot overbought and oversold market conditions.

However, in RSI, if moving average lines are below 30, the conditions are oversold and if they exceed 70, the market is overbought. RSI helps in conforming trend formations before entering a trade.

ADX

ADX is a useful indicator to tell how strong a market trend is, that is, if the prices are ranging or following a single direction. ADX helps a trader decide if one should close trade early or not. On a scale of 0 to 100, values below 20 show weak trends and those above 50 identify strong trends.

Ichimoku Kinko Hyo

In order to determine future price momentum and future areas of support and resistance, IKH identifies rising prices as ones above the blue line and dropping prices as ones below the blue line.

The Tenkan Sen indicates if a market is trending or not by the movement of a red line. When the line moves vertically, it means the market is trending. Horizontal movement indicates a ranging market.

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Types of Traders

There are four major types of traders. Traders may be Scalpers, Day traders, Swing traders or Position traders. Each type is a unique trading style belonging to you. Whatever style works for you must bring you considerable amounts of benefits but switching between styles can more surely lead to disastrous results.

1. Scalpers

Scalpers hold trades in extremely short periods of time. They aim to earn small number of pips as many times as possible so that by the end, they are able to gather larger overall profits. This style of trading works best for traders who are good at quick thinking and can concentrate for hours on charts. Scalpers work fast and are not patient enough to wait for long trades.

2. Day Traders

Day trading is different from scalping as it focuses on one trade a day only. Day traders are people who have ample amount of time during the day to closely scrutinize trades.

The trade finishes only when the day itself finishes ending in either a profit or a loss. Day traders are good a interpreting market trends, analyzing and monitoring them over the day.

3. Swing Traders

Traders who are patient and can hold their trades for several days are called Swing traders. Swing trading witnesses a lot of fluctuations and variations of prices over small periods of time.  Hence, this style of trading requires patience and trust in one’s own analysis and skills. This is best suited for people with full time jobs as they have less time to devote to monitoring market trends all day long.

Swing traders are usually the kind of traders who can survive huge losses and are ready to take less number of trades. However, they do make sure that the small number of trades are each wisely and carefully designed and set up to bring profits.

4. Position Traders

Position trading is that style of trading with the longest trading time period. This time period may last for months and even years. As a result of the lengthy time frames, the losses incurred may even be huger as compared to other trading styles.

This style of trading is best for the most patient traders. With the combined skills of patience and analyzability, they are able to capitalize in order to obtain the desired margin. Position trading requires one to be prepared for sure shot losses at some point in their trading careers.

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Equities

Currency fluctuations can have a huge impact on equities. The profitability and losses for multinational companies are directly related to currency fluctuations and same is the same for traders who import and export currencies.

Industry Players

The performance of industry players is also determined by currency fluctuations. That is, whether a company is over performing or underperforming relative to its competitors is also dependant on the currency strength and weakness at that point in time.

Boeing and Airbus

The example U.S based airplane manufacturer, Boeing and French-based Airbus simplifies how currency fluctuations represent a company’s performance.  When the euro appreciated by 20% between 2006 and 2007, orders for Boeing’s Dreamliner jet saw a steep rise. Foreign buyers began placing more orders with Boeing than Airbus causing Airbus a loss of $810 million.

Companies which import and export

Currency fluctuations have a different impact on companies which import heavily, like Wal-Mart, and those which heavily export, like Boeing. If the U.S dollar depreciates, Wal-Mart will underperform as compared to Boeing and outperform Boeing when the currency appreciates. This is because companies with significant buying power are able to reduce the cost of foreign goods.

Multinational corporations

Multinational corporations face profits and losses as a result of foreign exchange fluctuations.

Earnings increase with the appreciation of the local currency and decrease with the depreciation of the said currency.

Aegis PLC

A relevant example is that of Aegis PLC, the British buyer of advertising space, which underwent a loss of 18% when the U.S dollar depreciated 10% against the British pound. European sales and U.S profits were consequently negatively resulted.

Cross border merger and acquisitions

Currency fluctuations also affect the relative market shares of companies. A rise in currency fluctuations can lead companies to increase cross border merger and acquisitions. For example, when the Canadian dollar reached an all time high in 2007, Canadian banks announced cross-border acquisitions worth of billions of dollars.

Carry Trades

Currencies and equities have a strong relationship. Carry trades are currency pairs such as the New Zealand and the Australian dollar. The pair stood against the Japanese yen which became a cheap funding source for investments in equities and currencies.

Countries which have a higher rate of interest actually have a higher degree of risk attached or lower sovereign debt ratings. The risk in carry trades increases when the gains of Dow rise and falls when the gains in Dow falls.

Carry trades and equities are strongly correlated but the relationship is not foolproof. Hence, one should not assume that when the Dow rises, carry trades will increase as well.

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Fading Breakouts

Fading breakout means trading in opposite direction of the breakouts. It can also be referred to as trading false breakout .One can fade a breakout if they take the break in a resistance or a support level to be false and is not going to move in that direction for long.

Fading breakout is a great short-term strategy. It yields pretty high at times but that by no means mean that it can prove to be a beneficial one in the long run too. By learning this new strategy one can help suffering loss at times.

Appeal in Trading Breakouts

Support and resistance levels are considered to be the floor and ceiling. If these levels are broken one would expect the price to continue in the same direction as the breakage. If the support- the lower price limit, is broken then it means that the general price movement is downwards and people are more likely to sell then buy.

 Likely, if the resistance level- upper limit is broken then the crowd believes that the price is likely to get higher and will tend to buy rather than sell. Thus, it seems that if trade is done in the direction of the breakout, the outcome is likely to be likable. Masses believe that there are no chances of suffering loss on this way. This presumed fact makes a lot of the trading community including the independent retail traders put their attention in going along with the breakouts.

Failing Breakouts

Not always but sometimes the breakouts might fail miserably. The reasons for it happening so cannot formulate a long list; a short compact one can be made though. One of the constituents of that list would be a small minority of smart, foresighted, and comparatively more experienced traders who tend to fade instead of following the breakouts.

These traders tend to get an idea of the collective thinking of most of the unseasoned and nascent traders and envisage the change in market policy which works in their favor.

What usually happens is that when people want to buy above the resistance level or below a resistance level, market has to change its strategy and it does so too. Due to this change in guiding strategy it is made sure that those who involve in breakout trade are not always successful. It can be concluded then that trading alongside more experienced traders is very helpful because business is never predictable.

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First scenario:

It illustrates the first part of dollar smile theory and says that dollar gets appreciation because of risk aversion. Risk aversion provides benefits to U.S Dollar. Investors perceive the changing global economic conditions. They avoid pursuing risky assets and buy less risky U.S dollar. They invest in U.S dollar without considering the economic conditions of the U.S. U.S dollar is considered safe because they are less risky, less volatile and high yielding currency.

Second Scenario:

The dollar depreciates and reached to a new low. The U.S economy grapples with weak fundamentals. The bottom part of the smile dollar theory reflects the uninspiring performance of the greenback. U.S dollar weighs down with possible interest rate cuts. Dollars are sold when market shy away from the dollar.

Third Scenario:

Economic growth causes appreciation in the value of the dollar. A smile builds us when the U.S economy perceives light at the end of the tunnel.

Recovery signs begin to appear, dollar sentiment and optimism pick up.  Increase in GGP growth of U.S economy and expectations of interest rate hikes appreciate greenback.

After The Financial Crises Of 2009

After the financial crises of 2007 this theory came into play.  During the first phase, when global recession was at the peak the dollar got a huge boost up. Dollar won the award of worst currency for a year by 2009. Investors switched back to currencies that yielded more returns than other currencies. It happened when the market bottomed out in 2009.

Economic Cycles

Time will determine whether Dollar Smile Theory is true or not. This theory has its own importance; people must understand and remember it. Economies have different parts of the cycles or we can say that economies are cyclical. It is very important to determine the part of the cycle in which the economy is running.

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Benefits Of Forex Trading

A large number of investors have joined forex market due to greater money making options. A few of the benefits of trading forex are discussed below:-

No Charges

The forex trading has the advantage that a trader does not have to pay any commission to the agent. In addition, no government fees are levied on traders. He does not have to pay any brokerage fee or exchange fee. All business transactions are done by using ‘bid asked spread’

No Lot Size

In trading forex, you do not have to worry about the lot size. In stock market or commodity markets you have to follow the size of the lot but it is not applicable to forex. You sell or buy what you have and as much as you want.

No Intermediaries

One of the biggest advantages of sealing in forex is the non inclusion of a middle man.

In other markets, the business is handled by the brokers but in forex you are yourself responsible to close the deal.

Cheap Transactions

The transaction fees in case of forex market are extremely low. It is generally around 0.1 % in most of the stock markets but in case of forex, it is as low as 0.07%.

24 Hour Business

The forex market never closes so there is no concept of opening bell like the stock markets. The market is always open and currencies are traded round the clock. The sessions start from Australia with sun rise and continue in various parts of the world, round the clock.

Single Influencing Entity

The forex market is spread all over the world and there is no possibility of it being influenced by a single tycoon. Even the central banks can not influence the market and therefore the business is done in a fair way.

Easy To Join

Forex market does not require huge investments. IT is very easy to start trading in forex and you can start with any amount you like. The availability of market software makes it even easier to understand the market and trading conditions.

All the above mentioned benefits make the forex trading an interesting business option.

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Increasing amounts of investments affect the demand and supply schedules of an economiy. The varying interest rates help investors decide and foresee the current and future value of currencies to help them take lucrative decisions.

Fixed Income Securities

Fixed Income securities provide fixed payment to investors at regular time intervals.  The higher the return on any fixed income security, the more profitable the corresponding investment. As a result, the local currency of that economy will look more promising and attractive compared to ones with lower returns.

Long and Short Term Securities

The maturity period of time for bonds in different countries varies. Some bonds may be short term and mature in one year.  The rate of return for the yields of bonds in different countries signifies if an economy is facing good or bad times ahead.

Euribos and Gilts

To comprehend how currencies appreciate or depreciate, we can take an example of the of the U.K bonds known as gilts and the European securities, known as Euribos. The central factor to understand is that higher interest rates yield greater returns for investors.

For any investor, the decision to invest in a security lies in its potential of generating high returns. If Euribos offer a lower rate of return as compared to Gilts, investors will naturally prefer Gilts over Euribos because of the increased margins of profits. As a result of poorer investment in EUR, the currency is likely to depreciate against other more attractive currencies.

Turbulent Economies

The significance of emphasizing more on the value of different currencies cannot be more heavily stressed. Economies undergo inflation and deflation as a result of varying interest rates. Investors keep a close watch on the current and forecasted interest rates of economies and accordingly invest in short and long term bonds of countries climbing the ladder to economic growth.

Different Bonds

For different economies, there are different types of bonds offered. A few prominent examples include the U.S. Treasury bonds in the United States, the Gilts in the United Kingdom, the Japanese bonds and the Samurai bonds in Japan, the Euribos in the Euro zone, bunds in Germany, Swiss bonds in Switzerland, Canadian bonds in Canada, Australian bonds and Kangaroo bonds in Australia and Kiwi bonds in New Zealand.

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What Is Stop Loss?

Stop loss is the technique of bailing out when the market is going at a loss. The market is driven by a number of factors and it can crash any day due to any of the factors. However, a person may hope for a revival in the market when it is down but waiting too long is like committing a suicide. One has to take action and be able to decide as to when to throw down the cards. Making the right decision at the right moment is the difference between wealth and poverty and it is called stop loss.

Advantages Of Stop Loss

The market keeps on fluctuating and any shares that are down today are bound to rise someday. However, if one keeps on waiting for too long and the market does not change then he is doomed. Therefore, making the right call can save one from the excessive losses.

A correct decision will allow the investor to take out his money from the sunken currency and reinvest it at a promising place.

Techniques Of Stop Loss

There are four methods for stopping the loss and these are listed below:-

1. Equity Stop

This is commonly called the percentage stop. A trader risks the amount in percentage. For example he plans that he will bail out if he looses 2% in his stock. The risk loving people can keep this limit as high as ten percent.

2. Chart Stop

This method bases the planning of stop loss on the chart pattern. The behavior of the market is plotted in shape of the chart and any irregularities are noted. The limits are also defined and the investor can see and predict the future to some extent.

3. Volatility Stop

In this method you note down the habit of a particular currency. For example, if a currency increases 150 points daily then you can set the volatility at 40 point. Once the losses hit it, you call off your game.

4. Time Stop

In this method, you trade only during the specific hours and keep your stock of the shelf during other times. This is the most cautious approach.

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