Foreign exchange market (Forex) is the prime financial market in the globe. The overall funds in trade comprise of nearly trillions of US dollars in trade, which is a lot more than the entire amount of stock options and duties of the United States of America.
Forex is a non-stock exchange market that has no physical place. Forex is a banking network consisting of companies, forex brokers, private investors, integrated by one organization of information exchange.
As the Forex exchange trading does not rely on physical place, they trade internationally, all around the clock, with the exception of weekends for the time zone of the country dealing with it.
Foreign exchange covers up markets of most nations with universal platforms for foreign currency exchange trading functions in London, Tokyo and New York.
Major groups of Forex currency trading are:
Insurers – The major group is exporting and importing companies and some of the companies which consist of the few functions in foreign currency. For these partakers in forex, the main objective is to ensure loss minimization in a way keeping away from risks.
Speculators – Personal traders and corporations who are intended to trade foreign currency making profit from foreign currency exchange rates and short-term functions go to this category.
Arbiters – Investors of online forex trading who trade with big amounts of cash to invest and function on two or more markets at the similar time and generally they tend to make profit on the basis of foreign exchange rates.
Forex broker – These are brokers, banking establishments, currency dealers and companies who provide with electronic access to trading platforms and giving mediatory services in currency exchange deals.
Wednesday, December 9, 2009
Dubai crisis rings bells of prudent investment
Untill last month, Dubai was acclaimed worldwide as an exotic Manhattan on the sea, with huge skyscrapers towering in desert sands alongside golden beaches crowded with stunning hotels and upscale shopping malls.
Unsurprisingly, news of the financial collapse of the emirate's key construction firms came as a shock to many, but as far as regional economists were concerned, the Dubai bubble had been ready to burst for some time.
It is an experience that no country wants to see repeated within its borders. Israeli economists stressed over the weekend that lessons must be learned from the crisis, among which are modesty and caution.
SYMPTOMS
The prevailing view in Israel is that Dubai was simply putting all of its eggs in one basket. Its failure to diversify meant that a meltdown was likely to occur at one point or another.
Diversification of an economy is so important," said Yishay Yafeh, an expert in financial systems at the Hebrew University of Jerusalem.
"You can't base an entire economy on one sector," said Dan Catarivas, director of international relations at the Federation of Israeli Economic Organizations.
Dubai had a bold vision. It took a pearl-fishing village on the edge of the Arabian Desert and transformed it within a matter of a lifetime. Israeli economists told Xinhua they believe that while the dream of Dubai's founder was ambitious and praiseworthy, it was converted over the years by his successors to something that became unsustainable.
Massive investments in real estate led to an overheated economy, and despite government involvement in all the major development companies.
The economy also lacked an export base. In 2006, Dubai's imports totalled some 60 billion U.S. dollars, while exports stood at 5 billion dollars.
"The lesson is that they went too far. It's as simple as that," said Arie Melnik, a professor of economics at the University of Haifa, adding that he believes the "hubris" of the Dubai leaders was at the center of the crisis.
PREVENTION
Catarivas said Israel has got the mix just about right, which is why the country survived the international financial crisis better than most.
Noting that Israel, like Dubai, has virtually no raw materials, local experts said Israel's success is based on human capital.
Meanwhile, they said that Dubai's decision to move the economy in the direction of luxury villas lacked forethought and long-term feasibility.
In Israel, the high-tech industry may be a major force in the economy, recognized as a world leader, but it is not the only basket. Medical supplies, diamond polishing, agriculture and water technologies all rank high.
In Dubai, it was a very different case. "They thought they could do all this even if they couldn't see money at the end of the tunnel. Every small-time builder knows there is one simple rule, you don't begin building if you don't have buyers," said Melnik.
An economy must be diversified, it should be transparent, and a country's leaders should not plan too ambitiously and thus can avoid overextension, said the leading Israeli economists who spoke to Xinhua over the last few days, among other suggestions they offered to ensure no repeat of the Dubai crisis.
"It's about modesty and caution. There, the bubble was behavioral," suggested Moshe Justman, a professor of economics at Ben-Gurion University of the Negev in southern Israel.
FOREVER BURSTING BUBBLES
The Israeli analysts are of the opinion that the Dubai crash will have limited impact on the global stage. However, they cautioned that other crises may be around the corner.
The trouble is how to predict them. "I wanted to call this a million-dollar question, but of course it's worth much more," said Yafeh.
One needs to examine a state's investment portfolio to check whether it is diversified. Then there are the sums involved, said Justman.
There have been bubbles throughout recorded human history, said Yafeh, noting that similar hard times have been occurring for centuries, including the dotcom bubble in recent years.
However, nations tend to survive these difficult moments. The United States may have taken a beating over the last 18 months with the sub-prime crash, but its economy is resilient and large enough to have survived.
Israel and Australia may have growing bubbles right now, but their central banks are playing the game right by adjusting their lending rates accordingly, said Melnik.
At the end of the day, people will view Dubai's financial crisis as nothing more than "a curiosity," according to Yoram Landskroner, an expert on international debt at the Hebrew University of Jerusalem. "Dubai has nothing that links it to any group of nations. It's neither a developed state nor an emerging market."
As a result, little can be applied to other countries from the Dubai experience, other than to say that sometimes caution is the better part of valor.
However, in consideration of previous financial crises in emerging economies, it is safe to predict that some potential investors will no longer put their cash in high-risk, low-rated markets and will return to the days when making a small prudent profit was regarded as far more sensible than a rash gamble on a chancy but exotic option.
Unsurprisingly, news of the financial collapse of the emirate's key construction firms came as a shock to many, but as far as regional economists were concerned, the Dubai bubble had been ready to burst for some time.
It is an experience that no country wants to see repeated within its borders. Israeli economists stressed over the weekend that lessons must be learned from the crisis, among which are modesty and caution.
SYMPTOMS
The prevailing view in Israel is that Dubai was simply putting all of its eggs in one basket. Its failure to diversify meant that a meltdown was likely to occur at one point or another.
Diversification of an economy is so important," said Yishay Yafeh, an expert in financial systems at the Hebrew University of Jerusalem.
"You can't base an entire economy on one sector," said Dan Catarivas, director of international relations at the Federation of Israeli Economic Organizations.
Dubai had a bold vision. It took a pearl-fishing village on the edge of the Arabian Desert and transformed it within a matter of a lifetime. Israeli economists told Xinhua they believe that while the dream of Dubai's founder was ambitious and praiseworthy, it was converted over the years by his successors to something that became unsustainable.
Massive investments in real estate led to an overheated economy, and despite government involvement in all the major development companies.
The economy also lacked an export base. In 2006, Dubai's imports totalled some 60 billion U.S. dollars, while exports stood at 5 billion dollars.
"The lesson is that they went too far. It's as simple as that," said Arie Melnik, a professor of economics at the University of Haifa, adding that he believes the "hubris" of the Dubai leaders was at the center of the crisis.
PREVENTION
Catarivas said Israel has got the mix just about right, which is why the country survived the international financial crisis better than most.
Noting that Israel, like Dubai, has virtually no raw materials, local experts said Israel's success is based on human capital.
Meanwhile, they said that Dubai's decision to move the economy in the direction of luxury villas lacked forethought and long-term feasibility.
In Israel, the high-tech industry may be a major force in the economy, recognized as a world leader, but it is not the only basket. Medical supplies, diamond polishing, agriculture and water technologies all rank high.
In Dubai, it was a very different case. "They thought they could do all this even if they couldn't see money at the end of the tunnel. Every small-time builder knows there is one simple rule, you don't begin building if you don't have buyers," said Melnik.
An economy must be diversified, it should be transparent, and a country's leaders should not plan too ambitiously and thus can avoid overextension, said the leading Israeli economists who spoke to Xinhua over the last few days, among other suggestions they offered to ensure no repeat of the Dubai crisis.
"It's about modesty and caution. There, the bubble was behavioral," suggested Moshe Justman, a professor of economics at Ben-Gurion University of the Negev in southern Israel.
FOREVER BURSTING BUBBLES
The Israeli analysts are of the opinion that the Dubai crash will have limited impact on the global stage. However, they cautioned that other crises may be around the corner.
The trouble is how to predict them. "I wanted to call this a million-dollar question, but of course it's worth much more," said Yafeh.
One needs to examine a state's investment portfolio to check whether it is diversified. Then there are the sums involved, said Justman.
There have been bubbles throughout recorded human history, said Yafeh, noting that similar hard times have been occurring for centuries, including the dotcom bubble in recent years.
However, nations tend to survive these difficult moments. The United States may have taken a beating over the last 18 months with the sub-prime crash, but its economy is resilient and large enough to have survived.
Israel and Australia may have growing bubbles right now, but their central banks are playing the game right by adjusting their lending rates accordingly, said Melnik.
At the end of the day, people will view Dubai's financial crisis as nothing more than "a curiosity," according to Yoram Landskroner, an expert on international debt at the Hebrew University of Jerusalem. "Dubai has nothing that links it to any group of nations. It's neither a developed state nor an emerging market."
As a result, little can be applied to other countries from the Dubai experience, other than to say that sometimes caution is the better part of valor.
However, in consideration of previous financial crises in emerging economies, it is safe to predict that some potential investors will no longer put their cash in high-risk, low-rated markets and will return to the days when making a small prudent profit was regarded as far more sensible than a rash gamble on a chancy but exotic option.
Non-bank Foreign Exchange Companies
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments. I.e., there is usually a physical delivery of currency to a bank account. Send Money Home offer an in-depth comparison into the services offered by all the major non-bank foreign exchange companies.
It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
Types of financial markets
Capital markets which consist of:
Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof.
Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof.
Commodity markets, which facilitate the trading of commodities.
Money markets, which provide short term debt financing and investment.
Derivatives markets, which provide instruments for the management of financial risk.
Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market.
Insurance markets, which facilitate the redistribution of various risks.
Foreign exchange markets, which facilitate the trading of foreign exchange.
The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities.
Trend Analysis
The world of investment is flooded with excellent ideas of growing your money, but you are required to make use of geometrical patterns, diagrams, statistical analysis and other similar tools to reach a definite conclusion for efficient investments. The hugest trading market called forex is also not spared from in-depth study of market trends to earn profits and avert losses. Forex trend lines serve the purpose, as these patterns help to extract most rewarding information and plan your course of action for investing in various currencies.
Usefulness of Forex Trend Lines
The forex trend lines are helpful in introducing the most vital entity required by an investor and this entity is called information. How can one expect to make worthy investment, without adjudging the highs and lows existing in the market? Here is the list of most prominent benefits of forex trend lines:
- These lines help to depict the support and resistance levels, which are of great importance in deciding the sale or purchase of various investments.
- The trend lines help the investors to decide their entry and exit points to the forex trading market.
- These patterns make you familiar about nature of forex market; the sharp turns taken by trends and unwarned movements of different investments.
- In a nutshell, these lines fuel technical analysis of this investment market, which is certainly the most appreciable tool for making an investment.
Important Types of Forex Trend Lines
The forex trend lines are available in different popular forms, as summarized below:
- Simple trend lines consist of straight lines drawn vertically, horizontally as well as diagonally.
- Fibonacci trend lines have gained popularity in recent times and are excellent tools of understanding current market trends in forex trading. There are different variations of these lines in the form of Fibonacci Arc, Fibonacci Fan and Fibonacci Retracement.
- Pivot trend lines are drawn on the basis of fluctuations in the market during previous time frames.
- Speed trend lines are similar to Fibonacci trend lines, with the only replacement of Fibonacci numbers with calculations by thirds.
Drawing and Studying Forex Trend Lines
As you grow old in terms of experience of dealing with forex trading, you are able to play with forex trend lines. But, at the very onset of your investments in the forex market, you are required to seek the guidance of forex market experts in drawing as well as interpreting information from the trend lines. For instance, you must be capable of identifying the situation in advance, if the forex market is expected to move in an opposite direction. It could be a sudden turn and you must catch the signals generated by forex trend lines for this behavior of the market. Thus, initial understanding of these trend lines can provide benefit to an investor for rest of his age of investment.
It is the simplest and most convenient in all the technical analysis to draw a trend line on the forex chart. Upward trend:
Downward trend:
Sideways trend:
The market trend is consisted of three stages:
The first is the initial stage where the market trend is shaped up.
The second one is the developing stage where the trend is strongly kept as it is.
The last one is final stage where the forex market begins to suggest the next new trend on a certain turning point.
You can find the clear trend nearing to the final stage as long as you make use of the moving average, because it is coming later than the market movement. It might be fear that you would buy at the highest or sell at the lowest if you missed capturing the market trend accurately.
Forex Trend Lines Tools
There are many online websites, dedicated to introduce automated tools for drawing forex trend lines. These tools are part of automated software systems, available in large quantity over internet. You must evaluate all these systems on the basis of various factors and finally take a decision of choosing one of these tools. Make sure that you choose a reputed resource for accessing these tools.
For becoming a good player of the game of forex trading, you must consider trend patterns as right game gears. Also, keep your knowledge updated about various methods of drawing forex trend lines and switch over to a new system, if you find it more suitable. At a later stage, you will definitely experience the building up of your knowledgebase for forex trading trends and trend lines.
Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high—that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.
Currency Risk
A form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.
For example, if you are a U.S. investor and you have stocks in Canada, the return that you will realize is affected by both the change in the price of the stocks and the change in the value of the Canadian dollar against the U.S. dollar. So, if you realize a 15% return in your Canadian stocks but the Canadian dollar depreciates 15% against the U.S. dollar, this will amount to no gain at all.
Academic studies of currency risk suggest - although without absolute certainty - that investors bearing currency risk are not compensated with higher potential returns, meaning it is essentially a needless risk to bear.
For example, if you are a U.S. investor and you have stocks in Canada, the return that you will realize is affected by both the change in the price of the stocks and the change in the value of the Canadian dollar against the U.S. dollar. So, if you realize a 15% return in your Canadian stocks but the Canadian dollar depreciates 15% against the U.S. dollar, this will amount to no gain at all.
Academic studies of currency risk suggest - although without absolute certainty - that investors bearing currency risk are not compensated with higher potential returns, meaning it is essentially a needless risk to bear.
Currency Trading Pips and Ticks
A pip is the smallest change of price for any Foreign Currency. The currency quotes appear as numbers with either two or four decimal places. This means that if the Foreign Currency moves up or down, the smallest move is called a "pip". When you trade in Forex, you monitor how the pips rise and drop and this is what determines your investment.
An example of this is if you buy EUR/USD. This pair is quoted four decimal numbers after the point. A pip here is ten thousandth of a Dollar, or 0.0001 of a dollar, meaning 1/100 of a cent. The pip is an abbreviation of "Price Interest Point", and this is why another name used for pips is points.
Even though a pip is only a small amount of money, because your foreign currency trading is usually a leveraged investment, a few pips can mean serious cash fluctuations. Each serious trader needs to know how to calculate the change from pips the actual sums invested, and some online Foreign currency trading agents offer such calculators in their account. You should consider these and other advanced functions when selecting the broker you want to use. Pip value can vary, and is usually $1 in mini accounts or $10 in regular accounts.
An important concept that concerns pips is called The Spread. This is the pip difference between the bid price and the ask price done for the currency trading sum. When you buy Foreign Currency it costs you more than to sell it and this is the spread.
Ticks are the smallest amounts of time that exist between two currency trades. This time frame can be a short time period of a fraction of a second for major currencies, or can also be a time frame of a few hours for less popular currencies. Ticks do not happen in constant intervals, even though the charts used for technical analysisdo use specific time rates such as 4 hours of 15 minutes.
Currency Trading Leverage and the Margin
Leverage is when your invested cash is used to buy or sell foreign currencies that are worth far more that the investment. Simply put,leverage gets you more currency than you pay for.
When you buy\sell a leveraged currency, the sum you invest is called the Margin. The margin is used by your broker as a deposit for the currency you buy or sell.
A Leverage investment works as the following example:
- You buy/sell foreign currencies for $100
- You receive a leverage with a ratio of 100 to 1
- Your investment is now worth $10,000
Foreign currency trading companies have various criterions for opening a margin trading account, and there are different margin accounts availablefor you. usually moving from one to two thousand dollars deposit for each trading day. Upon opening an account the trader gains overwhelming leverage – up to 0.5%! In example - in order to execute a 200,000 dollar transaction you'll need only 1000 dollars in your margin trading account, thus minimizing the personal funds invested in every transaction.
With leverage you not only win big, but lose big - It's very important to remember that a margin account can enlarge your profits as well as your losses. So while you are upscaling your currency trading profits, any losses will also become greater for leveraged foreign currency. If you get a margin call, it means you've lost 75% of your initial investment, and you need to invest more to continue having the leveraged currency.
Leverage allows more people to trade - As a result of the size of the forex market (more than 1.9 trillion dollars each day), most of the trade is being made in $10,000 lots. This could have blocked the small forex traders, who are reluctant to risk such sums, out of the forex market. Fortunately the forex market provides extensive leveraging options that are far better than you can find in any other financial market.
The initial margin requirement is the minimum investment you need to make in a foreign currency trading action. Your margin account is very much like your regular bank, where you can deposit and withdraw your capital. All of the margins accounts are closed at the end of the trading day and all gains and losses are assessed into the end balance. This is called the Rollover.
Cyborg Automated Forex Trading System
This part human - part machine currency trading strategy trades a dozen different Forex strategies with the parameters set by us each and every day! It's very hard to create an automated Forex trading system as markets constantly change so we tell it everyday at what zones to LOOK for Forex currency buys & sells and WHEN to look for counter trend trades!
A computer can not do multi time frame Forex analysis as well as a professional trader can and that's why so many Automated Forex Systems fail miserably as online Forex markets are constantly changing. They just can't adapt, but our Cyborg FX System automatically adapts each day as we read the market and make changes to it!
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