The Forex Market is Forever Right

The Forex Market is Forever Right


People who are arrogant and complacent do not enter into Forex trading

People who are too self-confident do not enter into Forex trading

People who do not admit mistake do not enter into Forex trading






To understand the essence of these phrases, first of all is to understand how the Forex markets trend being formed. Forex traders should keep in mind that the Forex market is being formed through a buyer and a seller when someone wants to buy and sell at a particular price, that represents this price is the market approval price. It does not matter whether this price is being approved by a well-known analyst, it also does not matter whether this price is being approved by the President of the Central Bank.

Remembers, as long as there is a transaction, the price will be the correct market price, it does not matter how fast it goes or even jumps in 1 minute spatial several hundred, as long as there is a transaction, the price will always be the correct market price. But the majority Forex traders often could not accept that according to the technical analysis, how the market could fall in a sudden.

In other words according to the fundamental analysis, the economical numeral of this currency is very good, how could it fall until a certain price? Certainly it was a mistake created by the market. By giving more patients, it will return to its fundamental price. Thereupon the concept to buy at a low price has become a pushing hand for the Forex traders to enter the market without market price. Such "bad behavior" has created a pitiful destiny for a loser forever.

Was sure to remember that, only by admitting our mistake and then immediately "stop loss" and then wait for the right moment to come again. We have seen a Forex trader made mistake and being reminded to stop loss. But, without second thought, he picked up the phone and increased the amount of transaction. In the end, you can imagine that, it did not take long time for him to loss all his balance and ran away.

Finally, a skillful analyst repeatedly said, that "the road of investment is the road of admitting mistakes”, only by admitting mistakes continuously then only successful result can be achieved.

Forex Development History

Forex Development History


Foreign exchange development history - exchange market evolution foreign exchange development history - exchange market evolution gold remittance system and Bretton woods agreement




In 1967, a Chicago bank rejected to provide pound loan to a professor named Milton Friedman, because his purposed was to use this fund to sell short the British pound. Mr. Friedman realized excessively that the price ratio from the British pound to US dollar at that time was high, he wanted first to sell the British pound, after the British pound fell he buys back the British pound to repay the bank again. This family bank rejects the loan offer based on the "Bretton woods Agreement" which was established 20 years ago. This agreement has fixed the various countries' currency to US dollar exchange rate, and the price ratio between the U.S dollar and the gold is also fixed to 35 US dollars to each ounce of gold.

The Bretton Woods Agreement was signed in 1944, the purposed was to prevent the currency to escape between countries, and also to limit the international speculation, thus to stabilize the international currency. Before this agreement was signed, the gold remittance standard system which was widely used since 1876 - was leading the international economy system until the First World War. In the gold remittance system, the currency was at the stable level under the support of the gold price. The gold remittance system has abolished the old time king and the ruler which depreciates the currency value unlawfully, which will lead to inflation.

But, the gold remittance standard system is certainly imperfect. Along with a country economic potentiality enhancement, it can import massive products from overseas, until it exhausts the gold reserve of certain country. It resulted the supply of the currency reduces, the interest rate raises, the economic activity will start to decline until it reaches the recession limit. Finally, the commodity price falls to the valley, gradually attracts other countries to stream in, massively rushes to purchase this country commodity. This will pour gold into this country, this will increase this country currency supplies quantity, and it will reduce the interest rate, and will create the wealth. This is so called the "the prosperity - decline” pattern and is the circulation of the gold remittance standard system, until the trade circulation and the gold freedom was broken by the First World War.

After several catastrophes wars, the Bretton Woods agreement has appeared. The countries which signed the treaty agreed to maintain the domestic currency to US dollar exchange rate, as well as the necessity of the corresponding ratio of the gold, and only allow a small fluctuation. Countries are prohibited to depreciate the currency value for the gain trade benefit, only allows the country to depreciate not more then 10%. Enters the 50's, the continuous growth of the international trade causes the fund large-scale shift which produces because of the postwar reconstruction, this causes Bretton Woods system which establishes the foreign exchange rate to lose stability.

This agreement was finally abolished in 1971, US dollar no longer could convert to gold. Until 1973, each major industrialized nation currency exchange rate fluctuation has been more freely, mainly regulates by the foreign exchange market through the currency supplies and demand quantity. The business volume, the transaction speed as well as the price variability, have achieved a comprehensive growth in the 1970's, come along with the emerge of price ratio fluctuation, the brand-new financial tool, then only the market liberalization and the trade liberalization could be achieved.

In the 1980s, along with the published of the computer and correlation technology, the international capital has flow rapidly, and strongly related the Asia, Europe and America market. Foreign exchange business volume from 80's rises daily from 70 billion US dollars to 150 billion US dollars after 20 years.


European market inflation

One of the reasons why the foreign exchange developed rapidly was the rapid development of the Euro dollar market. In a Euro dollar market, US dollar is stored beyond the border of America banks. Similarly, the European market is refers to property depositing outside the currency rightful owner country market. A Euro dollar market was formed at first in the 50's, at that time Russia deposited its petroleum income beyond the US border, avoid being freeze by the US government. This has formed a large offshore US dollar national treasury which is beyond the control of the US government. The American government has formulated a law to prohibited US dollar from lending money for the foreigner. Because the degree of freedom of the Euro dollar market is bigger and the rate of return is bigger, therefore it has large attraction. Starting from the 80's, the American company starts to borrow loan from the offshore market, they discovered that the European market is a wealth center which consists of large amount of floating capital which could provide short-term loan.

London once was (until now still is) one of the main offshore market. In the 80's, the Bank of England in order to maintain its global finance industry center dominant position, using US dollar as England pound substitution to make loan, thus to become a Euro dollar market center. London's convenient geographical position (is situated between Asian and Americas market) also helps to maintain the European market as the dominant position.

The Fundamental Analysis of Foreign Exchange

The Fundamental Analysis of Foreign Exchange



The price of the foreign exchange is a kind of state of equilibrium that reflects the currency supplies and demands. The two main factors that influence the demand and supply are the interest rate and economical performance. In each economic indicator, like the gross national product, foreign capital inflow or perhaps the international trade representative are the national economical performance, also decides the national currency supplies and demand. Each day there are different kinds of economic indicator announcement, Forex traders must have the ability to judge which is more important, but within these numerous data, the interest rate and the international trade are the most worth taking.

The fundamental analysis involves finance, economic theory and political situation development, thus it is a factor which judges the demand and supply. The most obvious difference between the fundamental analysis and the technical analysis, the fundamental analysis studies the reasons behind the market movement, but the technical analysis studies the effect of the market movement.

When estimating a country currency by using another country currency, basic surface analysis includes the macroscopic economic indicator, property market as well as political factor research. The macroscopic economic indicator includes the numeral and economic growth rate, by essential factor computation and so on GDP, interest rate, inflation rate, unemployment rate, money supply, foreign exchange reserve as well as productivity. Property market includes stock, bond and real estate. The political factor can affect a country government's confidence level, the social stability climate and confidence.


Elementary theory

Interest rate

If the trend of the market rate is unclear, then any news which is related to the interest rate could influence the trend of the exchange rate. Generally, if a country raised its interest rate, this country's currency could relatively become strong, because the investors would transfer their properties into these countries in order to expect for a higher return rate in the future. But, if the interest rate is too high, it is bad news for the stock market, the investor would transfer their fund out of the country's stock market which will cause the currency price to drop. It is knowledge to judge strength is much stronger, this is decided according to the overall economic environment before the change of the interest rate. The most important economic indicators that could influence the interest rate are the consumer price index, the buyer price index and the gross national product, these indicators could the reference for various countries' central bank (BOE, FED, ECB, BOJ) before deciding the interest rate.


International trade

According to a country's trading balance, Forex traders could refer the difference between the import and export of a country, when a country's import is bigger than the exportation, there will be a trade deficit, and this usually is not good news. Take US as the example, in order to pay import debts, the government must sell its currency in order to buy another's currency to pay the debts, because the outflow of the currency could cause the U.S dollar to depreciate. If, balance show that the export ratio increases, US dollar can flow back to its homeland cause the U.S dollar to become strong. According to economical point of view, trade deficit may not be all negative but if the trade deficit is bigger than the market expectation, it could create a reverse side effect.


Purchasing (PPP)

This purchasing theory stipulated that, the exchange rate is decided by the identical group commodity relative price. For example, let's use hamburger as a classical case, if a hamburger in U.S is worth 2.00 U.S dollar each, but in Britain the value is 1.00 British pounds, according to the purchasing theory, the exchange rate certainly is 2 US dollar equals to1 British pound. If is in vogue the market exchange rate is 1.7 US dollars to each British pound, then the British pound has depreciated, but US dollar is has appreciated. This theory supposition these two currencies finally to 2:1 relational change.

The purchasing theory main drawback lies in its assumption that the commodity can be traded freely, and does not count transaction cost and customs duty, quota and payment of taxes. Another drawback is it only suitable for the commodity, actually it has neglected the service, but service has the extremely remarkable value disparity space. Moreover, besides the difference between the inflation rate and the interest rate difference, but there are also certain factors that could affect the exchange rate, for instance: Economical digital issue/report, property market as well as political situation development. Before 1990s, the purchasing theory is lack of fact to support its effectiveness. After 1990's, this theory is only suitable for long period (3 - 5 years). In during the span cycle, the price finally closes up to the fair price.


Interest rate fair price (IRP)

The interest rate fair price stipulated that, if the American interest rate is higher than the Japanese interest rate, then US dollar to a Japanese Yen depreciation, the depreciation scope decides according to the prevented the non- risk fraudulently obtained foreign exchange. In the future the exchange rate could reflect in the forward exchange rate as stipulated. In our example, the Japanese Yen which is bought by the forward exchange rate is much shorter then the Japanese Yen which is bought by the immediate exchange rate the Japanese Yen. The Japanese Yen is regarded as the premium. After 1990s, without any evidence indicated that the interest fair price theory is still ineffective. Is clearly opposite with this theory, currency usually does not depreciate based on high interest rate, instead it will prevent the inflation to rise in the future and it will appreciate as a highly benefited currency.


International payment balance pattern

This theory said that the foreign exchange rate must be in its balance level - - namely it is able to have the stable checking account remaining sum exchange rate. Country which has trade deficit, its foreign exchange reserve will be reducing, and finally it will cause its domestic currency value to reduce (depreciation). Cheap currency causes this country’s commodity to have the price superiority in the international market, simultaneously also causes the import product to become expensively. After a period of adjustment, the import quantity is compelled to drop, exportation quantity rise, thus causes the trade remaining sum and the currency is stable to the state of equilibrium.

It is same with the purchasing theory, the international payment balance pattern mainly stresses on the trade commodity and the service, but has neglected the whole world circulation of capital day by day vital function. In overall, the money not only pursues the commodity and the service, moreover from generally says, pursues financial property and so on the stock and bond. This kind of capital class enters the international payment balance capital account project, thus may balance in the checking account deficit. The circulation of capital increase has the property market pattern.


Intervention

In addition, sometimes, the government can intervene in the money market, it prevents the currency from a non-ideal level. The money market intervention is carried out by the Central Bank, usually it has short-term influence to the foreign exchange market. The Central Bank may adopt another way of buying and selling the domestic country currency, or unites other Central Bank to carry the intervention together, it obtains a more remarkable effect. Or, some countries can try to influence the currency value by giving warning or threat.

The Forex Trading Rules

Forex traders are prohibited to use daily living fund as trading margin

It is prohibited to use daily living fund as trading margin, the fund pressure could mislead a Forex trader's investment strategy this will increase the trading risk, which will cause an even bigger mistake.


Forex traders should use the free demo account to study Forex trading

Beginners must patiently study and not eagerly draws up the real Forex trading account. Beginner Forex traders may first test the demo account, in the demo Forex trading study process, the essential target is to develop individual Forex trading strategy with condition, when the probability of making profit enhances day by day, this indicate that a beginner Forex trader might draw up the real Forex trading account to carry on the Forex trading. But please use the real psychological way while doing demo Forex trading, the faster you enter the condition, the more faster that you may develop a suitable method to do the real Forex trading.


Forex trading cannot only depend on luck and intuition

If a Forex trader does not have the fixed trading method, then the possibly of making profit is stochastic, namely depends on luck. Such profit making will not last long. In other words, there will always be loss if there is no luck. Intuition in Forex trading is very important, but it is very risky to do trading just depending on the intuition, the most important thing is to understand the reason behind the profit taking and to develop your individual Forex trading technique.


Use stop loss to reduce risk

In Forex trading, Forex trader must be able to afford taking loss, using the stop loss will prevent any further loss, the affordable loss depends on the account available margin situation. If there is a stop loss, Forex traders should not feel upset because he or she has prevented the loss from getting worse.


Act according to own ability

It depends on the margin in the account to decide the trading volume. Generally, all combine trading position should not surpass 10% the account margin based on this rule. It is not wise to over trade, is very easy to have the loss out of control.


The account margin must be sufficient

The lesser the trading margin, the risk will become bigger, therefore must avoid letting the account margin left only suffice 50 undulations levels, such account amount does not allow any mistake to happen, but, even a well-experienced Forex trader could also make mistakes.


Mistakes are unavoidable, but learn from mistakes and do not repeat it

Mistakes are unavoidable, please do not blame yourself, the important thing is to learn from mistakes, avoid making the similar mistake again, the faster you learn to accept loss and remembers the lesson, the days of profit making will be much more closer. Moreover, must learn to control emotion do not be proud after making profit, also do not feel depress after losing money. During Forex trading, the lesser the emotion, the more clearer you can see the market and make the right decision. Forex traders must face the reality calmly, Forex traders must understand that they will not learn from profit taking but they will only learn from loss. After understanding the reason behind every loss, this means that you are approaching the profit making path, because you had found the correct direction.


Oneself is the biggest enemy

The biggest enemy of a Forex trader is oneself - greedy, irritable, the out of control mood, and so on, is very easy to let you neglect the market trend which causes the wrong trading decision. Do not do trading because of bored or it has been a long time of none trading, there is no specific rule saying that a Forex trader must do how many tradings within a period of time.


Record the trading details

Record all the trading details, whether there is certain news or other reasons that influence you to trade, after the trade record and analyze the result of the profit and loss. If the result of the trading is profitable, this indicates that your analysis is correctly, when such similar situation appear again, your trading records will be helpful for you to rapidly makes the correct trading decision; wherelse the loss trading record will help you from making the same mistake again. Forex traders could not remember the history of every trading, therefore record is helpful in enhancing your Forex trading skill and also to look for mistakes.


Follow the trend, never against the trend

Remember the Forex market ancient general rule: Settle the position when it starts to loss, put as long as possible when it is profit making. Another important rules is do not let loss happen when it is making profit, when there is reverse trend in the market, it is better to make profit during the profit making situation then to settle position at the non-profitable situation.


Do not eagerly enter the Forex market after making loss

During the loss situation, do not eagerly open a new reverse market position in order to recoup from loss, this will only cause the situation to become worse. Only when you have agreed that your anticipation and decision in the past was completely wrong, then only you settle the old position and start a new reverse market position. Do not play with the Forex market through guessing, it is better to loss the opportunity then losing money.

Foreign Exchange

Foreign Exchange

Forex is the abbreviation for foreign exchange, refers to the foreign currency or the foreign country currency expresses which can be use in the international settlement payment means and the property, mainly it includes the credit instrument, disbursement voucher, the negotiable securities and the foreign exchange cash and so on.

The International Monetary Fund defined Forex as the international creditor's rights which a country has, no matter this kind of creditor's rights are express by the foreign currency or expressed by the standard currency.



Exchange Rate

Exchange rate, also known as the exchange price, it refers by a country currency being express by another country currency, or it is also the price ratio between both countries currency, generally it is being expressed by using the price proportion of both countries. For instance: USD/JPY=105.40, is being expressed a US dollar equal to 105.40 Japanese Yen, US dollar is also known as the unit currency, the Japanese Yen is known as the price currency.

In the foreign exchange market, the exchange rate is demonstrated by five numerals, for example:

Euro/US dollar: EUR/USD 1.3325

US dollar/Japanese Yen: USD/JPY 104.95

Pound/US dollar: GBP/USD 1.9337

US dollar/Swiss Franc: USD/CHF 1.2303


The exchange rate smallest change unit is, namely a final one-figure number digital change, is called an exchange rate basic point (Pip), abbreviation exchange rate spot, for example:

Euro EUR 0.0001

Japanese Yen JPY 0.01

Pound GBP 0.0001

Swiss Franc CHF 0.0001