Forex Market: Currency Pairs and Forex Quotes

If you are new to the forex market, you might find forex quotes confusing. Do not allow yourself to be overwhelmed with forex quotes. In fact, reading forex quotes can be quite easy.

In reading forex quotes or currency pairs, there are two important things that you must keep in mind. First is that the currency being quoted first is what we refer to as the base currency. Second is that the value of base currency always equals to 1.

The centrepiece or focus of the forex market is the US Dollar. It is also often quoted as the base currency for a lot of pairs. A currency pair that has the US Dollar as the base currency is what we call “major”. Examples of major currency pairs are USD/JPY, USD/CAD, and USD/CHF. In major currency pairs, quoted currencies are expressed as the US Dollar, specifically, one (1) US Dollar for every, or a fraction of the, unit of the second currency quoted in the pair.

As an example, let us take the US Dollar and the Swiss Franc. In the currency pair USD/CHF, the base currency is the US Dollar. In the quote USD/CHF = 1.0806, one unit of the US Dollar is equivalent to 1.0806 units of Swiss Francs.

If a currency goes up, you must take note of the base currency. In the aforementioned pair, the US Dollar is the base currency. If the quote goes up, it simply means the value of the US Dollar has increased compared with the value of the Swiss Franc. If the quote goes down, then one can easily conclude that the value of the US Dollar has depreciated to a certain degree.

There are cases when the US Dollar is not the base currency. We often see the US Dollar as the quoted currency when it is paired with the Australian Dollar (AUD), British Pound (GBP), and Euro (EUR). Let us take the AUD/USD currency pair quoted at 0.8044. This shows that one unit of Australian Dollar is equivalent to 0.8044 or less than one unit of US Dollar. One can conclude that the Australian Dollar is weaker than the US Dollar. If the quote goes up, then it means that the US Dollar has weakened against the Australian Dollar.

Currency pairs do not always involve the US Dollar. These currency pairs are referred to as cross currencies. Examples of which are EUR/AUD, EUR/JPY, CHF/JPY, and EUR/SGD. Let us take the currency EUR/SGD pair quoted at 2.0373. This shows that one unit of Euro is equivalent to more than two units of Singapore Dollar or 2.0373 Singapore dollars.

Source: Bart Icles

13 Quick Tips for Forex Trading Success

#13: Back-test, but be logical. Back-testing a given strategy can prove priceless when done correctly, but remember to take the results with a grain of salt. Be especially wary of trade results shown on websites claiming astronomical gains since most of these results simply are not attainable under live market conditions for many reasons.

#12: Always analyse similar pairs in the forex market before placing any trade. Similar pairs can be defined as any tradable currency pair containing 1 of the 2 currencies you are about to trade. For example, by looking at no less than 4 US Dollar pairs before trading, one can determine if the pair will be moving based mostly on the US Dollar or the opposing currency. This can easily be done with the Japanese Yen and others as well.

#11: Be wary of trade ideas coming from other individuals or groups in the many online trading forums, blogs, or chat rooms. Only evaluate trade recommendations from trusted parties who have a proven track record of success. Remember this is your business, and to have a consistently profitable business, you need to execute reproducible trades based on your own strategies and ideals. Don’t build your house on sandy soil; lay a good foundation of continuing education and the rewards will come many times over.

#10: Longer-term charts (ie. monthly, weekly, daily) have logarithmically more importance upon technical analysis than shorter-term charts (ie. 1 minute, 5 minute, 15 minute). For example, a support or resistance level on a daily chart will hold much more importance than a similar line than a 5 minute chart. Most reputable traders will recommend trading on longer term charts, especially for those who are new to trading or have limited time to trade due to other commitments. Find your comfort zone and stick with it until you become consistent; even a slight edge in this market can set you free financially.

#9: Do not use any trading robots, expert advisors, or other “black box” automated trading software until you learn how to trade on your own first. Educating yourself is the key to success; deep roots will equal a tall tree that can weather any storm.

#8: Trade with a friend, group, partner, or mentor when you begin your journey of learning the forex market. Many of the glamorous ideologies of forex traders showered in riches come from high-risk, difficult to reproduce strategies. The way to often become most profitable in this market is to have consistency, be disciplined, and to repeat this over and over and over again. Forex trading, done properly, is not intended to be flashy.

#7: Be sure to use a forex broker with great service and support, along with low spreads. With the recent regulations we are much more protected against possible broker-related issues, but many traders are still paying much higher spreads than average when placing trades. Do your research on forex brokers to analyse not only the safe, financially sound companies, but also those that allow the lowest fees. Paying the bid/ask spread in the forex market is just one of the costs of doing business, but with the extreme level of competition in today’s marketplace there is no need to accept paying even 1 pip more than you should elsewhere.

#6: Have a backup power supply and internet access available at all times when you are trading. This can be as simple as a battery-powered laptop with a wireless access card. Don’t rely solely on the phone number of your broker as if there is a company-related trading issue; their lines will likely be slammed busy. Bottom line: be sure to have some redundancy incorporated into your trading plan; treat this like a true business and it will reward you like one.

#5: Break your trade order into 2 or 3 smaller orders to give yourself more control, both actual and psychological. As most forex brokers do not charge commissions to trade this market, they earn their fees through the bid/ask spread; you have no extra cost of placing 3 small orders rather than 1 single large one. Doing this allows you to place tighter stops on some orders, while adjusting the profit taking on others. Closing part of an order will give the same effect, but by having a few live at the same time, it is easier psychologically to set them and let them run.

#4: Trading profit comes from 1/3 psychology, 1/3 money management, and 1/3 trading strategy. It’s easy to get caught up in the “next best thing” or the potential of finding a “holy grail” system, but remember that most of your profits come from learning the things that are not quite as exciting. Trading psychology and money management are critical to any success in the forex market; without them you will be grouped with the 95% of those who lose their capital time and time again. Money management is the key to unleashing potential for compounding profits; it is an absolute necessity to learn. Do your research on the most highly coveted trading psychology texts and dig in ASAP.

#3: Be aware of world news releases. Even if you prefer to not trade news events, be certain to know when the major events are planned to take place. As a second line of asset protection to your business, a good live news feed is also recommended when you are trading. Knowing what is going on in the world is one of the most critical keys to forex trading success; without this knowledge, your chances of success are limited.

#2: Always use a well planned stop loss when placing any trade and never, ever, move it further from your entry point for any reason. Although it is a simple rule to put on paper, it’s often difficult to follow…always follow this rule.

#1: Always trade any new strategy in a demo account before going live in a real money account. Many traders simply become gamblers by placing trades live without the proper testing and education necessary to place the odds in their favour. It is also all too common for traders to have excellent results in a demo account or with paper trading, then lose all their capital once they go live in a real money account. Be realistic and treat your demo trades as real funds; that is the only way for a demo account to work over time. If you begin to have a winning pattern in the demo account, be 100% certain to follow all the rules exactly in your live account. Often, a good transition is to begin with a demo account, then go to a live mini or micro account where very little capital is risked before trading your regular sized account. Many times one can make the transition in trading psychology from demo to live when taking the added step of testing the proven system by trading very small lot sizes first.

Although these few trading “nuggets” are only the tip of the iceberg, I hope that they can pique your interest enough to warrant further research and attention. I wish you the best in your trading!

Source: Jason Gospodarek

Hyperinflation Is Not Coming Soon…Here’s Why

by James Bibbings

Over the past several months the idea that hyperinflation will hit the United States in the near future has become increasingly commonplace. From mainstream economists and money men to Joe barbeque’s cook out, everyone around the world it seems is on board with idea that the US Dollar is headed towards hyperinflation; everyone that is except for me and a handful of others.

Why You’re Being Told Hyperinflation Is Coming Soon

Generally speaking, (this certainly is not an exhaustive explanation) the arguments for hyperinflation point to almost exclusively to the idea that the US Treasury is currently running its printing presses non stop to keep up with Federal deficit spending. Through this printing activity, hyperinflationists contend that there is an ever increasing money supply which will create a glut of US Dollars at some point in the future (they do not generally agree to a specific date though most are suggesting late 2009 to mid 2010). To an extent this idea is accurate, the US government is indeed running the printing presses and they are in fact increasing our money supply at an alarming rate. Inflationists often illustrate and supported this through the use of the following charts taken from the Fed

Adjusted Monetary Base

M1 Currency

If you want to hear in detail what (arguably) the most famous of the hyperinflationists, Peter Schiff, was saying early in the crisis and is still saying take a listen here.

Now that you have been able to see the charts above and listen to the argument as presented by Peter Schiff, I’ll briefly explain why I think the thought of US Dollar hyperinflation is currently misplaced.

Why You Shouldn’t Be Concerned About Hyperinflation

There are three major reasons why hyperinflation will not be playing at a theater near you anytime soon.

1. There has never been a period in US history when home prices have been falling and we have had real inflation. Currently, prices on everything, everywhere (almost) are falling. Even more importantly in the US home prices are still plummeting, so unless there was some sort of abrupt and magic end to this global and domestic price free fall, statistically by all historical accounts, inflation is all but impossible at the current time or in the near future. If hyperinflation can’t be happening right now what is occurring? Deflation – A sustained in the general price level of goods and services; read up on it because the word will be in the news more and more frequently in the coming months.

2. Hyperinflationists, in general, only point to one side of the monetary argument when they discuss the “printing presses.” In almost all hyperinflationary arguments the discussion of the rate at which global wealth is being destroyed, relative to the amount of currency being printed is never fully reconciled. This is problematic to the hyperinflationists argument because they only take into consideration one component of monetary policy; creation of money not destruction. Institutions, small businesses, and average Joe’s the world over have witnessed wealth destruction in the form of massive real and/or paper losses in almost all asset classes. This loss of wealth far outstrips the amount of money which has been printed in the US and points us further away from the idea of hyperinflation on a sheer creation replacement basis.

To illustrate wealth destruction I wish that there was a simple graph which I could use to represent the “print to destruction ratio” I am trying to explain. Unfortunately, given the difficulty of determining how much wealth has been destroyed (there is no government stat for this) the best we can do here is use this projection from the Wall Street Journal and the IMF. They say:

“The report [from the IMF] indicated a significant deepening and spreading of the crisis beyond the mortgage-related assets in the U.S. responsible for sparking the turmoil. The IMF now projects that worldwide financial losses could top $4 trillion through next year, with the estimated damage from U.S. assets alone increased to $2.7 trillion from a previous forecast of $2.2 trillion in January.”

Recall form above (see adjusted monetary base graph), the money supply recently rose in the US from approximately $800 Billion to around $1.8 Trillion (Read: $1 trillion hot off the “printing press” which is indeed staggering). Now, according to the IMF, it is estimated that we have lost $2.7 trillion in the US alone; a difference of approximately $1.7 trillion dollars. Keep in mind that this does not include the amount of US Dollar denominated losses abroad.

3. When evaluating the risks of, and arguments for, hyperinflation (again this is not readily discussed) one must also consider the staggering reduction of consumer credit in the US and global economy. Over the past several months we have frequently heard our government officials refer to our banks as “not lending” and that being “the” problem. In fact just today Tim Geithner announced this (again) in response to questions asked of him (rightly) by congress about why the various rescue plans implemented do not appear to be working.

Now that you have looked at the wealth destruction component in point 2 above you can understand why, for these officials anyway, bank lending is a problem. To spell it out, credit is needed to reinflate the loss of US wealth now that we have a staggering aggregate reduction in real global capital. As I have said countless times in the past: If the problem was too much lending, then by definition, the solution could not possible be the same as the problem; more lending. So how does this relate to hyperinflation?

Due to the incredible level of credit contraction within the US, most of the money being put into the banking system by the government is not making it back into the economy. In general, banks are acting as they should by evaluating the overall lending risks in our economy and implementing tighter (more appropriate) lending standards. Under this regime few are willing to borrow and banks are also now unwilling to lend. Also under this ideology the printing presses could (in theory) run all day and nothing would happen because those who can afford to borrow money don’t want or need it, and those who do need it can’t qualify for it. If you are interested in this phenomenon, check out this video on the money multiplier effects of the fractional reserve system.

After watching it and understanding the “They Won’t Lend” model you’ll see why many are now suggesting the fractional reserve/Federal Reserve model should be abolished; however that argument is another issue all together.

With regard to “They Won’t Lend” this time around a graph is available to show that the money going into banks is not leaving. Notice here, how in the past banks ran with their capital requirements at the bare minimum. In addition, also note that banks have added on about $800 Billion in excess reserve capital over the past year or so. Does that number or this chart look familiar to anything you saw above?

Excess Reserves

Regardless of what you believe inflation, deflation, hyperinflation, total collapse…you should know what strategies to use when investing your hard earned money.

If you agree with me and feel that hyperinflation is not likely in the near future and want to invest in a deflationary period you should: avoid debt and additional risk, consider renting or leasing where possible, and try to increase your cash on hand.

If you agree with the hyperinflation idea you should: spend as much money as quickly as you possibly can, go long on real estate and real property investments, get out of treasuries and low risk fixed income return investments, get into foreign currencies, go long commodities, and check out the Bullion Vault to use Gold as Money.

In closing, based on the proven hyperinflationary and deflationary investment strategies I spelled out above which would you rather do right now? The way you answered that question should be the most compelling argument of all.

Disenchanted with the US dollar – BCA Research

“The US dollar is unlikely to be dislodged as the dominant reserve currency any time soon.

“There are legitimate reasons for the Chinese to be worried about their dollar holdings: China’s foreign exchange reserves total $2 trillion, or 48% of GDP. The Chinese authorities are growing increasingly disenchanted with their exposure to the US dollar, worried that Fed policy is debasing the currency.

“Last week central bank Governor Zhou called for a reform of the international monetary system that would see the US dollar replaced as a reserve currency, such as the SDR. However, leaked parts of the upcoming G20 Communique do not hint that such a ‘super sovereign’ currency is being seriously discussed at high levels. Even if a consensus forms that a new reserve currency is a good idea, global authorities would have to convince international business people to invoice in SDRs. Moreover, a wide variety of financial assets denominated in SDRs would have to be developed and traded in deep markets. Such a massive undertaking would take many years to develop.

“More likely, China will continue to slowly diversify away from the US dollar into other countries, a process that has been ongoing for years. China is unlikely to suddendly ‘dump’ US dollar assets, as this would damage China’s own interests. Bottom line: The structural downtrend in the US dollar has probably resumed, but it should be a fairly benign adjustment.”

Source: BCA Research, March 31, 2009.