Everybody knows that the holy grail of trading is the possession of a blackbox system that crunches all the numbers and does everything for its owner, who only lives to spend all the cash.
Such a system is a stand alone system that works all the time, never gets tired or complains and right all the time.
Such a system is called a blackbox, because not only is it dark in there, nobody but a few math geniuses knows what went in it. Such a system is secretive, a closely guarded secret because of its value to the owners and its importance to them.
In Forex trading, there are the elephants and the mice. The retail traders are the mice. When they move, the forest hardly rustles. The banks and governments and the biggest hedge funds are the elephants. You know what happens when they move. The whole forex forest shakes mightily devouring many an unsuspecting mice in the process.
You have heard before that 95% of retail forex traders lose money. They are losing it to the banks with their humongous accounts and their hidden blackboxes.
To create a blackbox, you need an exceptional amount of brain power of the right kind, with resources to make it happen. The banks established their own financial Manhattan Projects long ago in other to help them win the trading war.
In trading, you are either right or wrong. The banks with huge amounts of money cannot afford to be wrong often. Case in point, Societe Generale. Billions could be lost. It has happened before, could happen again but it rarely happens.
So blackboxes when done right are awesome. The banks have them, the retail traders don't...or may be they do!
In the world of retail forex, there are a few of them. The red light/green light kinds that thousands of people have bought retailing for $3,000 and more. But do they work?
Here is the difference between a bank blackbox and a retail blackbox- availability. The banks make all effort to not make theirs available to the public. If you had a box like that, you would make it a closely guarded secret because of its value.
Sunday, February 17, 2008
Forex Hedging Systems - Are They Useful?
There are many Forex retail traders who attempt to hedge their trades after suffering from substantial equity losses. While this may seem like a good way to limit their losses, a hedging strategy may not necessarily be any help at all. In this article, I will discuss why hedging trades may be a bad idea if you want to limit your trading losses.
What Is Hedging?
The objective of hedging a trade is to reduce the potential losses that may otherwise have been incurred without the hedge.
For example, let's say I go long on the EUR/USD at price 1.4030. The market immediately goes against me an plunges to 1.4010, resulting in an unrealized loss of -20 pips.
In order to hedge against further losses, I enter into a second trade: shorting at 1.4010 (which is the current market price). This way, if prices fall even further, at least I won't lose any more pips. If prices fall by a further 5 pips, I would lose 5 pips in my initial long position and gain 5 pips in my second short position, netting a total of zero pips.
The Problem With Hedging In This Manner
This form of hedging is very attractive to inexperienced traders who don't really understand what they're doing. At first glance, it looks as if hedging can stop a trader from suffering from further losses, while allowing for the potential of the trade to turn around in his favour. This is the exact manner of thinking that causes many traders to mistakenly enter into hedging trades like the one I just showed you.
Here's the problem with this method of hedging:
Even if price do turn around in my favour and moves back up to the price of 1.4030, I will still be suffering from an unrealized loss of -20 pips! Why?
Because even though my initial long trade broke even (current market price at 1.4030 is the same price I went long), my second short trade will be suffering from a -20 pip unrealized loss (remember I shorted at 1.4010), netting a total unrealized loss of -20 pips!
Can you see how that even when prices manage to go back up in my favour, hedging STILL causes me to lose money? If I didn't hedge at all, I would have at least broken even by now.
And that's not all. Because I entered into a second (hedging) trade, I had to pay extra transaction fees via the bid/ask spread!
What Is Hedging?
The objective of hedging a trade is to reduce the potential losses that may otherwise have been incurred without the hedge.
For example, let's say I go long on the EUR/USD at price 1.4030. The market immediately goes against me an plunges to 1.4010, resulting in an unrealized loss of -20 pips.
In order to hedge against further losses, I enter into a second trade: shorting at 1.4010 (which is the current market price). This way, if prices fall even further, at least I won't lose any more pips. If prices fall by a further 5 pips, I would lose 5 pips in my initial long position and gain 5 pips in my second short position, netting a total of zero pips.
The Problem With Hedging In This Manner
This form of hedging is very attractive to inexperienced traders who don't really understand what they're doing. At first glance, it looks as if hedging can stop a trader from suffering from further losses, while allowing for the potential of the trade to turn around in his favour. This is the exact manner of thinking that causes many traders to mistakenly enter into hedging trades like the one I just showed you.
Here's the problem with this method of hedging:
Even if price do turn around in my favour and moves back up to the price of 1.4030, I will still be suffering from an unrealized loss of -20 pips! Why?
Because even though my initial long trade broke even (current market price at 1.4030 is the same price I went long), my second short trade will be suffering from a -20 pip unrealized loss (remember I shorted at 1.4010), netting a total unrealized loss of -20 pips!
Can you see how that even when prices manage to go back up in my favour, hedging STILL causes me to lose money? If I didn't hedge at all, I would have at least broken even by now.
And that's not all. Because I entered into a second (hedging) trade, I had to pay extra transaction fees via the bid/ask spread!
Currency - Successfully Trading Money
Buying in or out at the currency options with a lot of time-value costs you in terms of profit potential. Brokers and guru's like to tempt you with the long shots and appeal to your greed, don't listen, stay in the money currency options and only trade trending markets - this scenario is where your chances of success are highest. If you are genuine in your quest to make money currency trading, you cannot trade without a system or without a plan.
This has made Chinese goods unnaturally cheaper for foreign currency holders, simultaneously impoverishing segments of the Chinese population. Today, most banks provide forex accounts to individuals and companies, but opening such accounts with large banks is preferable. Also, the banks offer services like foreign currency exchanges, traveler's checks, and foreign exchange demand drafts, to meet your travel needs.
By buying or selling in the forward market, it is possible to protect the value of any anticipated flows of the forex market, in terms of one's own domestic currency, from exchange rate volatility.
Another good thing about forex currency trading is that you can have a permanent job and still do your trading work in your spare time or whenever you are available to see what has been happening. Forex trading, also called currency trading, FX trading, Foreign Exchange trading and forex currency trading refers to the largest financial investment market in the world.
Global forex trading offer you the chance to deal in real time online currency trading that is making millions of forex brokers rich each day. For a foreign currency trading beginner to think they can do this is extremely unrealistic. Currency trading can indeed be a profitable form of investing, but those without access to large amounts of money will hardly see any notable gains unless taking large risks like investing in a nation whose currency isn't recognized by the world banks.
Now, again, there is a huge demand for successful currency traders. Fact: Most of the successful currency trading systems are simple, not complicated. So, take your time, get educated and join the world of successful traders. Proper planning in timing a trade correctly is perhaps the most crucial factor in successful currency trading.
This has made Chinese goods unnaturally cheaper for foreign currency holders, simultaneously impoverishing segments of the Chinese population. Today, most banks provide forex accounts to individuals and companies, but opening such accounts with large banks is preferable. Also, the banks offer services like foreign currency exchanges, traveler's checks, and foreign exchange demand drafts, to meet your travel needs.
By buying or selling in the forward market, it is possible to protect the value of any anticipated flows of the forex market, in terms of one's own domestic currency, from exchange rate volatility.
Another good thing about forex currency trading is that you can have a permanent job and still do your trading work in your spare time or whenever you are available to see what has been happening. Forex trading, also called currency trading, FX trading, Foreign Exchange trading and forex currency trading refers to the largest financial investment market in the world.
Global forex trading offer you the chance to deal in real time online currency trading that is making millions of forex brokers rich each day. For a foreign currency trading beginner to think they can do this is extremely unrealistic. Currency trading can indeed be a profitable form of investing, but those without access to large amounts of money will hardly see any notable gains unless taking large risks like investing in a nation whose currency isn't recognized by the world banks.
Now, again, there is a huge demand for successful currency traders. Fact: Most of the successful currency trading systems are simple, not complicated. So, take your time, get educated and join the world of successful traders. Proper planning in timing a trade correctly is perhaps the most crucial factor in successful currency trading.
Understand Forex Basics
With the increasingly prevalent use of the internet, trading of foreign currency has never been more available to investors. The involvement of large international corporations, hedge funds and banks makes the foreign currency (Forex) market the most highly traded and most liquid market in the world. The Forex market is open 24 hours a day, 5 days a week, with in excess of $1.4 trillion dollars changing hands every day.
This enormous liquidity together with the availability of diverse currency pairs can result in a high level of turbulence on a daily basis. Forex markets are also affected by financial news releases which are reasonably frequent and can cause large swings in the price of a currency. These variations in price give traders a chance to make money. Forex markets offer traders the ability to make money in both rising and falling markets. With a large variety of instruments to trade and highly leveraged trading, it is possible to start trading Forex with very limited funds.
Nearly all of the instruments that are traded on the Forex market have a minimum trade size, calculated on the base currency, a common minimum trade size is 100,000 units, for this reason the use of leverage is vital for traders. Most forex brokers offer mini accounts, where traders are able to place trades with a minimum size of 10,000 units.
Currencies are priced in duos, with each trade resulting in the purchase of one currency and the sale of another. If the currency you are purchasing increases in price relative to the currency you are selling, you will make profit. The first currency in a pair is the base currency and the second is the counter currency.
Forex quotes have two prices, a bid and an ask price. The bid price is the value at which you can sell the base currency in exchange for the counter currency. The ask price is the value at which you can purchase the base currency in exchange for the counter currency. There is always a gap between the two prices, called the spread. The spread can be calculated by reviewing the last two numbers in the bid and ask prices, for example if the prices are 1.8967 / 1.8971, the spread is 4 pips, this means the trade would need to move in your favor by 4 pips for you to breakeven.
This enormous liquidity together with the availability of diverse currency pairs can result in a high level of turbulence on a daily basis. Forex markets are also affected by financial news releases which are reasonably frequent and can cause large swings in the price of a currency. These variations in price give traders a chance to make money. Forex markets offer traders the ability to make money in both rising and falling markets. With a large variety of instruments to trade and highly leveraged trading, it is possible to start trading Forex with very limited funds.
Nearly all of the instruments that are traded on the Forex market have a minimum trade size, calculated on the base currency, a common minimum trade size is 100,000 units, for this reason the use of leverage is vital for traders. Most forex brokers offer mini accounts, where traders are able to place trades with a minimum size of 10,000 units.
Currencies are priced in duos, with each trade resulting in the purchase of one currency and the sale of another. If the currency you are purchasing increases in price relative to the currency you are selling, you will make profit. The first currency in a pair is the base currency and the second is the counter currency.
Forex quotes have two prices, a bid and an ask price. The bid price is the value at which you can sell the base currency in exchange for the counter currency. The ask price is the value at which you can purchase the base currency in exchange for the counter currency. There is always a gap between the two prices, called the spread. The spread can be calculated by reviewing the last two numbers in the bid and ask prices, for example if the prices are 1.8967 / 1.8971, the spread is 4 pips, this means the trade would need to move in your favor by 4 pips for you to breakeven.
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