Forex Hedging

I chuckle as I write the title for this commentary for the very simple reason that it is a line heard so often on the sales and trading desks on Wall Street. We can get a sample of “what the smart money is thinking and doing” from a very recent Bloomberg Poll. Be mindful that those polled represent a global random sampling of 1,263 Bloomberg subscribers. Would you like to know what they think of the following? 1. Which national markets will offer investors the BEST and WORST opportunities over the next year? 2. What asset class will offer the BEST and WORST RETURNS over the next year?  3. What do those polled think of their regional economy, the U.S. economy, and the global economy? 4. Where will the U.S. dollar stand relative to the Euro three months from now? 5. How do these global investors intend on shifting their exposures across asset classes over the next six months? (I find this question to be particular...

Spread betting is a risky game of trading in which you can lose more than you have in your account. That's because of leverage. Every time you buy or sell a market, you just need a small fraction of your total trade – a margin, which can be as low as 1-2%. If the market goes against you quickly, then you could be in trouble. That's what most people think – but are they correct? Spread betting has in fact some risks, and losing more than what you have in your account is a real possibility, but depending on your provider and on the type of trades you carry, it can be a really low one. Before going broke, there is a margin call trigger, in which most providers will automatically start closing positions you have in your account until the margin is again satisfied.

In Forex terms, the way to enter or exit a particular trade is named as an “order”. There are different types of order that can be placed, some are the basic ones that are employed by most of the brokers and some are least used. Here is a quick brief on these different types of order. The basic order types are known to most people and these are the ones all the brokers provide when you approach them to start the trade. These include, Market Order: This is the commonly used order where you buy or sell at the current market price. To cite an example, let us consider the EUR/USD pair that is currently running at 1.2050. If you are interested to buy this pair at this exact price, then you would buy and the trading platform will immediately carry out a buy order at this price and hence it becomes a market order Limit Order: A limit order is slightly different...

Pip: This is usually the smallest part of the currency being traded, and meant as the smallest movement the currency can make. It is actually difficult to mention the currency’s last decimal place when quoting since they often go beyond the tiniest currency unit, and that there are just so many currencies being traded. In other words, US$0.01 is a cent, but what will you call US$0.0001 or JPY0.001 for that matter? Better to name every currency’s smallest traded value as something else recognizable every time. Hence the pip! Lot: A lot is only a defined amount of a traded currency. For example, the normal lot for trading the dollar is $100,000, but there is also a mini-lot, $10,000. Since currency movement is measured in pips, a very small amount individually, a large amount of the currency is needed to feel the movement. Thus a mini-lot moving one pip will mean only a dollar lost or gained, and a normal lot...

Every trader will require a very good and fast computer for trading purposes. This chapter includes the basic components required for a proper day trading system including hardware, internet connection, software and system protection.   Day trading Hardware The minimum specifications for a day trader are as follows. The brackets include the preferred specifications • Windows XP Operating system • Pentium D 2.6 GHz (Intel Core 2 Duo/ AMD X2) • One 19-inch LCD monitor (two LCD flat screens) • 512 MB RAM (1 GB or higher of low-latency RAM) It is to be noted that in case of multiple monitors, the video card must contain two output ports in VGA and DVI formats in general. If the video has only one output port, video cards with nVidia or ATI chipsets are required to connect two monitors. Software  Special software will be used by most of the professional traders. This is to be installed in the computer. Good software is one which is widely used and popular, through which the...

Not much. All you need is a computer provided with a high-speed Internet connection and understanding fully the information provided in this guide to start trading in currencies. One needs to have an online currency trading account. There are two types of accounts: Micro Account where an initial deposit of $1,000 is advisable. For a Mini Account it would be advisable to start with $10,000. Funds Required: Margin trading is a common word used in “trading”. In simple language it means trading with borrowed capital. This method of trading enables one to open positions of huge amounts like $10,000 to $100,000 with small amounts ranging from $50 to $1,000. In short, margin trading enables one to carry out large transactions with very low initial capital. Margin trading in the Forex Market is quantified as “lots”. The term “lots” can be defined as the minimum amount of currency one has to buy. When you decide to “close” your position (meaning completing your transaction -...

All Foreign exchange quotes include bid and ask (two-way price). Normally, the value of the bid is lower than the value of ask. Bid refers to the value at which the trader wants to sell the currency to the dealer who is ready to purchase the base in trade for the quote. Ask refers to the value at which the dealer is ready to sell the base to the trader in trade for the quote. In short, bid is the selling price and ask is the buying price (in trader’s terms). Spreads refers to the difference in value of bid and ask prices.     In the figure above you can see that the left column shows the currency pair and then you have the bid and ask prices. The spread is the difference between these two prices.

The terms ‘Long’ and ‘Short’ are used instead of buy and sell. Initially, the trader determines if he wants to sell or buy. Let’s assume that the trader wants to buy a currency (buy base and sell quote), he expects a rise in base currency's value so that he can sell it at a price higher than the bought price. This is called taking a "long position" or "going long" in trader's slang. Now assume that he wants to sell a currency (sell base and buy quote), he expects a fall in base currency's value so that he could buy it later at a price lower than the sold price. This action by the trader is called taking a "short position" or "going short".  

Trading in foreign currencies is gaining lots of popularity these days. This is mainly due to many advantages it presents. Given below are some of these advantages that are attracting so many people to this market: • Commissions: One of the biggest advantages that this trading market offers is that there is no fee such as clearing, government, brokerage or exchange. The brokers get there compensation from “bid-ask” spread. • Middlemen: In foreign currency trade there is no middleman with whom you have to deal. Here you will deal directly with the market in order to buy or sell a currency. • Lot size: Exchanges decide the lot size or contract sizes in the future market. Silver future has a standard size of 5000 ounces. When dealing in spot Forex you are free to decide on your own lot size which allows the traders to buy lots as small as $250. However, we have explained later that it is not such a good decision...

When compared to trading in other financial instruments such as equities, trading in Forex has some distinct advantages. They include: • The Forex market is the largest financial market and thus no single person or entity has the ability to corner or dominate the market. • The Forex market has an average of $3.2 trillion dollars per day. With such a large volume, no one can hope to control the market for an extended period of time. • Taking charge of your own finances. You will be able to harvest better returns than those of mutual funds or hedge funds. • The initial capital outlay is low when compared to equity trading. • The Forex markets moves in patterns. Thus with technical analysis, one can actually predict the trends in the Forex market. • There is a high level of leverage to utilize when it comes to Forex trading unlike the equity market. • With 24 hours trading and its high trading volume, the Forex market is...