Invest Like A Pro

Invest Like A Pro 

Topic Covers: 

 Active Trading, Asset Allocation, Bear Market, Day Trading, Financial Theory, Hedge Funds, Investing Basics, Personal Finance, Portfolio Management, Retirement, Risk Tolerance, Stocks, Warren Buffett

 For those investors who have been lucky enough to have survived one or more major market downturns, some lessons have been learned. For example, there always seem to be some firms that not only survive those downturns, but profit handsomely from them. So why do certain investment companies do better than others and survive market waves? They have a long-term investment philosophy that they stick to; they have a strong investment strategy that they formalize within their products and understand that while taking some risk is part of the game, a steady, disciplined approach ensures long-term success. Once the key tools of successful investment firms are understood, they can easily be adopted by individual investors to become successful. By adopting some of their strategies, you can invest like the pros

Strength in Strategy

A strong investment philosophy should be outlined before any investment strategies are considered. An investment philosophy is the basis for investment policies and procedures and, ultimately, long-term plans. In a nutshell, an investment philosophy is a set of core beliefs from which all investment strategies are developed. In order for an investment philosophy to be sound, it must be based on reasonable expectations and assumptions of how historical information can serve as a tool for proper investment guidance.

 For example, the investment philosophy, "to beat the market every year," while a positive expectation, is too vague and does not incorporate sound principles. It's also important for a sound investment philosophy to define investment time horizons, asset classes in which to invest and guidance on how to respond to market volatility while adhering to your investment principles. A sound long-term investment philosophy also keeps successful firms on track with those guidelines, rather than chasing trends and temptations. Since each investment philosophy is developed to suit the investment firm, or perhaps the individual investor, there are no standard plans to write one.
If you are developing an investment philosophy for the first time, and you want to invest like a pro, it's important that you consider covering the following topics to make sure the philosophy is robust:

Define Your Core Beliefs

The most basic and fundamental beliefs are outlined regarding the reason and purpose of investment decisions.
Time Horizons
While investors should always plan on long-term horizons, a good philosophy should outline your unique time frame to set expectations.

Risk

Clearly define how you accept and measure risk. Contrary to investing in a savings account, the fundamental rule of investing is the risk/reward concept by increasing your expected returns with increased risk.

Asset Allocation and Diversification

Clearly define your core beliefs on asset allocation and diversification, whether they are active or passive, tactical or strategic, tightly focused or broadly diversified. This portion of your philosophy will be the driving force in developing your investment strategies and build a foundation to which to return when your strategies need redefining or tweaking.

The Secret of Success

Successful firms also implement product funds that reflect their investment philosophies and strategies. Since the philosophy drives the development of the strategies, core style investment strategies, for example, are usually the most common in most successful product lines and should also be part of an individual plan. Core holdings or strategies have multiple interpretations, but generally, core equity and bond strategies tend to be large cap, blue chip and investment grade types of funds that reflect the overall market.

 Successful firms also limit their abilities to take large sector bets in their core products. While this can limit the potential upside when making the right sector bet, directional bets, practiced by hedge funds, add significant volatility to a fund that is judged by not only its performance but its relative and absolute volatility.
When defining an investment strategy, it is very important to follow a strict discipline. For example, when defining a core strategy, restricting the temptation to follow or chase trends keeps the strategy grounded. This is not to say that one can't have additional momentum strategies with different goals, as these can be incorporated into the overall investment plan.

Outlining a Strategy

When outlining a sound investment strategy, the following issues, which are similar to those of creating a philosophy, should be considered:

Time Horizon

A common mistake for most individual investors is that their time horizon ends when they retire. In reality, it can go well beyond retirement, and even life, if you have been saving for the next generation. Investment strategies must focus on the long-term horizon of your investment career, as well as the time for specific investments.

Asset Allocation

This is when you clearly define what your target allocation will be. If this is a tactical strategy, ranges of allocations should be defined, if strategic in nature. On the other hand, hard lines need to be drawn with specific plans to rebalance when markets have moved in either direction. Successful investment firms follow strict guidelines when rebalancing, especially in strategic plans. Individuals, on the other hand, often make the mistake of straying from their strategies when markets move in sharp directions.

Risk Vs. Return

At this point you should clearly define your risk tolerance. This is one of the most important aspects of an investment strategy, since risk and return have a close relationship over long periods of time. Whether you measure it relative to a benchmark or a absolute portfolio standard deviation, just remember to stick to your predetermined limits.

Putting the Pieces Together

It's important to remember that investment strategies define specific pieces of an overall plan. Successful investors cannot beat the market 100% of the time, but they can evaluate their investment decisions based on their fit to the original investment strategy.

After you have survived a few market cycles, you can potentially start to see patterns of hot or popular investment companies gathering unprecedented gains. This was a phenomenon during the Internet technology investing boom. Shares of technology companies rose to rock star levels, and investors - institutional and personal - lined up at their gates to pile on funds. Unfortunately for some of those companies, success was short-lived, since these extraordinary gains were unjustified. Many investors deviated from their initial investment strategies in the hopes of chasing greater returns. Individuals can model themselves after successful investment companies by not trying to hit home runs, instead focusing on base hits.

That means trying to beat the market by long shots is not only difficult to do consistently, it leads to a level of volatility that does not sit well with investors over the long term. Individual investors often make mistakes such as shooting for the stars and using too much leverage when markets are moving up, and tend to shy away from markets as they are falling. Removing the human biases by sticking to a set approach and focusing on short-term victories is a great way to fashion your investment strategy like the pros.

The Bottom Line

Taking cues from successful professional investors is the easiest way to avoid common errors and keep on a focused track. Outlining a sound investment philosophy sets the stage for professional and individual investors, just like a strong foundation in a home. Building up from that foundation to form investment strategies creates strong directions, setting the paths to follow. Investing like the pros also means avoiding the temptation to drift from your investment philosophy and strategies, and trying to outperform by large margins. While this can be done occasionally, and some firms have done it in the past, it is nearly impossible to beat the markets by large margins consistently. If you can fashion your investment plans and goals like those successful investment companies, you too can invest like the pros.
 

Triple Screen Trading System - Part 3

TST System - Part 3

Topic Covers: 

Active Trading, Technical Analysis, Technical Indicators

A trader's chart is the foremost technical tool for making trading decisions with the triple screen trading system. For example, traders commonly use weekly moving average convergence divergence (MACD) histograms to ascertain their longer-term trend of interest. Deciding which stocks to trade on a daily basis, the trader looks for a single uptick or a downtick occurring on the weekly chart to identify a long-term change of trend. When an uptick occurs and the indicator turns up from below its center line, the best market tide buy signals are given. When the indicator turns down from above its center line, the best sell signals are issued.
By using the ocean metaphors that Robert Rhea developed (see Triple Screen Trading System - Part 2), we would label the daily market activity as a wave that goes against the longer-term weekly tide. When the weekly trend is up (uptick on the weekly chart), daily declines present buying opportunities. When the weekly trend is down (downtick on the weekly chart), daily rallies indicate shorting opportunities.

 

Second Screen – Market Wave

Daily deviations from the longer-term weekly trend are indicated not by trend-following indicators (such as the MACD histogram), but by oscillators. By their nature, oscillators issue buy signals when the markets are in decline and sell signals when the markets are rising. The beauty of the triple screen trading system is that it allows traders to concentrate only on those daily signals that point in the direction of the weekly trend.

 For further reading, see Getting To Know Oscillators - Part 1, Part 2 and Part 3.
For example, when the weekly trend is up, the triple screen trading system considers only buy signals from daily oscillators and eliminates sell signals from the oscillators. When the weekly trend is down, triple screen ignores any buy signals from oscillators and displays only shorting signals. Four possible oscillators that can easily be incorporated into this system are force index, Elder-Ray index, stochastic and Williams %R.

Force Index

A two-day exponential moving average (EMA) of force index can be used in conjunction with the weekly MACD histogram. Indeed, the sensitivity of the two-day EMA of force index makes it most appropriate to combine with other indicators such as the MACD histogram. Specifically, when the two-day EMA of force index swings above its center line, it shows that bulls are stronger than bears. When the two-day EMA of force index falls below its center line, this indicator shows that the bears are stronger.

More specifically, traders should buy when a two-day EMA of force index turns negative during an uptrend. When the weekly MACD histogram indicates an upward trend, the best time to buy is during a momentary pullback, indicated by a negative turn of the two-day EMA of force index.

When a two-day EMA of force index turns negative during a weekly uptrend (as indicated on the weekly MACD histogram), you should place a buy order above the high price of that particular day. If the uptrend is confirmed and prices rally, you will receive a stop order on the long side. If prices decline instead, your order will not be executed; however, you can then lower your buy order so it is within one tick of the high of the latest bar. Once the short-term trend reverses and your buy stop is triggered, you can further protect yourself with another stop below the low of the trade day or of the previous day, whichever low is lower. In a strong uptrend, your protective provision will not be triggered, but your trade will be exited early if the trend proves to be weak.

 

Try Currency Trading Risk-Free at FOREX.com 

 The same principles apply in reverse during a weekly downtrend. Traders should sell short when a two-day EMA of force index turns positive during the weekly downtrend. You may then place your order to sell short below the low of the latest price bar.
Similar in nature to the long position described above, the short position allows you to employ protective stops to guard your profits and avoid unnecessary losses. If the two-day EMA of force index continues to rally subsequent to the placement of your sell order, you can raise your sell order daily so it is within a single tick of the latest bar's low. When your short position is finally established by falling prices, you can then place a protective stop just above the high of the latest price bar or the previous bar if higher.

If your long or short positions have yet to be closed out, you can use a two-day EMA of force index to add to your positions. In a weekly uptrend, continue adding to longs whenever the force index turns negative; continually add to shorts in downtrends whenever the force index turns positive.

Further, the two-day EMA of force index will indicate the best time at which to close out a position. When trading on the basis of a longer-term weekly trend (as indicated by the weekly MACD histogram), the trader should exit a position only when the weekly trend changes or if there is a divergence between the two-day EMA of force index and the trend. When the divergence between two-day EMA of force index and price is bullish, a strong buy signal is issued. On this basis, a bullish divergence occurs when prices hit a new low but the force index makes a shallower bottom.

Sell signals are given by bearish divergences between two-day EMA of force index and price. A bearish divergence is realized when prices rally to a new high while the force index hits a lower secondary top.

The market wave is the second screen in the triple screen trading system, and the second screen is nicely illustrated by force index; however, others such as Elder-Ray, Stochastic, and Williams %R can also be employed as oscillators for the market wave screen.

 To continue learning about the second screen in this system, go to Triple Screen Trading System - Part 4. For further reference, you can also revisit Part 1 and Part 2.

Triple Screen Trading System - Part 2

TST System - Part II

 Topic Covers:  

Active Trading, Day Trading, Technical Analysis, Technical Indicators, Trading Software
Market Trends

The stock market is generally thought to follow three trends, which market analysts have identified throughout history and can assume will continue in the future. These trends are as follows: the long-term trend lasting several years, the intermediate trend of several months and the minor trend that is generally thought to be anything less than several months.

Robert Rhea, one of the market's first technical analysts, labeled these trends as tides (long-term trends), waves (intermediate-term trends) and ripples (short-term trends). Trading in the direction of the market tide is generally the best strategy. Waves offer opportunities to get in or out of trades, and ripples should usually be ignored. While the trading environment has become more complicated since these simplified concepts were articulated in the first half of the 20th century, their fundamental basis remains true. Traders can continue to trade on the basis of tides, waves and ripples, but the time frames to which these illustrations apply should be refined.

 Under the triple screen trading system, the time frame the trader wishes to target is labeled the intermediate time frame. The long-term time frame is one order of magnitude longer while the trader's short-term time frame is one order of magnitude shorter. If your comfort zone, or your intermediate time frame, calls for holding a position for several days or weeks, then you will concern yourself with the daily charts. Your long-term time frame will be one order of magnitude longer, and you will employ the weekly charts to begin your analysis. Your short-term time frame will be defined by the hourly charts.

If you are a day trader who holds a position for a matter of minutes or hours, you can employ the same principles. The intermediate time frame may be a ten-minute chart; an hourly chart corresponds to the long-term time frame, and a two-minute chart is the short-term time frame.

 

First Screen of the Triple Screen Trading System: Market Tide

The triple screen trading system identifies the long-term chart, or the market tide, as the basis for making trading decision. Traders must begin by analyzing their long-term chart, which is one order of magnitude greater than the time frame that the trader plans to trade. If you would normally start by analyzing the daily charts, try to adapt your thinking to a time frame magnified by five, and embark on your trading analysis by examining the weekly charts instead.

Using trend-following indicators, you can then identify long-term trends. The long-term trend (market tide) is indicated by the slope of the weekly moving average convergence divergence (MACD) histogram, or the relationship between the two latest bars on the chart. When the slope of the MACD histogram is up, the bulls are in control, and the best trading decision is to enter into a long position. When the slope is down, the bears are in control, and you should be thinking about shorting.
Any trend-following indicator that the trader prefers can realistically be used as the first screen of the triple screen trading system. Traders have often used the directional system as the first screen; or even a less complex indicator such as the slope of a 13-week exponential moving average can be employed. Regardless of the trend-following indicator that you opt to start with, the principles are the same: ensure that you analyze the trend using the weekly charts first and then look for ticks in the daily charts that move in the same direction as the weekly trend.

 

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 Of crucial importance in employing the market tide is developing your ability to identify the changing of a trend. A single uptick or a downtick of the chart (as in the example above, a single uptick or a downtick of the weekly MACD histogram) would be your means of identifying a long-term trend change. When the indicator turns up below its center line, the best market tide buy signals are given. When the indicator turns down from above its center line, the best sell signals are issued.

The model of seasons for illustrating market pricesfollows a concept developed by Martin Pring. Pring's model hails from a time when economic activity was based on agriculture: seeds were sown in spring, the harvest took place in summer and the fall was used to prepare for the cold spell in winter. In Pring’s model, traders use these parallels by preparing to buy in spring, sell in summer, short stocks in the fall and cover short positions in the winter.

Pring's model is applicable in the use of technical indicators. Indicator "seasons" allow you to determine exactly where you are in the market cycle and to buy when prices are low and short when they go higher. The exact season for any indicator is defined by its slope and its position above or below the center line. When the MACD histogram rises from below its center line, it is spring. When it rises above its center line, it is summer. When it falls from above its center line, it is autumn. When it falls below its center line, it is winter. Spring is the season for trading long, and fall is the best season for selling short.

Whether you prefer to illustrate your first screen of the triple screen trading system by using the ocean metaphor or the analogy of the changing of the seasons, the underlying principles remain the same.


To learn about the second screen in the triple screen system, read Triple Screen Trading System - Part 3. For an introduction to this system, go back to Triple Screen Trading System - Part 1.


 

Triple Screen Trading System - Part 1

TST System - Part 1  

Topic Covers:

 Active Trading, Technical Analysis, Technical Indicators, Trading Software

 Sounding more like a medical diagnostic test, the triple screen trading system was developed by Dr. Alexander Elder in 1985. The medical allusion is no accident: Dr. Elder worked for many years as a psychiatrist in New York before becoming involved in financial trading. Since that time, he has written dozens of articles and books, including "Trading For A Living" (1993). He has also spoken at several major conferences.

Many traders adopt a single screen or indicator that they apply to each and every trade. In principle, there is nothing wrong with adopting and adhering to a single indicator for decision making. In fact, the discipline involved in maintaining a focus on a single measure is related to the personal discipline is, perhaps, one of the main determinants of achieving success as a trader.

What if your chosen indicator is fundamentally flawed?

What if conditions in the market change so that your single screen can no longer account for all of the eventualities operating outside of its measurement? The point is, because the market is very complex, even the most advanced indicators can't work all of the time and under every market condition. For example, in a market uptrend, trend-following indicators rise and issue "buy" signals while oscillators suggest that the market is overbought and issue "sell" signals. In downtrends, trend-following indicators suggest selling short, but oscillators become oversold and issue signals to buy. In a market moving strongly higher or lower, trend-following indicators are ideal, but they are prone to rapid and abrupt changes when markets trade in ranges. Within trading ranges, oscillators are the best choice, but when the markets begin to follow a trend, oscillators issue premature signals.

 To determine a balance of indicator opinion, some traders have tried to average the buy and sell signals issued by various indicators. But there is an inherent flaw to this practice. If the calculation of the number of trend-following indicators is greater than the number of oscillators used, then the result will naturally be skewed toward a trend-following result, and vice versa.

Dr. Elder developed a system to combat the problems of simple averaging while taking advantage of the best of both trend-following and oscillator techniques. Elder's system is meant to counteract the shortfalls of individual indicators at the same time as it serves to detect the market's inherent complexity. Like a triple screen marker in medical science, the triple screen trading system applies not one, not two, but three unique tests, or screens, to every trading decision, which form a combination of trend-following indicators and oscillators.

The Problem of time frames

There is, however, another problem with popular trend-following indicators that must be ironed out before they can be used. The same trend-following indicator may issue conflicting signals when applied to different time frames. For example, the same indicator may point to an uptrend in a daily chart and issue a sell signal and point to a downtrend in a weekly chart. The problem is magnified even further with intraday charts. On these short-term charts, trend-following indicators may fluctuate between buy and sell signals on an hourly or even more frequent basis.

In order to combat this problem, it is helpful to divide time frames into units of five. In dividing monthly charts into weekly charts, there are 4.5 weeks to a month. Moving from weekly charts to daily charts, there are exactly five trading days per week. Progressing one level further, from daily to hourly charts, there are between five to six hours in a trading day. For day traders, hourly charts can be reduced to 10-minute charts (denominator of six) and, finally, from 10-minute charts to two-minute charts (denominator of five).

 The crux of this factor of five concept is that trading decisions should be analyzed in the context of at least two time frames. If you prefer to analyze your trading decisions using weekly charts, you should also employ monthly charts. If you day-trade using 10-minute charts, you should first analyze hourly charts.

Once the trader has decided on the time frame to use under the triple screen system, he or she labels this as the intermediate time frame. The long-term time frame is one order of five longer; and the short-term time frame is one order of magnitude shorter.

Traders who carry their trades for several days or weeks will use daily charts as their intermediate time frames. Their long-term time frames will be weekly charts; hourly charts will be their short-term time frame. Day traders who hold their positions for less than an hour will use a 10-minute chart as their intermediate time frame, an hourly chart as their long-term time frame and a two-minute chart as a short-term time frame.
The triple screen trading system requires that the chart for the long-term trend be examined first. This ensures that the trade follows the tide of the long-term trend while allowing for entrance into trades at times when the market moves briefly against the trend. The best buying opportunities occur when a rising market makes a briefer decline; the best shorting opportunities are indicated when a falling market rallies briefly. When the monthly trend is upward, weekly declines represent buying opportunities. Hourly rallies provide opportunities to short when the daily trend is downward.

To continue this article, see Triple Screen Trading System - Part 2.

5 Popular Portfolio Types

 Portfolio Types

 Stock investors constantly hear the wisdom of diversification. The concept is to simply not put all of your eggs in one basket, which in turn helps mitigate risk, and generally leads to better performance or return on investment. Diversifying your hard-earned dollars does make sense, but there are different ways of diversifying, and there are different portfolio types. We look at the following portfolio types and suggest how to get started building them: aggressive, defensive, income, speculative and hybrid. It is important to understand that building a portfolio will require research and some effort. Having said that, let's have a peek across our five portfolios to gain a better understanding of each and get you started.

The Aggressive Portfolio

An aggressive portfolio or basket of stocks includes those stocks with high risk/high reward proposition. Stocks in the category typically have a high beta, or sensitivity to the overall market. Higher beta stocks experience larger fluctuations relative to the overall market on a consistent basis. If your individual stock has a beta of 2.0, it will typically move twice as much in either direction to the overall market - hence, the high-risk, high-reward description.

Most aggressive stocks (and therefore companies) are in the early stages of growth, and have a unique value proposition. Building an aggressive portfolio requires an investor who is willing to seek out such companies, because most of these names, with a few exceptions, are not going to be common household companies. Look online for companies with earnings growth that is rapidly accelerating, and have not been discovered by Wall Street. The most common sectors to scrutinize would be technology, but many other firms in various sectors that are pursuing an aggressive growth strategy can be considered. As you might have gathered, risk management becomes very important when building and maintaining an aggressive portfolio.

Keeping losses to a minimum and taking profit are keys to success in this type of portfolio.

 

The Defensive Portfolio

Defensive stocks do not usually carry a high beta, and usually are fairly isolated from broad market movements. Cyclical stocks, on the other hand, are those that are most sensitive to the underlying economic "business cycle." For example, during recessionary times, companies that make the "basics" tend to do better than those that are focused on fads or luxuries. Despite how bad the economy is, companies that make products essential to everyday life will survive. Think of the essentials in your everyday life, and then find the companies that make these consumer staple products.
The opportunity of buying cyclical stocks is that they offer an extra level of protection against detrimental events. Just listen to the business stations and you will hear portfolios managers talking about "drugs," "defense" and "tobacco." These really are just baskets of stocks that these managers are recommending based upon where the business cycle is and where they think it is going. However, the products and services of these companies are in constant demand. A defensive portfolio is prudent for most investors. A lot of these companies offer a dividend as well which helps minimize downside capital losses.

The Income Portfolio

An income portfolio focuses on making money through dividends or other types of distributions to stakeholders. These companies are somewhat like the safe defensive stocks but should offer higher yields. An income portfolio should generate positive cash flow. Real estate investment trusts (REITs) and master limited partnerships (MLP) are excellent sources of income producing investments. These companies return a great majority of their profits back to shareholders in exchange for favorable tax status. REITs are an easy way to invest in real estate without the hassles of owning real property. Keep in mind, however, that these stocks are also subject to the economic climate. REITs are groups of stocks that take a beating during an economic downturn, as building and buying activity dries up.

An income portfolio is a nice complement to most people's paycheck or other retirement income. Investors should be on the lookout for stocks that have fallen out of favor and have still maintained a high dividend policy. These are the companies that can not only supplement income but also provide capital gains. Utilities and other slow growth industries are an ideal place to start your search.
SEE: Dividends Still Look Good After All These Years

 

The Speculative Portfolio

A speculative portfolio is the closest to a pure gamble. A speculative portfolio presents more risk than any others discussed here. Finance gurus suggest that a maximum of 10% of one's investable assets be used to fund a speculative portfolio. Speculative "plays" could be initial public offerings (IPOs) or stocks that are rumored to be takeover targets. Technology or health care firms that are in the process of researching a breakthrough product, or a junior oil company which is about to release its initial production results, would also fall into this category.
Another classic speculative play is to make an investment decision based upon a rumor that the company is subject to a takeover. One could argue that the widespread popularity of leveraged ETFs in today's markets represent speculation. Again, these types of investments are alluring: picking the right one could lead to huge profits in a short amount of time. Speculation may be the one portfolio that, if done correctly, requires the most homework. Speculative stocks are typically trades, and not your classic "buy and hold" investment.

 

The Hybrid Portfolio

Building a hybrid type of portfolio means venturing into other investments, such as bonds, commodities, real estate and even art. Basically, there is a lot of flexibility in the hybrid portfolio approach. Traditionally, this type of portfolio would contain blue chip stocks and some high grade government or corporate bonds. REITs and MLPs may also be an investable theme for the balanced portfolio. A common fixed income investment strategy approach advocates buying bonds with various maturity dates, and is essentially a diversification approach within the bond asset class itself. Basically, a hybrid portfolio would include a mix of stocks and bonds in a relatively fixed allocation proportions. This type of approach offers diversification benefits across multiple asset classes as equities and fixed income securities tend to have a negative correlation with one another.

The Bottom Line

At the end of the day, investors should consider all of these portfolios and decide on the right allocation across all five. Here, we have laid the foundation by defining five of the more common types of portfolios. Building an investment portfolio does require more effort than a passive, index investing approach. By going it alone, you will be required to monitor your portfolio(s) and rebalance more frequently, thus racking up commission fees. Too much or too little exposure to any portfolio type introduces additional risks. Despite the extra required effort, defining and building a portfolio will increase your investing confidence, and give you control over your finances.

Top 7 Questions About Currency Trading Answered

Top 7 Questions About Currency Trading Answered


Although forex is the largest financial market in the world, it is relatively unfamiliar terrain for retail traders. Until the popularization of internet trading a few years ago, FX was primarily the domain of large financial institutions, multinational corporations and secretive hedge funds. But times have changed, and individual investors are hungry for information on this fascinating market. Whether you are an FX novice or just need a refresher course on the basics of currency trading, read on to find the answers to the most frequently asked questions about the forex market.
Tutorial: The Ultimate Guide To Forex Trading
How does the forex market differ from other markets?
Unlike stocks, futures or options, currency trading does not take place on a regulated exchange. It is not controlled by any central governing body, there are no clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes. All members trade with each other based on credit agreements. Essentially, business in the largest, most liquid market in the world depends on nothing more than a metaphorical handshake.


At first glance, this ad-hoc arrangement must seem bewildering to investors who are used to structured exchanges such as the NYSE or CME. (To learn more, see Getting To Know Stock Exchanges.) However, this arrangement works exceedingly well in practice; because participants in FX must both compete and cooperate with each other, self regulation provides very effective control over the market. Furthermore, reputable retail FX dealers in the United States become members of the National Futures Association (NFA), and by doing so they agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through an NFA member firm.
The FX market is different from other markets in some other key ways that are sure to raise eyebrows. Think that the EUR/USD is going to spiral downward? Feel free to short the pair at will. There is no uptick rule in FX as there is in stocks. There are also no limits on the size of your position (as there are in futures); so, in theory, you could sell $100 billion worth of currency if you had the capital to do it. If your biggest Japanese client, who also happens to golf with the governor of the Bank of Japan tells you on the golf course that BOJ is planning to raise rates at its next meeting, you could go right ahead and buy as much yen as you like. No one will ever prosecute you for insider trading should your bet pay off. There is no such thing as insider trading in FX; in fact, European economic data, such as German employment figures, are often leaked days before they are officially released.
Before we leave you with the impression that FX is the Wild West of finance, we should note that this is the most liquid and fluid market in the world. It trades 24 hours a day, from 5pm EST Sunday to 4pm EST Friday, and it rarely has any gaps in price. Its sheer size and scope (from Asia to Europe to North America) makes the currency market the most accessible market in the world.
 

Commodity Prices And Currency Movements

Find out which currencies are most affected by fluctuations in gold and oil prices, and improve your trading.
Predicting the next move in the markets is the key to making money in trading, but putting this simple concept into action is much harder than it sounds. Professional forex traders have long known that trading currencies requires looking beyond the world of FX. The fact is that currencies are moved by many factors - supply and demand, politics, interest rates, economic growth, and so on. More specifically, since economic growth and exports are directly related to a country's domestic industry, it is natural for some currencies to be heavily correlated with commodity prices. The top three currencies that have the tightest correlations with commodities are the Australian dollar, the Canadian dollar and the New Zealand dollar. Other currencies that are also impacted by commodity prices but have a weaker correlation are the Swiss franc and the Japanese yen. Knowing which currency is correlated with what commodity can help traders understand and predict certain market movements. Here we look at currencies correlated with oil and gold and show you how you can use this information in your trading.