Derivatives Options » Foreign Exchange

Forex Trading Overview

admin — Tue, 19 Jan 2010 00:12:46 +0000

The worlds biggest most liquid market is where forex trading transactions are made daily. Currency pairs are bought and sold by forex traders with the expectation of a profit. The main idea is to sell high and acquire low.When a trader buys a currency, profits are derived if the rate of that currency rises above the price it was bought. When a profitable trade is closed for a profit, the investment is returned to the trader plus any profits he or she might have made. Due to the speculative nature of the forex market, there is a chance losses may be incurred. The amount one can lose depends entirely on the leverage and difference in price from the opening and closing price.When a forex trader buys a currency, that currency is expressed itn eh form of a currency pair. What actually takes place is the simultaneous buying of one currency and the selling of another. Currency pairs with lower than usual spreads usually see a high amount of trading compared to exotic currency pairs. Pairs made up of major currencies such as the Euro, British pound, American dollar, Japanese Yen, Swiss Franc and the New Zealand and Australian dollars are the most popular.There are many avenues to take when attempting to learn forex trading. Some choose to attend classes while others seek to learn from other traders via online methods. Forex trading courses usually make up the bulk of where beginners go to for guidance. Since all the major forex brokers offer free demo accounts, they are a good way to get some hands on experience.Automated software presents another viable option. These programs usually do the trading for you with very little user input being necessary. Irrespective of your physical presence the robot will carry out your transactions through and through.To become a well rounded trader, one should have a reasonable understanding of both technical and fundamental trading aspects. This means paying attention to any news that may impact a currency as well as outlining the current trend of that currency pair. Participating in an online forum can greatly increase your understanding of the markets through discussion with other traders.

Trade In, Trade Out – Staying on Top of the Forex Market

admin — Sun, 17 Jan 2010 12:20:31 +0000

Trade – Noun: The business of buying or selling commodities; commerce.
Verb: To engage in buying or selling for profit.
Adjective: Of or relating to trade or commerce.
Alright, alright you get the point. American Heritage Dictionary made it loud and clear for you. Trading and traders, though spelt differently the word alone gives me the chills, “What do you do?”
“I’m a trader.”
Eh, shouldn’t hold them accountable for whosoever made that name up, however convenient it may be. The trade corporations have lived and thrived in the productions. Some succeed, while others fail horribly. There is a passion that trails along this forte, and in the beginning stages the drive seems to derive from an implanted thought of thinking that you only have one day to live so you must prevail. Once established you can slither into other facets of trading that can propel you into new realms yet unknown. Finding your niche is where it’s at. Communication is the key to its success, and determination sits on the shoulders like the good and bad angel, aiding or debilitating in the victory.
Basic types of trading styles
“Develop a trading plan” seems to be the ideal phrase in browsing through trading websites, giving you the breakdowns of how great their system is or which would be best for an individual or the mass. Well come to find out there are a lot of trading styles, sectioned off into categories and then those categories are sprouted out to mini categories. Let’s keep it simple and knowledgeable shall we.
Automated Trade: This sounds uncomplicated enough; carrying out multiple entries and exits, monitoring markets, finding profitable targets, trailing stops and protective stops, and completing the details of orders without any need for manual, a person’s fingers, to type it in. So, basically a computer that does everything for you.
Carry Trade: For those who are not fully aware of carry trading, this system is based on currency of the foreign exchange. Well the stability of that; if there is such a thing. Investors borrow low or high yielding currencies; retracting when the global currency is on the short. What is not so great about this section of trading is the investors may have to pay up, by this I am referring to the foreign exchange rates inconsistency. Since the exchange rate varies the investor might have to pay back with less valuable money on a more expensive bill.
Day Trade: The buying and selling of various financial instruments such as stock, options and futures (futures huh, that stung a little bit). That is the way of day trade. Day traders (sounds like a human killing clan, instead of vampires it’s us) branch off into diverse specialties but their main goal is to make a profit off the difference between the buying and selling price of the item. The significant fad that stands out about day traders amongst their peers, is not working overnight shifts or when the market is closed; hence the term “day trade.”

Why People Trade Forex

admin — Wed, 06 Jan 2010 12:14:35 +0000

In today’s information technology driven economy you can just about trade anything you want. Whether it is currencies, metals, shares, wheat, pork bellies you name it.
Not only can you trade the main security but also in most cases you can trade the derivative of it e.g. Forwards, Futures and Options.
The Forex market is also vital to the general prosperity of the free world economy. Why? Some $1.5 trillion dollars worth of international currencies are bought and sold every single trading day.
It is by far the largest traded market in the world. This volume of trade is equivalent to over six months of trading in the New York Stock Exchange, which has an average daily volume of $10 billion dollars.
Even though the major focus in this country in reference to investing has always been and still is the stock and equity markets, the Forex market is 150 times larger than the New York Stock Exchange.
All financial instruments are commonly referred to as securities regardless of their name. When I mention securities it encompasses everything that can be traded.
The main thing to remember when trading, is first to decide if you are a speculator or investor.
If you are an investor it makes sense for you to know something about the thing you are investing in. It might be that you are in that field already or have a good knowledge base of what you are investing in.
On the other hand if you are a speculator who only intends to hold something for a few hours and are covering many markets, you will not have time to research as much as an investor.
Even as a speculator though, you should know something about what makes that market tick. In the currencies for instance, when the dollar strengthens it can effect all the major currencies at the same time.
In technology shares you might find that the whole sector is strengthening at the same time.
If the interest rates are raised in one country how will that effect the market you are in?
The point in all of this is that I think it is a good idea for people to trade something they either like, have an interest in or at least are familiar with.
For example I would not feel comfortable trading oil because I don’t know what drives the market or who the main players are.
Last but not least, the journey to the road of successful trading will make you confront your deepest fears. Your armor on this journey will be confidence, knowledge and believing that you can achieve your dreams.
Never, never equate your success or failure in the markets with who you are as a person!

Forex Options Trading – Commodity Currency

admin — Tue, 01 Dec 2009 02:29:30 +0000

In forex terminology, commodity forex trading refers to the exchange of a country that depends highly on exports. The countries that have commodity currency are those that have economies that rely chiefly on exporting raw materials to gain income. In a way, their economy depends on the foreign market.

Commodity exchange is probably the closest forex trading or any other speculation stoop to the level of the real economy since it involves the status of tangible goods instead of finances. Learning how to trade with commodity currency entails some knowledge on the economic status of the country that uses the currency to be able to speculate on how much income is derived from exports.

Most countries that have commodity currency are developing countries such as Papua New Guinea, Tanzania and other countries located in Africa and Southeast Asia. But there are also developed countries such as Australia and Canada that are viable for commodity forex trading. In fact, in forex trading, Australian Dollar, Canadian Dollar and New Zealand Dollar are generally considered as commodity currencies.

Another example of commodity currency is South African Rand which relies chiefly on exporting gold. The US Dollar is sometimes considered as a commodity and currency as well.

According to the International Monetary Fund (IMF) World Economic Outlook, there are 53 developing countries and 5 developed countries that depend on commodity exports. On the IMF study, it was shown that real commodity export prices influence the movement of real exchange rates in commodity with currency countries. Whenever a deviation on the real exchange rate on commodity currency countries occurs, it can easily be attributed to the fluctuation of real commodity prices.

The Anatomy of an Option

admin — Tue, 24 Nov 2009 00:15:42 +0000

Any time you read anything about options, it is incumbent upon the author to provide a brief introduction. This article is no exception.
Let’s suppose you are house shopping, but are waiting to hear whether or not the job you are hoping for is actually going to be offered. You find the perfect house, but you cannot afford it unless and until your dream job becomes your real job.
What is sometimes done in real estate is that you buy an option on the house. You pay the seller of the house, say, $500 to hold the house and sell it only to you for $100,000 at your option any time within the next thirty days. (The three underlined numbers are the terms of the agreement and are negotiable.)
If you do not get the job or find something better, you will not buy the house, but you also will not get your $500 back. You paid $500 for the right to buy the house at the agreed upon price any time before your option expires. The seller accepted your $500 and has the obligation to sell you the house at the agreed upon price any time before expiration, if you choose to exercise your option. You paid for the option, so you hold all the cards (except the $500). This is a legal contract.
In the stock and commodities markets, the type of option we just described would be known as a call. A call typically represents 100 shares of a stock. In the commodities markets, a single option contract represents a single futures contract. (For simplicity, from this point forward, I will talk about options on stock. Just remember that the same discussion applies to options on futures.)
Owning a call gives the owner the right to buy 100 shares (usually) of the underlying stock at the agreed upon strike price at or before the expiration date. (I say “usually” 100 shares because, due to splits or acquisitions, there are times when an options contract may represent something other than 100 shares.) Selling a call gives the seller the obligation to sell, if asked, 100 shares of the underlying stock at the agreed upon strike price any time up until the expiration date.
The other kind of option is called a put, and it is exactly the same as a call with one simple difference. A put gives the owner the right to sell 100 shares (again, usually) of the underlying stock at the agreed upon strike price at or before the expiration date. You can think of a put as insurance. No matter how badly the stock price crashes, having a put means that you can sell your stock for the strike price. On the flip side, selling that put means you may be obliged to buy stock at far more than its current market price. An important distinction to always keep in mind: Buying an option gives you rights.
Selling an option gives you obligations. Buying an option cannot cost you more than what you pay for the option. Selling an option can cost you far more than what you receive for selling the option.
Let’s examine the terminology of calls and puts. The underlying is the actual instrument such as a stock or commodity that is being represented by the options contract. In the real estate example, the house would be the underlying. Options are said to be derivatives because their value is directly tied to or derived from that of the underlying. An option has no meaning without an actual asset underlying it. It is the right to buy or sell that underlying asset that gives the option a reason for being and some value.
The strike price is the agreed upon price for which the underlying can be bought or sold under the terms of the option contract. In the real estate example, the strike price was $100,000. The expiration date, obviously, is the date when the option expires. The day after expiration, an option is worthless. This is the single most important fact about options that you must remember. This is why your friends think you are crazy for your interest in options. Unlike a stock, which you can hold forever, an option has a clearly defined shelf life.
One term remains, and that is the premium. The premium is what you pay for the option, when you are the buyer. Or what you receive for an option, when you are the seller. In our real estate example, the premium was $500. That’s what it cost you to hold the right to buy the house any time in that thirty-day period. The last day of the thirty-day period would, again, be the expiration date.
Let’s look at some scenarios and discover how market forces alter the value of an option. Let’s suppose you hold the option to buy the house above, and the next day, a toxic dump is discovered in the backyard of the house. Is the house still worth $100,000? No way.
What’s your option worth now? Very little. Would anyone be interested in buying from you your right to buy that house for $100,000? Unlikely. The owner of the house, however, gets to keep your $500. Yes, he’s stuck with a house he can’t live in or sell, but the premium is his to keep. Small consolation for him, and a small loss for you, but which position would you rather be in?
Let’s look at another scenario, one that will make you feel a little better for the poor homeowner. Instead of a toxic jump, they discover a diamond mine in his rose garden. Aren’t you happy for him now? Well, don’t be. He would share your excitement. You can now buy his house, INCLUDING the diamond mine, for the previously agreed to $100,000. Again, though, he gets to keep the $500 option premium. At least this time he gets to sell his house for the price he had intended. All he has “lost” is the unexpected profits from the diamond mine.
Are you starting to see how tricky it can be an option seller? As the option buyer, you spent exactly $500. Your loss is limited to that $500. No matter what. The seller of an option, on the other hand, has unlimited risk.
Was the real estate option in our example a call or a put? You bought the right to buy the house for $100,000, so, as we mentioned earlier, that’s a call.

The Joy of Options

admin — Mon, 23 Nov 2009 12:24:18 +0000

Owning stock has only two, maybe three, possibilities. The stock goes up. Or the stock goes down. Or, as a third possibility, it does a little of both. If you buy a stock, all you want it to do is go up.
If you sell a stock short or close a position (or consider buying it and then decide not to , all you want it to do is go down. I call this one-dimensional trading. You’re long, you’re short, or you’re flat. Your gains and losses travel up and down the number line you may remember from elementary school in lock step with the movement of the stock. Not only that, but it takes a big move to make a big profit. And a big move against you can mean a big loss. Potentially all the way down to zero.
You need to add a second dimension to your trading. You need more choices than picking a direction and hoping you are right. You need to limit your losses, improve your returns, and increase your flexibility. You need options.
For many people, options are something to avoid, being dangerous, complex, and scary. I would like to introduce you to the joy of options. Any time you think you want to buy a stock, I’d like to get you in the habit of first looking at how you could do more with less using options.
In the stock and commodities markets, the type of option we just described would be known as a call. A call typically represents 100 shares of a stock. In the commodities markets, a single option contract represents a single futures contract. (For simplicity, from this point forward, I will talk about options on stock. Just remember that the same discussion applies to options on futures.)
Owning a call gives the owner the right to buy 100 shares (usually) of the underlying stock at the agreed upon strike price at or before the expiration date. (I say “usually” 100 shares because, due to splits or acquisitions, there are times when an options contract may represent something other than 100 shares.) Selling a call gives the seller the obligation to sell, if asked, 100 shares of the underlying stock at the agreed upon strike price any time up until the expiration date.
The other kind of option is called a put, and it is exactly the same as a call with one simple difference. A put gives the owner the right to sell 100 shares (again, usually) of the underlying stock at the agreed upon strike price at or before the expiration date. You can think of a put as insurance. No matter how badly the stock price crashes, having a put means that you can sell your stock for the strike price. On the flip side, selling that put means you may be obliged to buy stock at far more than its current market price.
An important distinction to always keep in mind: Buying an option gives you rights. Selling an option gives you obligations. Buying an option cannot cost you more than what you pay for the option. Selling an option can cost you far more than what you receive for selling the option.
Let’s examine the terminology of calls and puts. The underlying is the actual instrument such as a stock or commodity that is being represented by the options contract. In the real estate example, the house would be the underlying. Options are said to be derivatives because their value is directly tied to or derived from that of the underlying. An option has no meaning without an actual asset underlying it. It is the right to buy or sell that underlying asset that gives the option a reason for being and some value.
The strike price is the agreed upon price for which the underlying can be bought or sold under the terms of the option contract. In the real estate example, the strike price was $100,000. The expiration date, obviously, is the date when the option expires. The day after expiration, an option is worthless. This is the single most important fact about options that you must remember. This is why your friends think you are crazy for your interest in options. Unlike a stock, which you can hold forever, an option has a clearly defined shelf life.
One term remains, and that is the premium. The premium is what you pay for the option, when you are the buyer. Or what you receive for an option, when you are the seller. In our real estate example, the premium was $500. That’s what it cost you to hold the right to buy the house any time in that thirty-day period. The last day of the thirty-day period would, again, be the expiration date.
We have barely scratched the surface. I say that not to intimidate you, but to make you realize that you only have enough knowledge to be dangerous to yourself. Please do not think that you are ready to go out and buy calls or place spread trades. You are not. You don’t know how an option moves relative to moves in the price of the underlying. You don’t know what time does to the value of an option. You don’t know what volatility is or how it plays into option prices. You don’t know the types of spreads or what they are used for.
Please, please get yourself better educated before you start putting money into option trades. Resist the temptation to buy some cheap options, just to try it out. This is expensive education. There are plenty of advantages to trading options, but it’s still a ruthless market, happy to take your money, your wallet, and your hand if you give it an opportunity. Learn the rules of the game before you put money on the line.
Trading options can be satisfying, rewarding, stimulating, and fun. I invite you to add another dimension to your trading by including options to your repertoire.