Forex trading recommendation
Friday, September 29, 2006
Forex Knowledge Base
What does FOREX mean?
FOREX is derived from Foreign Exchange and is the largest financial market in the world.
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What is a Lot?
A standard lot has the following characteristics:
* 1,000 USD
* Leveraged at the rate of 100 to 1
* Total controlled currency of $100,000
A mini lot has the following characteristics:
* 100 USD
* Leverage of 100 to 1
* A total control of $10,000 of the base currency
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What is the interbank?
This originally, as the name implies was simply banks and large
institutions exchanging information about the current rate at which
their clients or themselves were prepared to buy or sell a currency.
INTER meaning between and Bank meaning deposit taking institutions normally made up of banks, large institution, brokers or even the government. The market has moved on to such a degree now that the term interbank now means anybody who is prepared to buy or sell a currency. It could be two individuals or your local travel agent offering to exchange Euros for US Dollars. You will however find that most of the brokers and banks use centralized feeds to insure reliability of quote. The quotes for Bid (buy) and Offer (sell) will all be from reliable sources. These quotes are normally made up of the top 300 or so large institutions. This insures that if they place an order on your behalf that the institutions they have placed the order with is capable of fulfilling the order.
A lot has no expiration date or time restraints due to the automatic roller policy.
For comparison purposes, the lot when trading in the stock market are the number of shares you purchase in one transaction.
In a forex mini-account, the lot or contract size traded are 10,000 of the base currency whereas for a regular forex account, the lot or contract size traded are 100,000 of the base currency. Therefore, the mini-account contract is 1/10th the size of a standard forex contract
My recommendation is when first trading currencies, start trading just 1 lot. This may be more than enough to handle. Once you become more experienced, you can increase the size of your lots according to your trading plan. For instance, one professional trader trades 2 lots if he is trading against the trend and 5 lots if he is trading with the trend
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What is a Pip?
A pip is the smallest unit of price for any foreign currency. For example, for the USD/CHF one point (or pip) equals .0001 Swiss Francs and for USD/JPY, one point (or pip) equals .01 Japanese yen
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What is the base currency?
The base currency is the first currency in a currency pair. This is the currency that the exchange rate is applied to.
For example, the USD is the base currency in the USD/JPY pair; the EURO is the base currency in the EUR/USD pair
----------------------------------------------------------------
What is the interbank?
This originally, as the name implies was simply banks and large
institutions exchanging information about the current rate at which
their clients or themselves were prepared to buy or sell a currency.
INTER meaning between and Bank meaning deposit taking institutions normally made up of banks, large institution, brokers or even the government. The market has moved on to such a degree now that the term interbank now means anybody who is prepared to buy or sell a currency. It could be two individuals or your local travel agent offering to exchange Euros for US Dollars. You will however find that most of the brokers and banks use centralized feeds to insure reliability of quote. The quotes for Bid (buy) and Offer (sell) will all be from reliable sources. These quotes are normally made up of the top 300 or so large institutions. This insures that if they place an order on your behalf that the institutions they have placed the order with is capable of fulfilling the order.
--------------------------------------------------------------------
What are the commonly traded currency pairs?
EUR/USD Euro / US Dollar
GBP/USD Pounds Sterling/ US Dollar
USD/JPY US Dollar / Japanese Yen
USD/CHF US Dollar / Swiss Franc
USD/CAD US Dollar / Canadian Dollar
AUD/USD Australian Dollar / US Dollar
NZD/USD New Zealand Dollar / US Dollar
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Is your money at your forex broker safe?
The quick and dirty answer to this is no. Just ask retail traders whose monies were frozen when Refco went down.
I was reading an article in the Wall Street Journal today that brings up the fact that we as retail traders need more protection. The CFTC or Commodity and Futures Trading Commission have a "segregation" rule which means that brokers must keep client funds separate from the firm's operating funds. This rule only applies to U.S. traders who deposit funds for trading on-exchange futures or options on futures. If you trade over-the-counter derivatives or off-exchange products such as FOREX, there is no rule against brokers mixing your funds in with the firms operating funds. This is what Refco was doing.
So the bottom line is that our money is absolutely not safe and there is nothing that says that a broker firm cannot use your deposit money to operate their business. The unfortunate thing about all of this is that neither Congress or the CFTC have taken any steps to expand the segregation rule to FOREX traders.
This is very disturbing and probably reason enough to only deposit what is absolutely necessary to trade. In addition, if at any time you can withdraw money or profit, for this reason alone, you should do it.
This article was written by FXCM's chief compliance officer so I would be very interested in knowing if FXCM follows their own rules and applies segregation to their client's funds. I'll try to find out.
I sent the following email excerpt to James Sanders, Compliance Officer at FXCM and the author of the Wall Street Journal article I cited:
I read your article in WSJ regarding the "segregation" rule and how Congress nor the CFTC have done anything to apply this rule to FOREX. My questions are:
1. What if anything can we as retail traders do to put pressure on them?
2. Does FXCM apply the segregation rule to funds deposited by your clients for trading FOREX?
James was nice enough to respond to my email and here is his response:
1. You can write to your local Congressional representatives and the Chairman of the CFTC.
2. FXCM keeps customer funds separate from firm operating funds as a matter of practice but this would not provide the funds with any special protection from creditors in the event of a Refco-type collapse.
So even though a firm keeps customer funds separate doesn't mean jack. The creditors will still be entitled to your funds before you are.
------------------------------------------------------------------
What does FOREX mean?
FOREX is derived from Foreign Exchange and is the largest financial market in the world.
------------------------------------------------------------------
What is a Lot?
A standard lot has the following characteristics:
* 1,000 USD
* Leveraged at the rate of 100 to 1
* Total controlled currency of $100,000
A mini lot has the following characteristics:
* 100 USD
* Leverage of 100 to 1
* A total control of $10,000 of the base currency
------------------------------------------------------------------------
What is the interbank?
This originally, as the name implies was simply banks and large
institutions exchanging information about the current rate at which
their clients or themselves were prepared to buy or sell a currency.
INTER meaning between and Bank meaning deposit taking institutions normally made up of banks, large institution, brokers or even the government. The market has moved on to such a degree now that the term interbank now means anybody who is prepared to buy or sell a currency. It could be two individuals or your local travel agent offering to exchange Euros for US Dollars. You will however find that most of the brokers and banks use centralized feeds to insure reliability of quote. The quotes for Bid (buy) and Offer (sell) will all be from reliable sources. These quotes are normally made up of the top 300 or so large institutions. This insures that if they place an order on your behalf that the institutions they have placed the order with is capable of fulfilling the order.
A lot has no expiration date or time restraints due to the automatic roller policy.
For comparison purposes, the lot when trading in the stock market are the number of shares you purchase in one transaction.
In a forex mini-account, the lot or contract size traded are 10,000 of the base currency whereas for a regular forex account, the lot or contract size traded are 100,000 of the base currency. Therefore, the mini-account contract is 1/10th the size of a standard forex contract
My recommendation is when first trading currencies, start trading just 1 lot. This may be more than enough to handle. Once you become more experienced, you can increase the size of your lots according to your trading plan. For instance, one professional trader trades 2 lots if he is trading against the trend and 5 lots if he is trading with the trend
---------------------------------------------------------------
What is a Pip?
A pip is the smallest unit of price for any foreign currency. For example, for the USD/CHF one point (or pip) equals .0001 Swiss Francs and for USD/JPY, one point (or pip) equals .01 Japanese yen
---------------------------------------------------------------
What is the base currency?
The base currency is the first currency in a currency pair. This is the currency that the exchange rate is applied to.
For example, the USD is the base currency in the USD/JPY pair; the EURO is the base currency in the EUR/USD pair
----------------------------------------------------------------
What is the interbank?
This originally, as the name implies was simply banks and large
institutions exchanging information about the current rate at which
their clients or themselves were prepared to buy or sell a currency.
INTER meaning between and Bank meaning deposit taking institutions normally made up of banks, large institution, brokers or even the government. The market has moved on to such a degree now that the term interbank now means anybody who is prepared to buy or sell a currency. It could be two individuals or your local travel agent offering to exchange Euros for US Dollars. You will however find that most of the brokers and banks use centralized feeds to insure reliability of quote. The quotes for Bid (buy) and Offer (sell) will all be from reliable sources. These quotes are normally made up of the top 300 or so large institutions. This insures that if they place an order on your behalf that the institutions they have placed the order with is capable of fulfilling the order.
--------------------------------------------------------------------
What are the commonly traded currency pairs?
EUR/USD Euro / US Dollar
GBP/USD Pounds Sterling/ US Dollar
USD/JPY US Dollar / Japanese Yen
USD/CHF US Dollar / Swiss Franc
USD/CAD US Dollar / Canadian Dollar
AUD/USD Australian Dollar / US Dollar
NZD/USD New Zealand Dollar / US Dollar
---------------------------------------------------------------------
Is your money at your forex broker safe?
The quick and dirty answer to this is no. Just ask retail traders whose monies were frozen when Refco went down.
I was reading an article in the Wall Street Journal today that brings up the fact that we as retail traders need more protection. The CFTC or Commodity and Futures Trading Commission have a "segregation" rule which means that brokers must keep client funds separate from the firm's operating funds. This rule only applies to U.S. traders who deposit funds for trading on-exchange futures or options on futures. If you trade over-the-counter derivatives or off-exchange products such as FOREX, there is no rule against brokers mixing your funds in with the firms operating funds. This is what Refco was doing.
So the bottom line is that our money is absolutely not safe and there is nothing that says that a broker firm cannot use your deposit money to operate their business. The unfortunate thing about all of this is that neither Congress or the CFTC have taken any steps to expand the segregation rule to FOREX traders.
This is very disturbing and probably reason enough to only deposit what is absolutely necessary to trade. In addition, if at any time you can withdraw money or profit, for this reason alone, you should do it.
This article was written by FXCM's chief compliance officer so I would be very interested in knowing if FXCM follows their own rules and applies segregation to their client's funds. I'll try to find out.
I sent the following email excerpt to James Sanders, Compliance Officer at FXCM and the author of the Wall Street Journal article I cited:
I read your article in WSJ regarding the "segregation" rule and how Congress nor the CFTC have done anything to apply this rule to FOREX. My questions are:
1. What if anything can we as retail traders do to put pressure on them?
2. Does FXCM apply the segregation rule to funds deposited by your clients for trading FOREX?
James was nice enough to respond to my email and here is his response:
1. You can write to your local Congressional representatives and the Chairman of the CFTC.
2. FXCM keeps customer funds separate from firm operating funds as a matter of practice but this would not provide the funds with any special protection from creditors in the event of a Refco-type collapse.
So even though a firm keeps customer funds separate doesn't mean jack. The creditors will still be entitled to your funds before you are.
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