Some pointers I picked up from this trading simulator game that I’m currently having fun with:
During Financial Crisis:
- Stock market declines
- real estate tranx freezes
- retail sector may suffer high losses or even bankruptcy.
- markets have a more pessimistic outlook
- investors more risk averse
Forex on the other hand, can remain profitable even in worst of times, because they are always traded in pairs. When the value of one currency declines, the other rises.
Benefits of forex trading:
- Round the clock (24hr) trading, you can trade anytime you feel like it
- low entry costs
- Easy rules (most traders work mainly with just 8, some 10 (G10))
- Value of currencies affected by significantly less factors than value of stocks. (Easier to follow and keep track)
- Stock market daily turnover – ~100s billions. Forex daily turnover – 5 TRILLION. (more liquid)
The price of a currency is more or less a reflection of what the market thinks about the current and future condition of a country’s economy compared to other economies.
Easy illustration of forex mentality when trading:
When you buy U.S dollars with British Pounds, you are in fact buying shares of the U.S economy, expecting U.S economy to outperform the U.K economy. (like buying shares, you hope the shares with appreciate).
Majors – Developed economies, highly liquid, low spreads. Stable, predictable as opposed to small cap equities and stocks.
E.G – EUR/USD | USD/CHF | GPB/USD | EUR/JPY | USD/JPY | USD/CAD
Crosses – good for diversification, does not include U.S dollar.
Exotics – include a currency from a developing country. Extremely illiquid, high spreads. Examples include HKD, SGD.
EUR/USD 1.23 means one euro is worth 1.23 US dollars. (Base/Quote)
Price Interest Point (PIP) – Smallest change in a currency pair. Typically the forth or fifth decimal point.
Spread – The SMALLER the spread, the MORE LIQUID the currency.
Selling price (BID) – 1.2302 Buying price (ASK) – 1.2304
Spread = Difference between sell quote and buy quote in pips (Spread here = 2 pips)
Some influence of currency rates – Interest rates, Quant Easing, GDP, inflation, deflation, employment stats, political stability, military conflicts
Economic factors like interest rates and inflation accurately and instantly released by sites like Reuters, Economist, Bloomberg.
When you spot a bullish market, you want to BUY currencies for less, and sell for higher currency price. (Green indicator/candlestick) (long position)
When you spot a bearish market, you will want to short the currency. Means borrow the currency to sell first, then when price of currency depreciate you buy it back at the lower rate and return to the broker, effectively earning the difference. (Red indicator/candlestick)