Forex Trading

What Is Forex? The foreign exchange market is the “place” where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into euros. The same goes for traveling. A French tourist in Egypt can’t pay in euros to see the pyramids because it’s not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate. The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world. It dwarfs other markets in size, even the stock market, with an average traded value of around U.S. $2,000 billion per day. (The total volume changes all the time, but as of August 2012, the Bank for International Settlements (BIS) reported that the forex market traded in excess of U.S. $4.9 trillion per day.) One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney – across almost every time zone. This means that when the trading day in the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly. Spot Market and the Forwards and Futures Markets There are actually three ways that institutions, corporations and individuals trade forex: the spot market, the forwards market and the futures market. The forex trading in the spot market always has been the largest market because it is the “underlying” real asset that the forwards and futures markets are based on. In the past, the futures market was the most popular venue for traders because it was available to individual investors for a longer period of time. However, with the advent of electronic trading and numerous forex brokers, the spot market has witnessed a huge surge in activity and now surpasses the futures market as the preferred trading market for individual investors and speculators. When people refer to the forex market, they usually are referring to the spot market. The forwards and futures markets tend to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future. What is the spot market? More specifically, the spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, sentiment towards ongoing political situations (both locally and internationally), as well as the perception of the future performance of one currency against another. When a deal is finalized, this is known as a “spot deal”. It is a bilateral transaction by which one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present (rather than the future), these trades actually take two days for settlement. What are the forwards and futures markets? Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead they deal in contracts that represent claims to a certain currency type, a specific price per unit and a future date for settlement. In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves. In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange. In the U.S., the National Futures Association regulates the futures market. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterpart to the trader, providing clearance and settlement. Both types of contracts are binding and are typically settled for cash for the exchange in question upon expiry, although contracts can also be bought and sold before they expire. The forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well. Note that you’ll see the terms: FX, forex, foreign-exchange market and currency market. These terms are synonymous and all refer to the forex market.

Alternative Forms of Trading

What Is Sports Trading?

The simplest explanation I could think of: Sports trading is the practice of placing two bets against each-other, on the same selection, in order to profit. In essence that’s it. Although it’s an extremely broad explanation, in a little more detail… Sports trading is just the term used to refer this kind of behaviour on a betting exchange. Be it Betfair, Betdaq, Matchbook or any other. One way to explain it is: sports trading is just like stock trading. Instead of buying and selling shares of company, we buy and sell bets on sporting events. The real beauty of sports trading is that we don’t care who wins or loses the event. Just if the price moves. Because of this, we don’t have to pick winners to be a winner. A stock traders main aim is to buy low and sell high. The principles are exactly the same in sports, but we lay low and back high. Making a profit, regardless of the result.

How Sports Trading Works

Sports exchanges work just like any other financial markets. Traders from all around the globe use the exchange to place bets with each other. Betfair acts like a referee. By taking real-time information from thousands of football matches, horse races and other sports, Betfair makes sure the winners get paid and the losers pay up. For providing this service, Betfair take a 5% cut on all winning bets. When you place a bet at a traditional bookmaker, you are (almost) always placing a back bet. This means that you are betting that something will happen. By accepting your bet, the bookmaker is effectively placing a lay bet. They are betting against you that your outcome won’t happen. Using a betting exchange such as Betfair, allows us to place both back and lay bets. By doing this multiple times, we can produce a guaranteed profit no matter what the outcome. I’ll show and explain the mechanics of a successful trade in a second. Before I do, keep in mind that betting exchanges are very different to using a bookmaker in the sense that: •they won’t limit or ban wining accounts •you’ll nearly always get a better price

(1) Opening Bet: To make a successful trade in any instance, we have to have a reason we expect the price will move – or at least get both our bets matched. Most sports punters use tipster forums and free capper picks website like Odds Capper and and Betting advice and others. For the sake of this explanation, we will assume we’re very confident the price will move on Mershardal. In this case Mershardal is likely to drift in price, being shorter than it currently is before the start of the race. We open the trade by placing a lay bet at [4.8] 5 minutes before the start. Our lay bet of £100 is fully matched, as seen in the image below. At this stage we merely have a lay bet (liability expressed on the left).

(2) Closing Bet: As expected Mershardal’s price has drifted. This leaves us in the opportune position. We now have a bet that is of ‘value’ when compared to the current market price. Why? Because if we were to lay at the current price, we would have to outlay more liability. Assuming we now expect the price is where is should be, or better still, higher than it should be. We simply need to ‘trade out’ of our position. Closing the initial bets liability (amount we previously stood to lose). Notice we now have a position were we profit should Mershardal win the race, but nothing should the horse loose.

(3) Hedging/Greening: In order to spread our result, be it profit or loss – we need to hedge up. Otherwise known as greening. To do that, I personally use software (it saves extra calculations). Basically, there needs to be an extra lay bet in our example to guarantee a profit. No matter what happens – before the start of the race.

High-Low Binary Option Example

Your analysis indicates the S&P 500 will rally for the rest of the trading day and you to buy an index call option. It’s currently trading at 1,800 so you’re wagering the index’s price at expiration will be above that number. Since binary options are available for many time frames – from minutes to months away – you choose an expiration time or date that supports your analysis. You choose an option that expires in 30 minutes, paying out 70% plus your original stake if the S&P 500 is above 1,800 at that time or you lose the entire stake if the S&P 500 is below 1,800. Minimum and maximum investments vary from broker to broker. Say you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiration determines whether you make or lose money. The price at expiration may be the last quoted price, or the (bid+ask)/2. Each binary options broker outlines their own expiration price rules. In this case, assume the last quote on the S&P 500 before expiration was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. If the price finished below 1,800, you would lose your original $100 investment. If the price expires exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although brokers may have different rules. The profit and/or original investment is automatically added to the trader’s account when the position is closed.

The Upside and Downside

Risk and reward are known in advance, offering a major advantage. There are only two outcomes: win a fixed amount or lose a fixed amount, and there are generally no commissions or fees. They’re simple to use and there’s only one decision to make: is the underlying asset going up or down? In addition, there are also no liquidity concerns because the trader doesn’t own the underlying asset and brokers can offer innumerable strike prices and expiration times/dates, which is an attractive feature. The trader can also access multiple asset classes anytime a market is open somewhere in the world. On the downside, the reward is always less than the risk when playing high-low binary options. As a result, the trader must be right a high percentage of the time to cover inevitable losses. While payout and risk will fluctuate from broker to broker and instrument to instrument, one thing remains constant: losing trades will cost the trader more than she/he can make on winning trades. Other types of binary options may provide payouts where the reward is potentially greater than the risk but the percentage of winning trades will be lower. Finally, OTC markets are unregulated outside the U.S. and there is little government oversight in the case of a trade discrepancy. While brokers often use external sources for quotes, traders may still find themselves susceptible to unscrupulous practices.

Planning Futures

A Proven Approach

We start by clarifying our fee structure and explaining the different ways we can help. Then we analyze your goals and compare them to your current portfolio. Then we recommend an investment strategy designed to meet your risk tolerance. In a number of posts here we will explore different diversificated tools to invest your money in.

What Are Binary Options?

Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides access to stocks, indices, commodities and foreign exchange. These options have a clearly-stated expiration date, time and strike price. If a trader wagers correctly on the market’s direction and price at the time of expiration, he or she is paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment. Advertisement Advertisement The binary options trader buys a call when bullish on a stock, index, commodity or currency pair, or a put on those instruments when bearish. For a call to make money, the market must trade above the strike price at the expiration time. For a put to make money, the market must trade below the strike price at the expiration time. The strike price, expiration date, payout and risk are disclosed by the broker when the trade is first established. For most high-low binary options traded outside the U.S., the strike price is the current price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price. (For more, see What is the history of binary options?)