Exchange Rate Regimes

ok boys and girls, today i am going to copy and paste from a book "primer of foreign exchange" this is super boring and super dry, you can read if you cant sleep at night. why do we need to know all these? acturally we dont need to know about all these, these are just some information from history that i write in my blog so that i can refer to next time if i need. i always thought there is only floating or fixed, i do come across other like crawling by other economist but i dunno there are so many around.

Exchange Rate Regimes
Global trading require an effective international monetary system. A good monetary system will facilitate international trade among nations. There are a number of exchange rate regimes in which different foreign exchange rates are determined and how goverments can affect exchange rates.

Currency regimes around the world differ and do not follow a fixed pattern. These are some typical currency regimes as defined by IMF.

Exchange agreements with no separate legal tender
The currency of another country circulate as the sole legal tender. in such regimes the country may belong to a monetary or currency union in which the same legal tender is shared by the other members of the union.
examples are east timor, euro zone, cameroon and senegal.

Currency board arrangements
A monetary regime based on a legal commitment to exchange domestic currency for a specific foreign currency at a fixed exchange rate.
examples are hong kong and brunei

Fixed peg arrangement (different exchange rate margins)
the country pegs its currency at a fiexed rate to major currency, or a basket of curriencies, allowing the exchange rate to fluctuate within different margins around a central rate.
example are UAE, fiji,latvia,denmark and cyprus


crawling pegs
the currency is adjusted periodically in small amounts at a fixed preannounced rate or in response to changes in selective quantiative indicators
examples are bolivia, tunisia and nicaragua

managed floats with no preannounced path for the exchange rate
the monetary authority influences the movements of the exchange rate through active intervention in the foreign exchange market without specifying or committing to a preannounced path for the exchange rate
examples are india, indonesia, thailand, pakistan, argentina and czech

independent floating
the exchange rate is market determined, with any foreign exhcnage intervention aimed at moderating the rate of change and preventing undue fluctuations in the exchange rate rather than at establishing a level for it.
examples are brazil, canada, philippines, UK, US, japan.



The European Union
On January 1 1999, the euro became the only legal tender for EU members in the eurozone. TO ensure the stability of the new cuyrrency system, the participating countries had to adhere to a set of criteria. These are the Maastricht Criteria, named after the city where they were negotiated, Maastricht in the Netherlands.



The Maastricht Treaty

Inflation
cannot be higher than 1.5% above the average inflation rate of the 3 EU countries with the lowest individual inflation rates.

Long term interest rates
cannot be higher than 2% above the interest rates of the 3 countries with the lowest individual interest rates

debt/GDP ratio
a country debt cannot be greter than 6% of gross demestic product (GDP). the budgetary deficit must either be lower than 3% of national income, or be falling and almost have reached 3%, or be of a transitory nature. the deficit must also be lower than 60% of national income, or be galling at a sufficient rate towards the 60% mark.

exchange rates
the exchange rates of the national currency must have stayed within the normal boundaries of the exchange rate of the EU countries, also called the european monetary system (EMS) for 2 years. the country must have been a member of EMS for the same period

International Monetary Fund

The International Monetary Fund (IMF) is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rates and the balance of payments. It is created in created in July 1944 and its goal is to stabilize international exchange rates. It also offers highly leveraged loans mainly to poorer countries. It manages a fund contributed by all the countries, this fund can be borrowed by countries with payment imbalances.

The main reason for establishing the IMF is to discourage "beggar thy neighbor" exchange rate policies. Such policies that seeks benefits for one country at the expense of others. Such policies attempt to remedy the economic problems in one country by means which tend to worsen the problems of other countries.

Article IV, Section 1 paragraph iii of the IMF fund Articles of Agreement stipulates that each member shall

"avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain unfair competitive advantage over other members"

IMF members are free to pick fixed rates, floating rates or any currency regime in between. It is also true that members countries are expected and permitted to intervene in exchange markets and counter disorderly market conditions. But what each member should not do is seek to maintain the "wrong" exchange rate by large scale prolonged exchange market intervention in one direction. Countries maintaining fixed rates can intervene if it is of short duration, or it is on small scale, or if it is one direction or another. but they cannot violate all three simultaneously.

A country cannot be "manipulating" if it has maintained the same fixed parity over an extended period, eg China. Real effective rates has to be evaluated against changing balance of payments.

The exchange rate system needs to be concerned with both overvalued and undervalued exchange rates. International codes of conduct for exchange rates policy are needed to enforce members. The IMF is charge with the responsibility for overseeing international monetory system.. without them there will be a free for all that is in no one interestes. all the economies depend so heavily on access to international markets.

As i was researching on IMF, i read a lots of negative comments on IMF directions and doings.This leads me to suspect that the IMF maybe is another US consiracy theory or another wolf in sheep wool "helping" those poor and in need.

Argentina experienced a catastrophic economic crisis in 2001, which some believe to have been caused by IMF-induced budget restrictions — which undercut the government's ability to sustain national infrastructure even in crucial areas such as health, education, and security — and privatization of strategically vital national resources. Others attribute the crisis to Argentina's misdesigned fiscal federalism, which caused subnational spending to increase rapidly. The crisis added to widespread hatred of this institution in Argentina and other South American countries, with many blaming the IMF for the region's economic problems

In 1978, one year after Jamaica first entered a borrowing relationship with the IMF, the Jamaican dollar was still worth more on the open exchange than the US dollar; by 1995, when Jamaica terminated that relationship, the Jamaican dollar had eroded to less than 2 cents US. Such observations lead to skepticism that IMF involvement is not necessarily helpful to a third world economy.

Equilibrium

hello everyone

ok today i am going to talk abt equilibrium exchange rate. even my tennis coach weber teaches his tennis using a equilibrium theory. hot/cold, high/low, ying/yang, flat/spin, etc. So what excatly is equilibrium all about?

Equilibrium does not only apply to econoimics and finance, equilibrium is all around us in our everyday lifes. If you bath and you feel that the water is cold, what you do? you add hot water to balance the tempreture until you feel comfortable. if you feel you overspent, then wat you do? you spend less and save more. if you execerise intensively, you will rest. if you eat a lot during lunch, you will eat less during dinner. so in a way, there is always a balance in everything we do.

SO now what is a equilibrium exchange rate?

The exchange rate between two currencies is like a price like any other. Its movement enables the two economies to archive trade and payment balance. If one country's exchange rate is overvalued (if a unit of its currency is worth too many units of the other currency), its export become more expensive in the foreign currency, while imports become cheaper in its own currency. Therefore export volumes tend to decline and imports volumes to increase, eventually the trade balance moves into deficit and unemployment rises. Conversely, when a country lowers its exchange rates, exports become cheaper and increase,while imports are decline. The trade balance improves but real income is lowered due to higher internal prices.

The correct "equilibrium rate" for the exchange rate at any one time is that which enables an economy to combine full employment of productive resources simultaneously with balance of payments equilibrium. A higher exchange rate generates overseas deficits and uncmployment, a lower exchange rate build up excessive foreign currency reserves and domestic inflation.

The correct "equilibrium rate" varies in value over time. The variety of factors (trade balance,productivity, etc) ensure that the "equilibrium rate" changes with the years. There are a number of theories and methods to calculate the "equilibrium rate", which i wont discuse about it now. becoz i dun realli think it is important and it wont help us to make money, then y bother abt it rite? The monetory authorites wont tell us how they calculate anyway. aiya dun really need to know this in details, all we need to know such a equilibrium rate exist. hehe

Rules of the Game

Rules of the game

Over the past century, we had seen a evolution in international monetary policy, from the classic gold standard of the 19th century, to the pegged exchange rate known as Bretton Woods in 1944, and now to the floating exchange rate system that began in the early 1970.

The floating rate system was the only system compatible with the separate macro economics of nation and financial markets. Countries tend to place domestic economics priorities ahead of external economics means that exchange rates needs to be more flexible to equilibrate international capital movements.

After a decade of floating exchange rates, policymakers reduce exchange rates volatility either by intervention to keep rates within target zones, or by forming regional currency such as the euro. A well international financial system may be beneficial for gains from international trades, it also may be able to transfer macroeconomics shocks from one nation to another.

Below is seven separate international financial systems of the last century, each with their own set of rules:

1. International Gold Standard, 1879 - 1913
2. Bretton Woods Agreement, 1945
3. Fixed Rate Dollar Standard, 1950 - 1970
4. Floating Rate Dollar Standard, 1973 - 1984
5. Plaza Louvre Intervention Accords and Floating Rate Dollar Standard, 1985 - 1996
6. European Monetary System, 1979
7. The European Monetary System as a "Greater DM" Area, 1979 - 1992

Exchange rates were too important to be left to market forces, so intervention was deemed appropriate to smooth disorderly markets. Better policy coordination was required. As a results, since 1985 a new set of rules has evolved, commonly known as "Rules of the Game".These rules emphasizin the role of exchange markets intervention and macroeconomic policy coordination.

The international Gold Standard, 1879 - 1913
- Fix an official gold price and allow free convertibility between domestic money and gold at that price.

Bretton Woods Agreement, 1945
- Fixed an official par value for domestic currency in terms of gold.
- Keep the exchange rate pegged within 1 percent of its par value.
- Offset payments imbalances by use of country reserves
- Each member to pursues its own price level

Fixed Rate Dollar Standard, 1950 - 1970
- Fix an official par value for domestic currency in terms of USD and keep the exchange rate within 1 percent.

US
- Remain passive in the foreign exchange market and practice free trade.
- Pursue an independent monetary policy that establishes a stable price level for tradable goods.

Floating Rate Dollar Standard, 1973 - 1984
- Smooth short term variability in the dollar exchange rate, but do not commit to an official or long term exchange rate
- Modify domestic monetary policy to support major exchange rate interventions, reducing the money supply when the national currency is weak against USD and expanding the money supply when the national currency is strong
- Set long run national monetary and price level targets independently of US. Let the exchange rate adjust over the long run to offset these differences.

US
- Remain passive in the foreign exchange market. Practice free trade without balance of payments or exchange rate target.
- Pursue a monetary policy independent of the exchange rate or policies in other countries, thereby not striving for a common, stable price level for tradable goods.

Plaza Louvre Intervention Accords and Floating Rate Dollar Standard, 1985 - 1996

Germany, Japan, US
- Set broad target zones for USD/DM and USD/JPY exchange rates . Do not announce the agreed upon central rates, and allow for flexible zonal boundaries
- Central banks intervene collectively but infrequently to reverse short run exchange rate trends that threaten a zonal boundary. Signal the collective intent by anouncing rather then hiding intervention
- Sterilize the immediate impact of exchange market intervention by not adjusting short term interest rates
- Each G3 country aim its monetary policy toward stable price, which anchorts world price level and reduce drift in exchange rate target zones.

Other countries
- Support and do not oppose interventions by the G3 to keep the USD within its target zone limits.

European Monetary System, 1979
All member countries
- Fix a value for each exchange rate in terms of the European Currency Unit
- Keep exchange rates stable in the short run by limiting movements within 2.25% on either side of the central rates
- When an exchange rates threatens to break a limit, the strong currency bank must lend freely to the weak curreny central bank to support the exchange rates
- Adjust the par value only if necessary to realign national price levels, and with the collective agreement of the EMS countries
- Work towards national maroeconomic polices that leads to stable values for exchange rates

The European Monetary System as a "Greater DM" Area, 1979 - 1992
All Members
- Intervene inside the parity bands to stabilize currency values
- Adjust national monetary growth and interest rates to support exchange market interventions.
- Remains passive in the foreign exchange market with respect to other EMS countries
- Sterilize the effect of official intervention. Set German monetary policy as anchor for EMS price level.

If we want to be profitable in the FX markets, we need to understand internation money markets and how they evoled. By studying history we will have a much clearer picture.

Source: Adapted from Ronald I Mckinnon, "The Rules of the Game: International money in Historical Perspective, "Journal of Economic Literature 31 (Mar 1993) Page 32

Foreign exchange limits

Hello everyone

Today i am going to talk about a very important topic. i believe this is very important to forex trading in general. if i use one word to describe forex and that is "Economics", then i can also use one word to describe economics. and that word is "Trade". Economics is all about trading between different countries, and this is very important why we must all understand what is trading between countries means for us in trading FX. To illustrate my point, I will give a example of Singapore and Malaysia. The commodities here will be Pirated CD from Malaysia and New water from Singapore. The exchange rate will be 1SGD : 2RM. This example is not real and this is just for easy explanation only, who the hell needs pirated CD, but it is nevertheless a very important "commoditity" from our neighbour Malaysia.

The exchange rate is 1SGD : 2RM

Local prices for each commodity in each country.


@Singapore in SGD
Prices for Singapore traders, after converting malaysia prices from RM to SGD and comparing with local Singapore prices.


For Singapore traders
CD is cheaper in Malaysia then in Singapore. Singapore will import cheaper CD from Malaysia, selling them at Singapore to earn a higher profit.

Water is more expensive in Malaysia then in Singapore. Singapore will export New water from Singapore to Malaysia, selling them at Malaysia to earn a higher profit


@Malaysia in RM
Prices for Malaysia traders, after converting Singapore prices from SGD to RM and comparing with local Malaysia prices.



For Malaysia traders
Malaysia traders will find water cheaper in Singapore as compared to buying them at Malaysia. Malaysia will import New water from Singapore and sell them at Malaysia to earn a higher profit.

So therefore, a proftiable 2 way trade occurs between Singapore and Malaysia. Singapore import CD from Malaysia, export water to Malaysia. At the same time, Malaysia will import water from Singapore.

Ok everyone clear and understand what i just said? you need to because if you dont understand what i said eariler, then you surely wont understand what i am going to say next. so go and read what i just said on top again. if you are ready then lets proceed!



Money Value
If the money value of Singapore import of CD is equal to Malaysia import of Water, then we have balance trade. If not, the imbalance will cause the exchange rate to shift.

If Malaysia wanted 10 million worth of Water but Singapore is only willing to offer 9 million worth of water. The excess demand of Singapore Water and no supply causes the exchange rate to increase to maybe 1SGD :2.5RM, What will happen next is due to the shift in the exchange rate. Singapore water will cost more for Malaysia traders, and they will import less water from Singapore. At the same time, CD will become cheaper for Singapore and Singapore will import more CD from Malaysia.

How far can the exchange rate go? Are there any limits on its movement? The answer is that the range of the exchange rate movement can only move in a range that can offer profitable two way trading between Singapore and Malaysia. If both commodities were cheaper in Malaysia, then trade would only flow in only one direation: from Malaysia to Singapore. Lets take a closer look at this with numbers.





if lets say the exchange rate now change to 1SGD : 5RM
Here is the new price list for Singapore Traders



As you can see from the price list after the change in exchange rate. Now both commodities are cheaper in Malaysia. Singapore will import both commodities from Malaysia and thus one way trade will occur. From Malaysia to Singapore.


if lets say the exchange rate now change to 1SGD : 1RM
Here is the new price list for Singapore Traders



As you can see from the price list after the change in exchange rate. Now both commodities are cheaper in Singapore. Malaysia will import both commodities from Singapore and thus one way trade will occur. From Singapore to Malaysia.



I hope you understand what i just said because if we wish to be profitable in FX, we need to understand what we are dealing with. now as i mention eariler FX is economics and economics is internation interaction and trading. We say that the exchange rate must lie between the limits in which profitable two way trade can take places between the two countires. It is not like the exchange will not go beyond the limits in future, unless the economy of the countries we are trading completely crashed, we will not expect to see exchange rate going beyond the limits. Situations that would cause such a movement could not happen without people knowing about it.

Currency correlation between Aud Nzd and Eur Chf

Hello everyone

A little update about myself, i just been retrenched from my previous job and i have just started my new job with NCS. I am still waiting for their clearence. without their clearence i cant do anything, and so i am basically doing nothing everyday for the past 2 months here. everyday reached late go home early, whole day do nothing but read my book and surf internet.
This is also why i been updating my blog so often, i cant waste my time here, so i bought my books and do my reseach here, people here think i am crazy. but i dun care abt them la. i keep writing my economics theory here in my blog.
life soooooo shiok here! if only i can do this kinda job everyday, then i no need to trade already, everyday i will love going to work.

ok now talk about forex correlationship
If you have been checking out currency rates or looking at forex charts, you would have noticed a strange similarities between Aud/Nzd and Eur/Chf. When ever Aud go up, Nzd will also go up. When ever Eur go down, Chf will also go down. isnt this strange? both are different countires but their correlation is almot >90%. when you look at them from a chart, it is almost like they are 2 mirror reflections.
Why is this so? i will try to explain this now.

Lets first start by saying a bit about history first. after the breaking of Bretton woods, which is a fix rate. Swiss Fran initally pegged itself to France Fran during the late 1970s. but shortly during 1980s, Swiss Fran then pegged itself to German Mark. After the formation of the Eur. Swiss pegged itself to Eur now.

Why does the Swiss Fran keep swithing pegging? from France Fran to German Mark and eventually now to Euro. The answer is logical and simple. It is because of Trade.
A example will be fisher man exchanging fish with farmers for crops. trade is the main reason why humans will gather together and live close to one another. this is how important trade is to mankind, in fact this is the reason why civilaization was created.

It pegged its currency firstly to France fran becuase France was then Swiss biggest trading partner. Then German became Swiss biggest trading partner, and now eventually it is the Euro as Swiss is right in the middle of Euro zone. It is the same reason too why Aud and Nzd have such strong currency correlation too. The strong currency relationship is due to the strong trading relationship between the two countries.

Now you might ask. so what if Aus is NZ main trading partner? why does it affect the currency rates? Well being their main trading partner ,it has a huge affect on the currency rates. This is because everytime aus wish to trade with nz. it must first check the currency rates. (read my another posting about Exchange limits). If their currency rates are being kept pegged together and their movement is very smiliar to one another. then the currency rates movement will not be a problem or an barrier whenever they wish to trades. To archieve this type of correlationship, the countries involved must be commited to maintain such a relationship, actions need to be done by the respective central banks to maintain the rates and make sure it does not go out of equilibrium.

A country will tend to trade primarly with neighbouring countries. Transport cost will means that a country will trade more with its neighbours and less with distand countries. The profits of trading are reduce by transportation cost. Transportation is a obstacle to trade.

if two countries become mutually dependent on each other for important resources and commodities, then it becomes more diffcult for them to separate their economics against each other. Because extensive trade relations require frequent contacts.



Ok now comes the next questions, If their trading relationship is so close and their currecny movement is almost the same, then why not just form one currency? why still need two different currency?

Ok to answer this question lets again go back to history.
Shortly after Bretton woods, the European Monetary System was formed (EMS). Until 1992 there were 9 full members (Belgium, Denmark, France, Ireland, Italy, Germany, UK, Netherlands and Luxembourg) Members agreed to maintain the exchange rates within one another.

The EMS Bundesbank was tightening rates in 1991-92 to tackle inflation, just as UK was entering a recession. The conflict between the EMS raising rates to tackle inflation and UK wish to lower rates to tackle recession, eventually force UK to leave EMS and return sterling to a floating exchange rate. Italy which was encountering similar problems followed UK a few days later.

There are lots of advantages of a single currency between close trading relationship countries but one huge disadvantage remains. Individual countries would not be able to use monetary policy or exchange rates to deal with different economic circumstances during business cycle.

a bit chim to understand becoz i just copied from economics textbook and never really rephrase them in lay man easy to understand terms.
but should be able to understand la, coz its simple logic nothing very difficult hehe

Understanding the Enermy

Hello everyone

After the previous few bullshit postings, people must be thinking that i am some kinda childish bo liao nutcase. Maybe i am. Ok so now the self proclaim xiao guru think he should give some "guru" talks.

To be profitable in the FX market, we must first understand what FX is all about.
FX is all about economics, it is very boring and dry so i wont go into too much details, and i am keeping things very simple. my views are based on my own trading theories research and i ignore other textbook theories/economics models that are not
helpful in my research. i am not an expert in economics or finance, anyone thinks i am not correct in any way, do let me know. i am of course not perfect. this is just my own understanding of the fx market.



What is FX?
Unlike the various bond and equity markets, the Forex market is not generally utilized as an investment medium. While speculation has a critical role in its proper function, the lion’s share of Forex transactions are done as a function of international business.

A brief history of FX.
Gold standard > Bretton woods > flexible "free float" exchange (current)
Each central banks determine its own interest rates and monetary policies, and lets their currency float in the exchange.Some countries have a semi peg currency

Why is fixed forex exchange rates policy like bretton woods and gold standard eventualy removed?
The reasons to fixed or peg a currency are linked to currency stability. However a lack of monetery and economics flexiblity proves too rigid and often leads to speculative attacks. while it did work at that point of time, but as times goes by, different countires undergo different economics cycle, conflicts and events arose and eventually major players involved in the agreeement will break off as history had shown. eg Bretton woods, Gold standard, etc

Why is a flexible foreign exchange rate prefered?
Allowed respective monetary authorities to follow more country independent fiscal polices to look into their current account imbalances. Using the flexible currency rates to absorbe or transfer financial shocks and unexpected events, monetary authorities aims to creating equilibrium within the country and in the international market.

Although our current foreign exchange is call the flexible exchange rate system, this does not mean that monetary authorities and goverment remained on the side lines and do nothing. In fact the monetary authorities and goverment had intervened heavily in the foreign exchange market, buying and selling foreign exchange in order to influence the movement in the exchange rates. We do not know why or when goverment intervene. Could be 101 reasons, they might think the currencies is too high/low/volatile. All we know is their role is to ensure that their country exchange rates is stable and they do intervene frequently.

What is the structure of the FX markets?
Fed > Central banks > Tier 1 banks > Tier 2/ECN > Market Makers/Brokers/Tier 3 banks

What is the role of the central banks?
The main role of the central banks is to provide liquidity to daily transactions, and to ensure that the country currency is not too volatile or over/under valued. To prevent the currency from being attack by speculators or hedge funds. Based on the current economics situations, central banks decide on the country interestes rates. tackling issues like inflations, deflations, balanceof payment, equilibrium, etc. Banks perform such tasks by directly intervening in the currcency market, buying/selling their own currency. To do this they need large amount of reserve/gold. This is why each central bank hold such large amount of reserve in gold or USD.

Who are the main players of FX? why does FX curencies flactuate?
They are of course the central banks, hedge funds, goverment and normal daily tractions mostly by internation business transactions resulted in a random movement of intraday exchange prices based on supply and demand.

There are serveral theories about the movement of curriencies such as interest rates, purchasing power parity, economics data, events, etc. I feel i don't need to know in detail as these are just theories, not really helpful in trading as there are all based on hind sight or long term.

FX market being so important to a country economics, why does banks/brokers even allow non-bank participant like me to speculate on it? doesnt this causes unnecessary movement and volalitiy?

As a byproduct of transacting all this business, bank developed the ability to speculate on the future of currency rates. Utilizing a better understanding of the market, a bank could quote a business a spread on the current rate but hold off hedging until a better one came along. This process allowed the banks to expand their net income dramatically. The unfortunate consequence was that liquidity was redistributed in a way that made certain transactions impossible to complete.It was for this reason and this reason alone that the market was eventually opened up to non-bank participants. The banks wanted more orders in the market so that
a) They could profit from the less experienced participants (only 10% of traders win)
b) The less experienced participants could provide a better liquidity distribution for execution of international business hedge orders.
Initially only megacap hedge funds (such as Soros’s and others) were permitted, but it has since grown to include the retail brokerages and ECNs.

Ok thats all for now, i will add on more here if i find something useful. I leave you with this quote from Sun Tzu Art of War

"If you know the enemy and know yourself, you need not fear the result of a hundred battles".

The 5 Steps to becoming a trader

Hello all

This is a very meaningful article i read. would like to share with everyone
believe me, i am currently walking these steps. hope i can reach the top.

The 5 Steps to becoming a trader

Step One: Unconscious Incompetence.

This is the first step you take when starting to look into trading. you know that its a good way of making money because you've heard so many things about it and heard of so many millionaires. Unfortunately, just like when you first desire to drive a car you think it will be easy - after all, how hard can it be? Price either moves up or down - what's the big secret to that then - lets get cracking!

Unfortunately, just as when you first take your place in front of a steering wheel you find very quickly that you haven't got the first clue about what you're trying to do. You take lots of trades and lots of risks. When you enter a trade it turns against you so you reverse and it turns again .. and again, and again.


You may have initial success, and thats even worse - cos it tells your brain that this really is simple and you start to risk more money.


You try to turn around your losses by doubling up every time you trade. Sometimes you'll get away with it but more often than not you will come away scathed and bruised You are totally oblivious to your incompetence at trading.

This step can last for a week or two of trading but the market is usually swift and you move onth the next stage.

Step Two - Conscious Incompetence

Step two is where you realise that there is more work involved in trading and that you might actually have to work a few things out. You consciously realise that you are an incompetent trader - you don't have the skills or the insight to turn a regular profit.

You now set about buying systems and e-books galore, read websites based everywhere from USA to the Ukraine. and begin your search for the holy grail. During this time you will be a system nomad - you will flick from method to method day by day and week by week never sticking with one long enough to actually see if it does work. Every time you come upon a new indicator you'll be ecstatic that this is the one that will make all the difference.

You will test out automated systems on Metatrader, you'll play with moving averages, Fibonacci lines, support & resistance, Pivots, Fractals, Divergence, DMI, ADX, and a hundred other things all in the vein hope that your 'magic system' starts today. You'll be a top and bottom picker, trying to find the exact point of reversal with your indicators and you'll find yourself chasing losing trades and even adding to them because you are so sure you are right.

You'll go into the live chat room and see other traders making pips and you want to know why it's not you - you'll ask a million questions, some of which are so dumb that looking back you feel a bit silly. You'll then reach the point where you think all the ones who are calling pips after pips are liars - they cant be making that amount because you've studied and you don't make that, you know as much as they do and they must be lying. But they're in there day after day and their account just grows whilst yours falls.

You will be like a teenager - the traders that make money will freely give you advice but you're stubborn and think that you know best - you take no notice and overtrade your account even though everyone says you are mad to - but you know better. You'll consider following the calls that others make but even then it wont work so you try paying for signals from someone else - they don't work for you either.


You might even approach a 'guru' like Rob Booker or someone on a chat board who promises to make you into a trader(usually for a fee of course). Whether the guru is good or not you wont win because there is no replacement for screen time and you still think you know best.


This step can last ages and ages - in fact in reality talking with other traders as well as personal experience confirms that it can easily last well over a year and more nearer 3 years. This is also the step when you are most likely to give up through sheer frustration.

Around 60% of new traders die out in the first 3 months - they give up and this is good - think about it - if trading was easy we would all be millionaires. another 20% keep going for a year and then in desperation take risks guaranteed to blow their account which of course it does.


What may suprise you is that of the remaining 20% all of them will last around 3 years - and they will think they are safe in the water - but even at 3 years only a further 5-10% will continue and go on to actually make money consistently.


By the way - they are real figures, not just some ive picked out of my head - so when you get to 3 years in the game dont think its plain sailing from there.


Iv had many people argue with me about these timescales - funny enough none of them have been trading for more that 3 years - if you think you know better then ask on a board for someone who's been trading 5 years and ask them how long it takes to become fully 100% proficient. Sure i guess there will be exceptions to the rle - but i havent met any yet.


Eventually you do begin to come out of this phase. You've probably committed more time and money than you ever thought you would, lost 2 or 3 loaded accounts and all but given up maybe 3 or 4 times but now its in your blood

One day - im a split second moment you will enter stage 3.

Step 3 - The Eureka Moment

Towards the end of stage two you begin to realise that it's not the system that is making the difference. You realise that its actually possible to make money with a simple moving average and nothing else IF you can get your head and money management right You start to read books on the psychology of trading and identify with the characters portrayed in those books and finally comes the eureka moment.

The eureka moment causes a new connection to be made in your brain. You suddenly realise that neither you, nor anyone else can accurately predict what the market will do in the next ten seconds, never mind the next 20 mins.


Because of this revelation you stop taking any notice of what anyone thinks - what this news item will do, and what that event will do to the markets. You become an individual with your own method of trading


You start to work just one system that you mould to your own way of trading, you're starting to get happy and you define your risk threshold.

You start to take every trade that your 'edge' shows has a good probability of winning with. When the trade turns bad you don't get angry or even because you know in your head that as you couldn't possibly predict it it isn't your fault - as soon as you realise that the trade is bad you close it . The next trade or the one after it or the one after that will have higher odds of success because you know your system works.


You stop looking at trading results from a trade-to-trade perspective and start to look at weekly figures knowing that one bad trade does not a poor system make.


You have realised in an instant that the trading game is about one thing - consistency of your 'edge' and your discipline to take all the trades no matter what as you know the probabilities stack in your favour.

You learn about proper money management and leverage - risk of account etc etc - and this time it actually soaks in and you think back to those who advised the same thing a year ago with a smile. You weren't ready then, but you are now. The eureka moment came the moment that you truly accepted that you cannot predict the market.

Step 4 - Conscious Competence

You are making trades whenever your system tells you to. You take losses just as easily as you take wins You now let your winners run to their conclusion fully accepting the risk and knowing that your system makes more money than it looses and when you're on a loser you close it swiftly with little pain to your account

You are now at a point where you break even most of the time - day in day out, you will have weeks where you make 100 pips and weeks where you lose 100 pips - generally you are breaking even and not losing money. You are now conscious of the fact that you are making calls that are generally good and you are getting respect from other traders as you chat the day away. You still have to work at it and think about your trades but as this continues you begin to make more money than you lose consistently.

You'll start the day on a 20 pip win, take a 35 pip loss and have no feelings that you've given those pips back because you know that it will come back again. You will now begin to make consistent pips week in and week out 25 pips one week, 50 the next and so on.

This lasts about 6 months

Step Five - Unconscious Competence

Now we’re cooking - just like driving a car, every day you get in your seat and trade - you do everything now on an unconscious level. You are running on autopilot. You start to pick the really big trades and getting 200 pips in a day doesnt make you any more excited that getting 1 pips.


You see the newbies in the forum shouting 'go dollar go' as if they are urging on a horse to win in the grand national and you see yourself - but many years ago now.

This is trading utopia - you have mastered your emotions and you are now a trader with a rapidly growing account.

You're a star in the trading chat room and people listen to what you say. You recognise yourself in their questions from about two years ago. You pass on your advice but you know most of it is futile because they're teenagers - some of them will get to where you are - some will do it fast and others will be slower - literally dozens and dozens will never get past stage two, but a few will.

Trading is no longer exciting - in fact it's probably boring you to bits - like everything in life when you get good at it or do it for your job - it gets boring - you're doing your job and that's that.


Finally you grow out of the chat rooms and find a few choice people who you converse with about the markets without being influenced at all.


All the time you are honing your methods to extract the maximum profit from the market without increasing risk. Your method of trading doesnt change - it just gets better - you now have what women call 'intuition'

You can now say with your head held high "I'm a currency trader" but to be honest you dont even bother telling anyone - it's a job like any other.


I hope youve enjoyed reading this journey into a traders mind and that hopefully youve identified with some points in here.


Remember that only 5% will actually make it - but the reason for that isnt ability, its staying power and the ability to change your perceptions and paradigms as new information comes available.


The losers are those who wanted to 'get rich quick' but approached the market and within 6 months put on a pair of blinkers so they couldnt see the obvious - a kind of "this is the way i see it and thats that" scenario - refusing to assimilate new information that changes that perception.


Im happy to tell you that the reason i started trading was because of the 'get rich quick' mindset. Just that now i see it as 'get rich slow'

If youre thinking about giving up i have one piece of advice for you ....

Ask yourself the question "how many years would you go to college if you knew for a fact that there was a million dollars a year job at the end of it?

Take care and good trading to you all.

Candlesticks

Trading Mistakes

Mistake #1
Setting the stop at round numbers.
Solution: When setting your stop, avoid numbers that end in zero.
This is not due to superstition! It's just that round numbers, especially with certain currency pairs like EUR/USD and GBP/USD, represent key psychological levels in the minds of traders and institutions.
Price will often pull back to a number that ends in zero and go no further. If your stop is set at that level you run the risk of getting stopped out of your trade only to see price resume the direction you had anticipated anyway. How frustrating!
So always make sure your stop is set at a number other than one that ends in a zero, and reduce the number of times you get taken out.

Mistake #2
Setting stops according to a pre-determined amount.
Solution: Calculate your stop according to strategic levels, not an arbitrary amount.
Many traders set stops somewhere between 20-30 pips as that is about as much as their equity will allow.
Some new traders tend to do simple arithmetic to establish their stop level: entry price plus/minus 25 pips.
However, it makes much more sense to look at a previous support/resistance level, trendline, or yesterday's high or low, and see if a 20-30 pip stop puts you near one of those levels.
If it does, then calculate more precisely. It makes no sense to set a 20 pip stop if a major support/resistance line is 25 pips away from your entry level. Price is likely to go right back to that level to test it, and stop out your trade, before bouncing.
Keep your eyes open for such key levels and set well-thought out stops which help you avoid getting taken out unnecessarily on trades where your appraisal of price direction was right all along.

Mistake #3
Setting target limits right on key levels.
Solution: Trim your target by 2 or 3 pips.
Equally frustrating is to see price ALMOST reach your target, fall short by just 2 or 3 pips, and then within seconds retrace by 10 to 15 pips.
One moment you see a nice profit of 25 pips on your trading platform, the next moment it is showing 15. Now you are left in a quandary. Anxiety sets in as you wonder whether price will go back to retest the previous level. Do you stay in and hope or just take the 10 or 15 pips left on the table?

Forex Basic

Main Currencies Currencies Pair
US dollar - USD EUR/USD
Euro - EUR GBP/USD
Great Britain - GBP USD/CHF
Swiss Franc - CHF USD/JPY
Japanese Yen - JPY EUR/JPY
Australia - AUD USD/CAD
New Zealand - NZD AUD/USD
Canada - CAD

Base Quote
USD/JPY USD JPY
Long up down
Short down up
If USD/JPY is $119.68, then 1 unit of USD cost $119.68 of JPY

If USD/JPY is $119.68/75
We buy at Ask price $11975
We sell at Bid price $119.68

Standard lot is $100 000, Mini lot is $10 000
Used margin – money used to hold existing positions
Free margin – money available for additional positions

Order types
Market Order – current market price

Pending orders
Buy Stop order – buy at a price higher then current. now $2, buy at $3
Sell Stop order – sell at a price lower then current. now $2, sell at $1

Buy limit order – buy at a price lower then current. now$2, buy at $1
Sell limit order – sell at a price higher then current. now $2, sell at $3

OCO – one cancel the other

Economics News

1. Non-Farm Payrolls
2. ISM Non-Manufacturing
3. Personal Spending
4. Inflation (Consumer Price Index)
5. Existing Home Sales

Here is a list of some of the top U.S. market moving reports:
Employment Growth
Interest Rate decisions
Trade Balance Gross Domestic Product
Retail Sales
Durable Goods Inflation reports (Consumer Price Index and Producer Price Index)
Foreign Purchases report (TIC Data)

Major Indicators

The Gross Domestic Product (GDP) - The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country's economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.
Industrial Production - It is a chain-weighted measure of the change in the production of the nation's factories, mines and utilities as well as a measure of their industrial capacity and of how many available resources among factories, utilities and mines are being used (commonly known as capacity utilization). The manufacturing sector accounts for one-quarter of the economy. The capacity utilization rate provides an estimate of how much factory capacity is in use.

Purchasing Managers Index (PMI) - The National Association of Purchasing Managers (NAPM), now called the Institute for Supply Management, releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders. It is divided into manufacturing and non-manufacturing sub-indices.

Producer Price Index (PPI) - The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output. The PPIs most often used for economic analysis are those for finished goods, intermediate goods, and crude goods.

Consumer Price Index (CPI) - The Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services. It reports price changes in over 200 categories. The CPI also includes various user fees and taxes directly associated with the prices of specific goods and services.
Durable Goods - Durable Goods Orders measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. A durable good is defined as a good that lasts an extended period of time (over three years) during which its services are extended.

Employment Cost Index (ECI) - Payroll employment is a measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation's business and government establishments.
Retail Sales - The retail sales report is a measure of the total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation. It is the timeliest indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences. Retail sales include durable and nondurable merchandise sold, and services and excise taxes incidental to the sale of merchandise. Excluded are sales taxes collected directly from the customer.

Housing Starts - The Housing Starts report measures the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing. Housing is very interest rate sensitive and is one of the first sectors to react to changes in interest rates. Significant reaction of start/permits to changing interest rates signals interest rates are nearing trough or peak. To analyze, focus on the percentage change in levels from the previous month. Report is released around the middle of the following month.

Fundamental News

Fundamental News
interest rate
non farm payroll and employment report (first Friday every month)
GDP
Production Index
- producer price index
- purchasing manager index
- industrial production
Consumer Index
- consumer price
- consumer confidence
- retail sales
- durable goods
Housing
Trade deficits

- Germany IFO
- Japan Tankan
- Central bank meeting minutes
- Political unstable
- Nature disaster