Forex Managed Accounts - financial safeguards to ensure that clearing members (usually companies or corporations) perform on their customers' open futures and options contracts. Clearing margins are distinct from customer margins that individual buyers and sellers of futures and options contracts are required to deposit with brokers. Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfilling of contract obligations. FCMs are responsible for overseeing customer margin accounts. Margins are determined on the basis of market risk and contract value. Also referred to as performance-bond margin. Self-trading in the currency markets can be a difficult proposition. To be successful, a currency trader must follow market movements 24 hours a day, six days a week. Many Forex investors do not have the time, experience or desire to self trade, but seek the diversification and profit potential that foreign exchange trading offers. Forex Managed Accounts were created for investors with risk capital who chose to have a professional trade on their behalf. In a Forex Managed Account, the positions are held in the investors account, independent of other investors. Unlike mutual funds or hedge funds, which commingle your funds with other investors, a Forex Managed Account is an account held exclusively in your name and all or part of your funds can be redeemed within one day. There is no lock up period and no withdrawal fees. The field of forex trading requires much expertise and knowledge without which the trader may incur great losses. The forex trading field is very vast where the trader is required to have knowledge regarding the factors concerned with bringing about the fluctuations in the currency prices. These factors may be analyzed fundamentally or technically but without the proper analysis of these factors it does not possible to derive profits from forex trading. To gain knowledge in the field of forex trading requires time and turns out to be quite expensive. So the trader who wants to avoid all this goes in for something called managed forex with which the trader is not needed to have any knowledge regarding this field. All the work is done by professional people have been into this field for a long time and are experienced analyze the forex market for the forex traders and then invest the traders money into the forex market to provide him with financial profits. There are two types of managed forex accounts: first which uses robots and the second which makes use of the professional experienced people in the field of forex trading. Both of these include the complete study and analysis of the forex market and the factors related with the currency fluctuations. The emotional factor is excluded and robots and they work according to the analysis of the live data using all the indicators and the results derived from this are used for taking decisions regarding forex trading. The other type of managed forex account involves a forex dealer who trades for the forex trader after analyzing the market data using different indicators and then takes trading decisions for the traders. The trading account remains in the name of the forex trader but the trading is done by the forex dealer after analyzing the market. The forex trader is free to utilize the money in his forex trading account according to his own wish. The managed forex in addition to providing profit to the novice forex trader also gives him the benefit of learning the forex trading. It also provides benefit to the experienced traders as they get opportunity of fine tuning their forex trading skills and get a deeper understanding of the movement of the forex market. The choice of managed forex is very difficult to make due to existence of several managed forex systems in the market for. There are managed forex systems which try to make several smaller trades which may prove dangerous for the forex traders as this may lead to loss of money. The forex traders should make sure that the managed forex has been back tested using real time forex data to avoid losses. With a managed currency account an investor who cannot watch the market 24 hours a day can still participate in the dynamic world of currency trading. An investor who wishes to have his funds professionally managed might also be a good candidate for managed currency accounts. Studies of professionally managed currency funds have shown returns that are not related to the performance of the stock market. Thus, a great way to enhance an existing portfolio regardless of what the stock market does, is to allocate a portion of the funds to an FX managed account. Advantages of forex managed accountsAcquiring managed Forex makes a good deal sense given the vagaries of international trading schemas. The increasing pace of political change has crafted a strange new environment. Even Forex trading mavens are concerned about the direction of events. Protect yourself against unseen market forces by employing consultants to assist you. You will quickly discover that this relationship will pay off - big-time! And the good news is that the education you'll receive during the process will last a lifetime. A managed Forex account relieves you from much of the stress associated with Forex trading. The solicitation of outside services enables you to go about your day without worrying about every single vagary of the market. However, just because you have a managed Forex account doesn't mean you can completely ignore the international arena. Constantly be on the lookout for viable tips on your particular market niche. Slacking on your commitment to your investments will inevitably cause a decline in your ultimate return. Such a lax attitude can also interfere with your relationship with your investment manager. Actually, the best way to get an account managed by someone else is to always communicate with the person who will be managing your account. This method is advisable due to the fact where a lot of trust needs to be put onto the person managing your account as normally, FOREX trading involves a very big risk and a huge sum of circulating funds. By communicating frequently with the person managing your account, you can gain a better understanding about him and therefore in return, builds up a better trust between the two parties. Lastly, regardless of who is managing the account, one must always acknowledge the fact where FOREX trading is not child's play and all the risk involved in FOREX trading must always be well assessed. |
Sunday, September 16, 2007
Managed forex accounts
Forex hedging
Hedger is an individual or company owning or planning to own a cash commodity, corn, notes, bills etc. and concerned that the cost of the commodity may change before either buying or selling it in the cash market. A hedger achieves protection against changing cash prices by purchasing (selling) futures contracts of the same or similar commodity and later offsetting that position by selling (purchasing) futures contracts of the same quantity and type as the initial transaction.
Currency hedging refers to a strategy that strives to minimize the exposure to exchange rate fluctuations, thereby minimizing the uncertainty of future transactions denominated in a foreign currency and providing some stability to earnings and cash flow. This is typically accomplished through the use of options or futures contracts.
Forward contracts can also be used to hedge currency risk. However, while forward contracts are superior to futures in terms of their overall risk reduction, there is no central market for forward contracts, which contributes to higher transaction costs and lower liquidity, as well as counterparty risk (i.e. the risk that the contract will not be honoured at expiration).
When a business chooses to hedge its exposure to foreign currency, the objective is to minimize uncertainty, not to maximize profit from currency speculation. A hedged position will therefore not produce the benefit of a favourable exchange rate movement, but at the same time will not expose the hedger to the loss potential of an unfavourable exchange rate movement.
The underlying principle of a hedging strategy is to construct a portfolio consisting of a long position in the foreign currency asset and a short position in a foreign currency asset such that gains on one offset losses on the other. This is achieved by using derivatives whose price movements are highly correlated with movements in the spot market.
Ideally, the derivative being used to hedge will have the same underlying currency as the foreign currency asset being hedged, since the price movements of the two assets would be highly similar.
Forward contracts give you a fixed cost for your foreign currency and therefore for your foreign currency purchasing. If the interest rates in the foreign country are higher than they are in the US, the forward rate is at a discount to the spot rate, and this reduces the dollar cost still more.
Forward contracts also have the advantage of being suitable for internal transactions. If your company exports to the country you are buying in, and wants to sell in local currency, purchasing in local currency reduces the company's currency exposure. The purchasing flow of funds offsets the sales office flow of funds. If an internal forward agreement is made between the two departments, only the difference between the two flows needs to be hedged at banks.
Options allow a buyer to take advantage of an increase in the value of the US dollar but protect against a decrease. Unfortunately, they are expensive. A six month option on a volatile currency typically costs about 5% and most people choose not to buy them. An added difficulty is that option prices for the European style options that buyers need are not well listed in financial newspapers.
Hedging does involve some risks, but they are limited and can be controlled with simple attention to the fundamentals. Risk arises from forecast inaccuracy, and can lead to unexpected price variations, either up or down. If a company over forecasts purchases and hedges with forwards, there will be larger profit or loss on the hedge than the variance on part cost.
With over forecasts, there will be a loss on forward contracts if the dollar strengthens and a gain if the dollar weakens. The total unexpected gain or loss will be approximately the percent over forecasted times the percent that the dollar changed. For example, a 20 % over forecast and a 15% currency strengthening will result in a 3% (15% of 20%) extra cost of the parts.
With under forecasts, some of the parts must be purchased at the spot rate without an offsetting hedge. If the dollar weakens, they will be more expensive and if it strengthens, they will be cheaper.
The biggest gains in currency management will come from choosing the right currency. A good negotiator should be able to get an initial price reduction of 5% or more against a volatile currency like the yen or the mark. The next most consequential decision is whether or not to hedge. Not hedging opens the buyer to dollar price swings that are often 20% in six months. This uncertainty is unacceptable to most companies.
The third decision is to choose a hedging strategy. A recent article in the International Journal of Purchasing and Materials Management showed the benefits of actively choosing a hedge strategy based on a Bayesian statistical analysis of probable outcomes. Over a five year period, actively choosing a hedge strategy would have saved 3.6 percent compared to paying in the supplier's currency (yen) without hedging, and 1.8 percent compared to always hedging with forwards. The authors did not consider options as a potential hedge strategy.
If buying in the supplier's currency without hedging is unacceptably risky, and buying in dollars is excessively expensive, the choice is between hedging with forwards and hedging with options.
If options were free, they would be the ideal choice, because they permit taking advantage of a stronger dollar and protect against a weaker dollar. However, options are not free, and almost always will be more expensive than forwards.
If you actively analyze probabilities of currency changes as the authors in the Journal recommend, and believe that the dollar will weaken, you should use forward contracts. They will give the same results as an option but at a lower cost. If you see no clear trend, make the choice based on relative costs. During two one-year periods when the dollar had no net change against the yen, options would have saved an average of 3.5% compared to forwards, before the costs of either.
If the difference in costs between an option and a forward contract is less than 3.5% and you predict no increase or decrease, consider buying an option.
If you predict a strengthening dollar, an option is the better choice. During a one year period of a strengthening dollar, options would have saved 7.71% compared to forward contracts.
Forex signals
One of the disadvantages of FOREX trading is the time investment needed to monitor the markets for advantageous entry and exit points. It's possible to sit in front of a computer monitor for hours watching the markets.
Of course, you can use automated orders such as limits and stops. These allow you to walk away from your computer with the knowledge that your losses will be kept to a minimum, but by doing so, you may miss out on potential profits because your limit order kicks in too soon.
Forex Trading Signals maintain trading logs regularly to show you trends over a period. Best way to learn and form your own trading signals of Forex market is to start with a demo Forex trading account. You can get such an account through Forex brokers and practice trading through these accounts for certain time. This provides you with a feel of the market. You can then form your own signals and implement them in your trading activities to understand their implications. Thereafter you can invest little money and slowly develop your trading in Forex markets.
Forex trading strategy
Forex trading strategy begins with fundamental and technical analysis. The following explains why this analysis is vital to building a solid forex trading strategy:
Fundamental Analysis
Fundamental analysis is mainly used to better understand long-term trends in the currency market. There are a number of factors that determine the value of a country's currency.
The overall political, economic, and social climates of a specific country are the primary issues measured in fundamental analysis. As you can imagine, it can be difficult measure how these issues affect one another.
Every trader should be aware of the affects of political events, central bank news, non-farm payrolls, consumer price index, imports, exports etc. on the value of currency before forex trading.
Technical Analysis
Technical analysis produces charts and graphs subsequent to scrutinizing past data on volume and price. One of the latest buzzwords in this approach to currency trading analysis is "Fibonacci retracement." Fibonacci was a 12th century, Italian mathematician whose contribution to a modern forex trading strategy consists of his arcs, fans, and retracements. The lines in these mathematical studies are currently used to anticipate a trend change as prices near the lines created by these arcs, fans, and retracements. So some of the more popular forms of technical analysis used in forex are Candlestick Formations, Fibonacci Sequence, Financial Breakouts and Trend Lines.
Traders who are profitable will develop a personal forex trading strategy and perfect it over time. Some people will focus a specific study or calculation, while others use broad spectrum analysis as a means of determining their trades.
Most experts suggest that you try using a combination of both fundamental and technical analysis, with which you can make long-term projections and also determine entry and exit points. Whatever you finally decide, the fact remains that trading is a discipline that requires preparation and hard work.
Your overall personal forex trading strategy should include three vital ingredients; the currency pair you decide to trade, what technical indicators you use for entry/exit plans and sound money management.
Strategy 1 - Simple Moving Average
Successful trading is often described as optimizing your risk with respect to your reward, or upside. Any trading strategy should have a disciplined method of limiting risk while making the most out of favorable market moves. We will illustrate one decision making model which uses a Simple Moving Average ("SMA") technical study, based on a 12-period SMA, where each period is 15 minutes. This is one example of a trading decision making strategy, and we encourage any trader to research other strategies as thoroughly as possible.
We will use a simple algorithm: when the price of the currency crosses above the 12-period SMA, it will be taken as a signal to buy at the market. When the currency price crosses below the 12-period SMA, it will be a signal to "Stop and Reverse" ("SAR"). In other words, a long position will be liquidated and a short position will be established, both with market orders.
Thus this system will keep the traders "always in" the market - he will always have either a long or short position after the first signal. In the chart below, the white line represents the price of USDJPY, the purple line represents the 12-period SMA of USDJPY, and the red line indicates where USDJPY crosses above the SMA, generating a buy signal at approximately 129.90:
This is a simple example of technical analysis applied to trading. Many strategies used by professional traders make use of moving averages along with other indicators or "filters". Note that the moving average method has an element of risk control built in: a long position will be stopped out fairly quickly in a falling market because the price will drop below the SMA, generating a stop-and-reverse signal. The same holds true for a sell signal in a rising market. Note that the SMA is generated automatically by GCI's integrated charting application.
Strategy 2 - Support and Resistance Levels
One use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.
For example, in chart below EURUSD has established a resistance level at approximately .9015. In other words, EURUSD has risen up to .9015 repeatedly, but has been unable to move beyond that point:
The trading strategy would then be to sell EURUSD the next time it gets close to .9015, with a stop placed just above .9015, say at .9025. This would have indeed been a good trade as EURUSD proceeded to fall sharply, without breaking the .9015 resistance. Hence a substantial upside can be achieved while only risking 10 or 15 pips (.0010 or .0015 in EURUSD).
Rules of good trading strategy
1. Trading is an investment not an income
It is important to have a realistic expectation of what you can achieve through forex trading. The nature of trading is such that you may make a good return on your initial capital over an annual period, but during that period you may have a number of consecutive losing months, with only a few bumper months inbetween.
2. You can't predict the forex markets
The forex markets are influenced by billions of traders, economic and political events. You simply cannot predict the direction and manner in which the markets will move. Technical and fundamental analysis does much to provide a more educated guess than a simple coin toss but it is important to realise that each of these techniques will have a large failure rate. You will lose a large percentage of the time. Sometimes you will lose on more trades than you gain on.
3. Let profits ride and cut your losses
The only way to make money from forex trading (or any form of trading) is by making enough money on your winning trades to cover your losses and to gain additional profit to grow your capital. It is harder to put into practice than it sounds as psycologically it is much easier to "marry" your losing trades in the hope that the market will turn in your favour and grabbing your profit too soon when you see your hard earned gains slipping away as the market temporarily turns against you.
4. Trade according to a tried and tested system
This is one of the most important forex principles. The only way to cut out emotion in trading and adopt a more business-like and informed approach is to use a system of rules that have been developed and tested on market data. In this way, all the trade decisions have already been made before you even enter the forex market. This is a much less time consuming and less stressful way to trade for a living.
Forex trading system
Trading Forex works remarkably easy. But you have to make your own trading system.
A trading system is created by generating signals, setting up a decision making procedure, and incorporating risk management into the system. A trading system is supposed to be objective and mechanical. The analyst combines a set of objective trading rules (usually in a formula or algorithm). As a general rule, good technical analysis indicators are the building blocks of good trading systems. However, as previously mentioned, even good technical analysis indicators can lose their validity when combined in a trading system. Therefore, it is important to not only back-test your system but to also forward-test your system in real time.
Pitfalls of Trading Systems
Trading systems are supposed to be objective and mechanical. They take the intuition out of trading. Buy when the system tells you to and sell when the system tells you to. The problem is that there are not a lot of good trading systems out there. However, some are created for certain institutions to take advantage of arbitrage opportunities, or tricky derivative strategies. They are not at all suitable for the average trader.
Traders tend to lose objectivity when using technical analysis indicators. The trader is not able to remain objective and the subjectivity of using the indicator overwhelms him.
Traders have a tendency to test their trading systems and technical analysis indicators on an insufficient amount of data. Analysts need to test trading systems and technical analysis indicators on a wide array of data in different types of trading markets.
Additionally, many traders and analysts don't forward test their trading systems and technical analysis indicators in real time. They rush to trade based on insufficient back-testing and forward-testing. Thus, they are trading on not a sound, valid basis. Many traders fail to incorporate sound risk management techniques in their trading systems. Additionally, many traders fail to incorporate stop loss orders with their initial orders when using technical analysis indicators only.
Traders also tend to over-optimize their trading systems. They start asking the what-if question and back-test the trading system with different parameters. They are always trying to trade with the parameters which generate the highest amount of wins. However, in real time these over-optimized systems rarely perform well. Another trap traders fall into is to use too many technical analysis indicators. Find the few that work consistently well for you and go with them.
There are basically two types of Forex trading systems, mechanical and discretionary systems. The trading signals that come out of mechanical systems are mainly based off technical analysis applied in a systematic way. On the other hand, discretionary systems use experience, intuition or judgment on entries and exits.
We will first analyze the advantages and disadvantages of each system.
| Advantages | Disadvantages |
| Mechanical systems | |
| This kind of system can be automated and backtested efficiently. It has very rigid rules. Either, there is a trade or there isn’t. Mechanical traders are less susceptible to emotions than discretionary traders. | Most traders backtest Forex trading systems incorrectly. In order to produce accurate results you need tick data. The Forex market is always changing. The Forex market (and all markets) has a random component. The market conditions may look similar, but they are never the same. A system that worked successfully the past year doesn’t necessary mean it will work this year. |
| Discretionary systems | |
| Discretionary systems are easily adaptable to new market conditions. Trading decisions are based on experience. Traders learn to see which trading signals have higher probability of success. | They cannot be backtested or automated, since there is always a thought decision to be made. It takes time to develop the experience required to trade successfully and track trades in a discretionary way. At early stages this can be dangerous. |
Now, which approach is better for Forex traders? The one that fits better your personality. For instance, if you are a trader that finds it hard to follow your trading signals, then you are better off using a mechanical system, where your judgment won’t play an important role in your system. You only take the trades that your system signals.
Your objectives and goals have to be very specific to you, but they must also include the following characteristics if they are going to be useful. They should be measurable within the allotted time frame and be worth the time and effort involved.
Here is a quick outline of a few actual objectives.
1. Create two new positive-expectancy trading systems each and every year.
2. Strive to make fewer errors implementing the trading systems each year.
3. Work to achieve a maximum return of (specific percentage).
4. Take 2 weeks vacation from trading during the year.
Forex rules
| We would like to present you some advice for successful forex trading.
|
Forex positions
There are such important terms in forex as "long position", "short position", "close position", "open position".
Position - The amount of currency or security owned or owed by a forex trader or investor.
Long (Position) - A position that was obtained by buying in anticipation of an increase in price.
Open:
Each open position has four major characteristics: You're trading a particular currency pair, you're either long or short the market (you've bought or sold, respectively), the size of the position in increments of 100,000 of the base currency, and an exchange rate at which the position was opened. For example a "EUR/USD, 500, S, 0.9220", means the trader Sold 500,000 Euros for U.S. Dollars at an exchange rate of 0.9220.
Close:
The close rate is the current exchange rate at which the trader can exit the position using a market order. If you're long the market, the current bid will be shown as the close rate. If you're short, the close will reflect the current FX market ask price.
Going short – going long
When you buy a currency, you are said to be “long” in that currency. Long positions are entered into at the offer price. Thus if you are buying one GBP/USD lot quoted at 1.5847/52, then you will buy 100,000 GBP at 1.5852 USD.
When you sell a currency, you are said to be “short” in that currency. Short positions are entered into at the bid price, which is 1.5847 USD in our example.
Because of the symmetry of currency transactions, you are always simultaneously long in one currency and short in another. For example if you exchange 100,000 GBP for USD you are short in sterling and long in US dollars.
Closing out
An open position is one that is live and ongoing. As long as the position is open, its value will fluctuate in accordance with the exchange rate in the market. Any profits and losses will exist on paper only and will be reflected in your margin account.
To close out your position, you conduct an equal and opposite trade in the same currency pair. For example, if you have gone long in one lot of GBP/USD (at the prevailing offer price) you can close out that position by subsequently going short in one GBP/USD lot (at the prevailing bid price).
Your opening and closing trades must the conducted through the same intermediary. You cannot open a GBP/USD position with Broker A and close it out through Broker B.