In much of the discussion about the collapse of the U.S. housing market, commentators have assumed that the massive run-up in property prices that preceded the subprime-mortgage meltdown were simply the result of a speculative frenzy that became a full-fledged market bubble.
But that’s not the case at all.
You see, the bubble and subsequent crash were inevitable under the current system of housing finance. Fundamental changes must be made.
Standard and Poor’s recently projected the likely future loss rate on the $650 billion of subprime-mortgage-backed securities that are still out in the marketplace. From that we can estimate the losses S&P is projecting on the actual mortgages themselves.
According to S&P, senior AAA-rated bonds will pay out about 60% of principal, junior AAA-rated bonds about 35%, AA-rated bonds about 5% and lower-rated bonds nothing at all. Since about 75% of subprime mortgage-backed securities were AAA rated, we can calculate that S&P thinks subprime mortgages will eventually return about 40% on the original principal amount.
That’s a startling number.
Losses Still to Come
If you had a portfolio consisting entirely of 100% loan-to-value mortgages, on which the appraisals were accurate but a large percentage of the borrowers had poor credit, and house prices were destined to drop between 20% and 25% over the next few years, you’d expect to lose 25% - or perhaps 30% - of principal, but still manage to keep 70% to 75% of your money.
When you had a foreclosure, there would be costs involved that increased your loss. On the other hand, some of the borrowers would be able to make their mortgage payments, leaving you with no loss at all. Thus, if subprime mortgages are expected to return only 40%, almost half of them must have had some fraud involved, either by the borrower, the mortgage broker or the appraiser.
Let’s now turn to actual housing prices. The S&P/Case-Shiller Home Price Indices of home prices in the Top 20 urban markets dropped a bigger-than-anticipated 12.7% in the 12 months that ended in February - the worst showing since the index debuted in 1991. What’s even more alarming, however, is that the decline is accelerating. In February alone, prices dropped 2.7% - the equivalent of a 28% decline if this rate persisted for the entire year.
That should have alarmed both homeowners with large mortgages and mortgage market participants - if prices were to drop 30% to 40%, instead of the generally expected 15% to 20%, even prime home mortgages would get in trouble and the losses would be appalling - in the range of multiple trillions of dollars.
Since the first-quarter vacancy rate in U.S. housing - owner-occupied and rental - increased to 2.9%, the highest level in 50 years, we may indeed be approaching such a bearish scenario.
However, when you look at factors like the ratio of house prices to incomes, it becomes obvious that the problem is not the current drop, but the previous rise. Since World War II, the average house price was 3.2 times the average income. By 2006, however, the average house price had jumped to 4.5 times the average income. With house prices outrunning incomes in that way, mortgage financing was bound to become more and more risky, and a substantial drop was eventually inevitable - to take prices from 4.5 times income to 3.2 times would require housing prices to plunge 29%. And that doesn’t even consider the possibility that prices might overshoot on the downside.
The principal reason for the excessive rise in house prices and the high level of fraud was the housing finance system. In the modern system, the originator of a home mortgage loan is paid a fee on the origination, and never has to worry again about the credit risk on that loan, which is passed off to investors through a process known as “securitization.”
Because securitization separates the mortgage originator and the actual investor, the investors - often foreigners - have no idea of the actual underlying quality of the loans that they’re purchasing.
The mortgage broker’s incentive is to maximize loan volume - pretty much regardless of whether or not the borrower can afford the loan. Falsification of documents, suborning of appraisers, and other similarly reprehensible machinations becomes a normal course of action in such a situation, as does turbo-charging the housing market to valuation and sales levels it cannot sustain. A system in which prices are forced up to unsustainable levels and fraud is rampant is broken, and needs to be replaced with something better.
It (Once) Was a Wonderful Life
Years ago, the United States had a superior home-financing system; it was extolled in the 1946 Jimmy Stewart movie, “It’s a Wonderful Life.” Home-mortgage loans were made by local institutions to borrowers whom they knew personally. The system had some inefficiencies. For example, if the housing needs in a particular area expanded rapidly, there might be a shortage of funds, so that mortgages would be unavailable. However, banking is mostly national today, so local funds shortages would be less important, although there would probably be a corresponding decline in personal knowledge of the borrowers.
It’s not true that the Jimmy Stewart system of financing home mortgages was less efficient than today’s: That’s a myth put out by Wall Street, which has been one of the chief beneficiaries of the recent shenanigans. (Riddle me this: Do you think that “George Bailey” - Jimmy Stewart - ever got a million-dollar bonus?).
If you look at the U.S. Federal Reserve statistics on U.S. interest rates (which started recording home mortgage rates in 1972), you will discover that in 1972-78 - when the Jimmy Stewart home financing system was still mostly in place - 20-year Treasury bonds yielded an average of 7.41%, while 30-year fixed rate home mortgages yielded 8.49%, a differential of 1.08%. In 2000-06, an equivalent period that predates the recent worries about credit risk, 20-year Treasuries yielded an average of 5.28%, while home mortgages yielded 6.50% - a differential of 1.22%.
Thus, the “spread” of home mortgage interest costs over Treasury bond yields, the most appropriate measure of home mortgage costs, has widened by 0.14%. That may not sound like much until you realize that it’s an effective cost increase of 13%. Where did that increase go?
While some lawyers made money, too - what did you expect - it’s largely Wall Street that would rather you didn’t think about that question.
Two Key Changes
We can move back a long way toward the Jimmy Stewart system, but to do so two things must be changed:
First, we need to close down Fannie Mae (FNM: 30.08 +1.79 +6.33%) and Freddie Mac (FRE: 27.21 +1.69 +6.62%), the government-sponsored enterprises that guarantee most home mortgages. By putting a quasi-government guarantee on the mortgages - they’re not quite government-guaranteed, but close (another worry for the taxpayers of America) - you take away the local credit risk and make them easy to pass around the money pits of Wall Street. Most countries don’t have the government-guarantee home mortgages; it’s entirely unnecessary as good home mortgages are fine credit risks on their own.
Second, you need to enact some kind of small transfer tax on paper shuffling that makes securitization of mortgages expensive. The British have a 0.5% stamp duty on share dealing; even a 0.1% duty per transfer would probably be enough, here. It would make packaging the mortgages and turning them into mortgage bonds just a little less competitive, compared to the other alternative of having local banks or bank branches lend directly.
Once the financial incentives had been tilted against securitization, and the foolish government guarantees had been removed from the mortgage market, home-mortgage lending could revert to the Jimmy Stewart model. (You might want to leave a small loophole for low-income housing, on which mortgages - otherwise non-creditworthy - still could be guaranteed by Ginnie Mae, part of the U.S. Department of Housing and Urban Development; it seems voters want the government to subsidise housing for the poor and help them get mortgages).
Overall, under the new model, home mortgages would be a little cheaper, you would go to a proper bank - and not a salesman - to get them, and housing prices would remain reasonable.
Of course, thousands of rich Wall Streeters would be thrown out of work. There’s a pity.
segunda-feira, 19 de maio de 2008
Yahoo Shares Set To Plummet
Microsoft (MSFT: 29.489 +0.409 +1.41%) has decided to withdraw its bid for Yahoo (YHOO: 25.82 +1.45 +5.95%) as the price of $37 per share that Yang and the Yahoo board wanted was higher than the latest revised offer of $33 per share that Microsoft has made. This will probably lead to a blood bath in Yahoo shares on Monday as arbitragers who had bought the shares and expecting to sell them at $31+ will now have to exit their positions in a hurry. Since Yahoo is also traded on the Tokyo stock exchange, the first round of sales will happen there as the market opens on Monday. Even traders who opened positions in the US markets will be short selling on the Tokyo exchange to square their positions. After that, the next round of shorts will come in the pre-market session in the US, and finally when the US exchanges actually open, most of the action may already have taken place.
This could of course be just a negotiating tactic for Microsoft. Yahoo shareholders who see their shares plummet after Yahoo refused Microsoft’s offer will file lawsuits and put pressure on the Yahoo management. Furthermore, with share prices plummeting, Microsoft will be able to buy shares on the open market and possibly launch a hostile takeover at an even lower price. And then they’ll have many options if they still want Yahoo, use shareholder pressure/lawsuits to replace the board, or buy a big enough stake on the open market that allows them to replace the board themselves. In the meantime, the biggest winner will be Google (GOOG: 590.3912 -4.5089 -0.76%) who can take advantage of the distractions of these two companies to forge ahead with its own business.
This could of course be just a negotiating tactic for Microsoft. Yahoo shareholders who see their shares plummet after Yahoo refused Microsoft’s offer will file lawsuits and put pressure on the Yahoo management. Furthermore, with share prices plummeting, Microsoft will be able to buy shares on the open market and possibly launch a hostile takeover at an even lower price. And then they’ll have many options if they still want Yahoo, use shareholder pressure/lawsuits to replace the board, or buy a big enough stake on the open market that allows them to replace the board themselves. In the meantime, the biggest winner will be Google (GOOG: 590.3912 -4.5089 -0.76%) who can take advantage of the distractions of these two companies to forge ahead with its own business.
Daily Market Commentary - GCI Financial
EURO
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.5500 figure and was supported around the $1.5420 level. Technically, today’s intraday low was just above the 38.2% retracement of the move from $1.4430 to $1.6020. European Central Bank President Trichet reported “global growth remains significant despite the slowing down observed in a number of industrialized economies and clearly thanks to the remarkable resilience of a great number of emerging economies.” He added inflation risks remains “significant” on account of oil, commodities, and food price increases. Most traders believe the ECB will keep its benchmark main refinancing rate unchanged at 4.0% this week. Data released in the eurozone today saw Sentix May investor confidence lost 0.6 points to 3.5. In U.S. news, the April ISM non-manufacturing index improved to 52 from 49.6 in March. Data to be released in the U.S. this week include unit labour costs, non-farm productivity, and foreign trade. Remarks from Federal Reserve officials including Kansas City Fed President Hoenig, Fed Governor Kroszner, and former Federal Reserve Chairman Greenspan will be closely monitored. Euro bids are cited around the US$ 1.5345 level.
JPN/CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥105.10 level and was capped around the ¥105.45 level. Liquidity was reduced on account of the ongoing Japanese Golden Week holidays and is likely to be reduced in Tokyo for the duration of the week. Finance minister Nukaga talked about surging inflation in many parts of the world saying “As nations try to figure out what impact that higher input prices will have and how to deal with economic growth and inflation, it’s very important that we discuss and bring our collective know-how together on how to make policy in these very difficult times.” The Nikkei 225 stock index last closed at ¥14,049.26. Dollar bids are cited around the ¥103.65/ ¥101.35 levels. The euro depreciated vis-à-vis the yen as the single currency tested bids around the ¥162.35 level and was capped around the ¥163.10 level. The British pound came off vis-à-vis the yen as sterling tested bids around the ¥206.80 level while the Swiss franc appreciated vis-à-vis the yen and tested offers around the ¥208.30 level. The Chinese yuan weakened vis-à-vis the U.S. dollar as the greenback closed at CNY 7.0016 in the over-the-counter market, down from CNY 7.0002. Data released in China today saw the CFLP April manufacturing PMI survey improve to 59.2 from 58.4 in March. Goldman Sachs sees April inflation around 8.5% and Lehman Brothers sees 2008 GDP growth below 10.0%. People’s Bank of China Governor Zhou said “We’re always observing very carefully whether there is significant hot money flow into China. In the recent circumstances, (after) the U.S. lowered down the interest rates, a lot of short-term investors pay attention to investing in China. These circumstances may create some new situation.” Finance minister Yi reported China will boost the flexibility of the yuan’s exchange rate.
STERLING
The British pound came off vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.9660 level and was capped around the $1.9785 level. Technically, today’s intraday high was right around the 23.6% retracement of the move from US$ 2.0395 to $1.9595. U.K. financial markets were closed for a public holiday and liquidity will return to normal tomorrow. Some traders believe Bank of England’s Monetary Policy Committee will reduce its repo rate this week while others believe BoE will not reduce interest rates until June. Cable bids are cited around the US$ 1.9505 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.7865 level and was supported around the ₤0.7815 level.
SWISS
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0515 level and was capped around the CHF 1.0565 level. Technically, today’s intraday low was right around the 61.8% retracement of the move from CHF 1.1105 to CHF 0.9645. U.S. dollar offers are cited around the CHF 1.0760 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.6340 level while the British pound weakened vis-à-vis the Swiss franc as sterling tested bids around the CHF 2.0705 level.
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.5500 figure and was supported around the $1.5420 level. Technically, today’s intraday low was just above the 38.2% retracement of the move from $1.4430 to $1.6020. European Central Bank President Trichet reported “global growth remains significant despite the slowing down observed in a number of industrialized economies and clearly thanks to the remarkable resilience of a great number of emerging economies.” He added inflation risks remains “significant” on account of oil, commodities, and food price increases. Most traders believe the ECB will keep its benchmark main refinancing rate unchanged at 4.0% this week. Data released in the eurozone today saw Sentix May investor confidence lost 0.6 points to 3.5. In U.S. news, the April ISM non-manufacturing index improved to 52 from 49.6 in March. Data to be released in the U.S. this week include unit labour costs, non-farm productivity, and foreign trade. Remarks from Federal Reserve officials including Kansas City Fed President Hoenig, Fed Governor Kroszner, and former Federal Reserve Chairman Greenspan will be closely monitored. Euro bids are cited around the US$ 1.5345 level.
JPN/CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥105.10 level and was capped around the ¥105.45 level. Liquidity was reduced on account of the ongoing Japanese Golden Week holidays and is likely to be reduced in Tokyo for the duration of the week. Finance minister Nukaga talked about surging inflation in many parts of the world saying “As nations try to figure out what impact that higher input prices will have and how to deal with economic growth and inflation, it’s very important that we discuss and bring our collective know-how together on how to make policy in these very difficult times.” The Nikkei 225 stock index last closed at ¥14,049.26. Dollar bids are cited around the ¥103.65/ ¥101.35 levels. The euro depreciated vis-à-vis the yen as the single currency tested bids around the ¥162.35 level and was capped around the ¥163.10 level. The British pound came off vis-à-vis the yen as sterling tested bids around the ¥206.80 level while the Swiss franc appreciated vis-à-vis the yen and tested offers around the ¥208.30 level. The Chinese yuan weakened vis-à-vis the U.S. dollar as the greenback closed at CNY 7.0016 in the over-the-counter market, down from CNY 7.0002. Data released in China today saw the CFLP April manufacturing PMI survey improve to 59.2 from 58.4 in March. Goldman Sachs sees April inflation around 8.5% and Lehman Brothers sees 2008 GDP growth below 10.0%. People’s Bank of China Governor Zhou said “We’re always observing very carefully whether there is significant hot money flow into China. In the recent circumstances, (after) the U.S. lowered down the interest rates, a lot of short-term investors pay attention to investing in China. These circumstances may create some new situation.” Finance minister Yi reported China will boost the flexibility of the yuan’s exchange rate.
STERLING
The British pound came off vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.9660 level and was capped around the $1.9785 level. Technically, today’s intraday high was right around the 23.6% retracement of the move from US$ 2.0395 to $1.9595. U.K. financial markets were closed for a public holiday and liquidity will return to normal tomorrow. Some traders believe Bank of England’s Monetary Policy Committee will reduce its repo rate this week while others believe BoE will not reduce interest rates until June. Cable bids are cited around the US$ 1.9505 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.7865 level and was supported around the ₤0.7815 level.
SWISS
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0515 level and was capped around the CHF 1.0565 level. Technically, today’s intraday low was right around the 61.8% retracement of the move from CHF 1.1105 to CHF 0.9645. U.S. dollar offers are cited around the CHF 1.0760 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.6340 level while the British pound weakened vis-à-vis the Swiss franc as sterling tested bids around the CHF 2.0705 level.
Dollar Gets Smacked By Fannie Mae
Just last week dollar’s rebound looked promising, but yet as we enter the second trading day of the week, dollar’s upside momentum is slipping away. The main catalyst of dollar’s decline today has been the bigger-than-expected loss by Fannie Mae, US’s biggest mortgage lending company, reigniting fears that we haven’t seen the worst of the financial market turmoil. The company reported a first-quarter net loss of $2.19 billion, or $2.57 a share, compared with a loss of 64 cents a share, and said it expected its credit losses to be significantly higher next year than in 2008. Fannie Mae also said it will need to raise $6 billion in capital. This kind of negative news, coming hot on the heels of not-so-bad GDP and not-so-terrible payrolls, is a jolt to overall market sentiment and confidence, and a reminder that more pain could be in store for the economy, something which Warren Buffett had said over the weekend.
Alien Talk
And speaking of Buffett, he has been hogging headlines lately with his Berkshire’s annual general meeting and numerous interviews. During the AGM, he even made fun of the US dollar, a currency which he said he has been shorting since 2002, saying even aliens won’t want to keep US dollars. He said, “If I landed from Mars today with a billion Martian dollars, or whatever they call them, went to the local bank near where my UFO landed, and they asked what would I like, I don’t think I’d put my money in the US dollar.” His outer-space remarks come at a time when a sustained dollar recovery seems to be a possibility, though a vulnerable one. For traders, their perspective is more short-term and opportunistic, unlike Buffett’s long-term view, so his comments may not have much of an influence, short-term wise, in the fickle currency markets.
Fisher the Hawk
Dallas Fed President Fisher, one of the two dissenters to last week’s rate cut, said a dramatic slowdown would be needed to justify more rate cuts, and that the Fed policy has already discounted significant “anemia” in the US economy. He sees risks on both sides of the economy.
Forex Trading
Today’s data has been helpful to the Euro: Eurozone producer prices rose 5.7% from a year ago, the most since August 2006, after gaining 5.4% in February. EUR/USD rose to a high of 1.5600. If it breaks successfully above 1.5610, it may target 1.5640, then 1.5680-1.5700. USD/CHF could slide towards 104.00, then 103.50-60. For now, the sour taste of Fannie Mae’s woes stays with the US dollar.
Alien Talk
And speaking of Buffett, he has been hogging headlines lately with his Berkshire’s annual general meeting and numerous interviews. During the AGM, he even made fun of the US dollar, a currency which he said he has been shorting since 2002, saying even aliens won’t want to keep US dollars. He said, “If I landed from Mars today with a billion Martian dollars, or whatever they call them, went to the local bank near where my UFO landed, and they asked what would I like, I don’t think I’d put my money in the US dollar.” His outer-space remarks come at a time when a sustained dollar recovery seems to be a possibility, though a vulnerable one. For traders, their perspective is more short-term and opportunistic, unlike Buffett’s long-term view, so his comments may not have much of an influence, short-term wise, in the fickle currency markets.
Fisher the Hawk
Dallas Fed President Fisher, one of the two dissenters to last week’s rate cut, said a dramatic slowdown would be needed to justify more rate cuts, and that the Fed policy has already discounted significant “anemia” in the US economy. He sees risks on both sides of the economy.
Forex Trading
Today’s data has been helpful to the Euro: Eurozone producer prices rose 5.7% from a year ago, the most since August 2006, after gaining 5.4% in February. EUR/USD rose to a high of 1.5600. If it breaks successfully above 1.5610, it may target 1.5640, then 1.5680-1.5700. USD/CHF could slide towards 104.00, then 103.50-60. For now, the sour taste of Fannie Mae’s woes stays with the US dollar.
How You Can Make Money by Trading Forex
Your mission as a Forex trader (should you choose to accept it) is to earn as many pips as you possibly can. The more pips you earn in currency trading the larger your profits will be. So, what is a pip and why does earning them help you make money in Forex?
The basic goal of Forex trading is to swap one currency for another currency then cross your fingers and hope the currency you bought will increase in value relative to the one you sold. Then once it increases in value you sell it back in order to receive more of your original currency in exchange.
It’s your old favorite investment cliché of buy low and sell high. However, there are many ways to accomplish this with Forex trading. Let’s explore a few examples to help you better understand how to make money in Forex.
Pick a Pair
Before we dive into the ways a Forex trader makes money, it is important to understand how a currency pair works. You’ve probably heard of an exchange rate before – news anchors and travel agents often talk about favorable exchange rates.
Well, what is an exchange rate? It is purely the value of one currency in relationship to another. In other words it is the amount of Euros that a Dollar can buy or the amount of Dollars that a Euro can buy.
Since exchange rates pit one currency against another they are quoted in currency pairs. If you wanted to know how many Euros it would take to buy one Dollar then you would check the USD/EUR exchange rate.
The first currency listed is known as the base currency and the second is known as the counter or quote currency. The exchange rate will tell you how many units of the counter currency it will take to buy one unit of the base currency and vice versa.
Theory of Relativity
Remember when you were a kid and traded baseball cards with your friends? Let’s imagine that it’s 1998 and you are engaging in some hardnosed negotiations with Tommy, the local seventh grade card kingpin.
You trade Tommy one of your Mark McGwire cards for one of his Sammy Sosa cards. Sosa then hits homerun number 66 and you hurry over to Tommy’s house and trade him your Sosa back for two Mark McGwires (of course McGwire goes on to beat Sosa in the homerun race and if you’re smart you trade McGwire for as many Barry Bonds as possible…)
Forex trading is very similar to baseball cards – except that your broker doesn’t usually include bubblegum in a currency lot. Let’s evolve our baseball card example by substituting currency for cards and increasing the quantity:
Say you start with 1,000 U.S. Dollars (USD) and wish to purchase Japanese Yen (JPY) because you think the JPY will increase in value relative to the USD, just like why we originally traded the McGwire for the Sosa. So, if the JPY/USD exchange rate is 0.0075 (meaning that each yen will buy a very small percentage of each dollar) then you start off by purchasing approximately 133,333 JPY with your 1,000 USD.
You then hold onto your JPY for 2 weeks at which time your instincts prove correct because the U.S. president announces the U.S. is heading towards a recession and the value of the dollar plummets. With this news the JPY/USD exchange rate rises to 1.000 (1 JPY now equals 1 USD). You then buy 133,333 USD back with your 133,333 JPY, resulting in a profit of about 132,333 USD.
This example is a bit extreme and currency values do not usually change that drastically in a two week period, but hopefully you’re beginning to see how money can be made in Forex trading.
The Long and Short of It
There are several ways for you to make money on a Forex trade depending on whether you want to buy or sell the currency that is currently in your possession. In the example above we decided to buy JPY with the USD we had. In Forex speak we went long on the JPY/USD.
Suppose you had started off with JPY instead of USD and decided to sell your JPY for USD in anticipation that the JPY would decrease in value. Your strategy here would enable you to buy more JPY back once the price dropped. Executing your trades in this manner is considered going short on the JPY/USD.
Going short or long in Forex is just an insider’s way of saying whether you bought or sold a particular currency as part of your strategic move to make a profit. Just remember that long equates to buying and short equates to selling.
Buddy, Can You Spare a Pip?
In the introduction to this article we told you that your goal was to earn pips. So, what is a pip? Well, it’s not a character on South Park or the star of a Charles Dickens’ novel (just in case you were wondering).
Put simply, a pip is the smallest price change that a given exchange rate can make. Most major currency pairs are priced to four decimal points, so the smallest change for most exchange rates is equal to a 1/100th of one percent.
Your profits and losses can be calculated in terms of how many pips you gained or loss. A pip is derived by comparing the starting rate to the ending rate. The difference between the two is how many pips you gained or lost.
For example, if the exchange rate for the USD/CHF was initially 1.2155 and rose to 1.2159 then it has moved 4 pips – which could be good or bad depending on whether you own Francs or Dollars.
Putting It All Together
You should now have a better understanding of how you can actually make money as a successful Forex trader. Remember, Forex trading is NOT easy – anyone who tells you otherwise is lying.
Carefully prepare yourself and learn all you can before trying to execute any trades with real money. Once you feel comfortable then go out there and get all the pips you can!
The basic goal of Forex trading is to swap one currency for another currency then cross your fingers and hope the currency you bought will increase in value relative to the one you sold. Then once it increases in value you sell it back in order to receive more of your original currency in exchange.
It’s your old favorite investment cliché of buy low and sell high. However, there are many ways to accomplish this with Forex trading. Let’s explore a few examples to help you better understand how to make money in Forex.
Pick a Pair
Before we dive into the ways a Forex trader makes money, it is important to understand how a currency pair works. You’ve probably heard of an exchange rate before – news anchors and travel agents often talk about favorable exchange rates.
Well, what is an exchange rate? It is purely the value of one currency in relationship to another. In other words it is the amount of Euros that a Dollar can buy or the amount of Dollars that a Euro can buy.
Since exchange rates pit one currency against another they are quoted in currency pairs. If you wanted to know how many Euros it would take to buy one Dollar then you would check the USD/EUR exchange rate.
The first currency listed is known as the base currency and the second is known as the counter or quote currency. The exchange rate will tell you how many units of the counter currency it will take to buy one unit of the base currency and vice versa.
Theory of Relativity
Remember when you were a kid and traded baseball cards with your friends? Let’s imagine that it’s 1998 and you are engaging in some hardnosed negotiations with Tommy, the local seventh grade card kingpin.
You trade Tommy one of your Mark McGwire cards for one of his Sammy Sosa cards. Sosa then hits homerun number 66 and you hurry over to Tommy’s house and trade him your Sosa back for two Mark McGwires (of course McGwire goes on to beat Sosa in the homerun race and if you’re smart you trade McGwire for as many Barry Bonds as possible…)
Forex trading is very similar to baseball cards – except that your broker doesn’t usually include bubblegum in a currency lot. Let’s evolve our baseball card example by substituting currency for cards and increasing the quantity:
Say you start with 1,000 U.S. Dollars (USD) and wish to purchase Japanese Yen (JPY) because you think the JPY will increase in value relative to the USD, just like why we originally traded the McGwire for the Sosa. So, if the JPY/USD exchange rate is 0.0075 (meaning that each yen will buy a very small percentage of each dollar) then you start off by purchasing approximately 133,333 JPY with your 1,000 USD.
You then hold onto your JPY for 2 weeks at which time your instincts prove correct because the U.S. president announces the U.S. is heading towards a recession and the value of the dollar plummets. With this news the JPY/USD exchange rate rises to 1.000 (1 JPY now equals 1 USD). You then buy 133,333 USD back with your 133,333 JPY, resulting in a profit of about 132,333 USD.
This example is a bit extreme and currency values do not usually change that drastically in a two week period, but hopefully you’re beginning to see how money can be made in Forex trading.
The Long and Short of It
There are several ways for you to make money on a Forex trade depending on whether you want to buy or sell the currency that is currently in your possession. In the example above we decided to buy JPY with the USD we had. In Forex speak we went long on the JPY/USD.
Suppose you had started off with JPY instead of USD and decided to sell your JPY for USD in anticipation that the JPY would decrease in value. Your strategy here would enable you to buy more JPY back once the price dropped. Executing your trades in this manner is considered going short on the JPY/USD.
Going short or long in Forex is just an insider’s way of saying whether you bought or sold a particular currency as part of your strategic move to make a profit. Just remember that long equates to buying and short equates to selling.
Buddy, Can You Spare a Pip?
In the introduction to this article we told you that your goal was to earn pips. So, what is a pip? Well, it’s not a character on South Park or the star of a Charles Dickens’ novel (just in case you were wondering).
Put simply, a pip is the smallest price change that a given exchange rate can make. Most major currency pairs are priced to four decimal points, so the smallest change for most exchange rates is equal to a 1/100th of one percent.
Your profits and losses can be calculated in terms of how many pips you gained or loss. A pip is derived by comparing the starting rate to the ending rate. The difference between the two is how many pips you gained or lost.
For example, if the exchange rate for the USD/CHF was initially 1.2155 and rose to 1.2159 then it has moved 4 pips – which could be good or bad depending on whether you own Francs or Dollars.
Putting It All Together
You should now have a better understanding of how you can actually make money as a successful Forex trader. Remember, Forex trading is NOT easy – anyone who tells you otherwise is lying.
Carefully prepare yourself and learn all you can before trying to execute any trades with real money. Once you feel comfortable then go out there and get all the pips you can!
Surviving as a Beginner: Education, Responsibility, and Expectations
Many people expect to end up swimming through mountains of money in their own private vault like Scrooge McDuck when they start trading Forex. This is most likely not the case. It takes beginning investors years to develop the skills necessary to excel as a Forex trader.
As with any career, it takes dedication and hard work in order to succeed at trading currency. The old Japanese proverb, “fall down seven times, stand up eight” is very applicable as you start out in Forex trading.
The three main things to consider as you establish a career as a Forex trader are education, responsibility, and expectations. If you are able to manage these three areas effectively then you will eventually do well in currency trading.
Seek Ye Knowledge
In order to survive as a beginning Forex trader, you must learn all you can about foreign exchange markets. Simple, right? Not so fast. So, how do you go about tackling this daunting task?
The first thing to do is start learning about the fundamentals of currency trading – which we assume you’ve started since you are visiting this site. It would also be wise to familiarize yourself with the basic principles of macroeconomics and to understand the current foreign policies affecting currency markets.
It is important to educate yourself about key economic indicators such as interest rates, employment rates, gross domestic product (GDP), gross national product (GNP), etc. In a sense, you must learn the lingo so you start to know what to look for when you are trading.
Another area of expertise you should look to develop is a keen understanding of technical analysis. This will give you the ability to analyze charts, identify trends, and forecast results. Much of Forex trading involves crunching numbers and trying to make sense out of mounds of data. Technical analysis skills will give you a distinct advantage as a beginning trader.
Buckle Your Seat Belt and Check Your Rearview Mirror
The Forex market is a relatively new market involving many speculators – all hoping to strike it rich. Since it has only been within the last few decades that the general public has access to currency trading, it has created an atmosphere which is somewhat akin to the gold rush of the 1840s and the dotcom hysteria of the late 1990s.
It is your responsibility as a new Forex investor not to get caught up in the hype. We strongly recommend that you open a demo account and set aside a long period of time – at least 6 months – during which you promise only to trade fake money. This should give you time to go through a few waves of different world and economic events in which you can see how the currency market reacts.
You must also be responsible not to exceed your financial limitations when you start trading. Forex offers unprecedented margin or leverage for an investing vehicle, and while this can eventually help you rack up big profits, it will also cause you to rack up big losses when you are first starting off.
Set aside an amount of money that you know you can lose – some people recommend saving the money you would have invested during your demo period – and do not put yourself in a position to trade more than that. Consider it a less glamorous Las Vegas trip when you tell yourself that you’ll only spend $500, no matter how quickly you lose it at the craps table.
Great Expectations
Many people say that money doesn’t buy happiness, but from our experience we’ve learned that it makes a great down payment. Most investors don’t start trading Forex because they’re bored or enjoy crunching mountains of numbers just for the fun of it. Most Forex traders start investing for one reason – to make money, lots of money.
It is vital that as you begin trading currency you keep your expectations reasonable. Don’t turn in your two weeks’ notice the day you place your first trade, and don’t take out a second mortgage on your house to fund your investments.
Most beginning Forex traders LOSE money. This is one of the main reasons we recommend opening a demo account first. Expect to lose money on the majority of your trades as you begin; however, make sure you evaluate why you were wrong and identify what you can do differently. For example, did you buy too early or sell too late? Or did you misread the impact a certain economic indicator was going to have?
Reasonable expectations will help you not to get discouraged as you start trading currency. This will allow you to avoid getting frustrated and instead learn from your mistakes and keep improving. If you are able to do this, than you can expect to become a very successful Forex trader.
Get Started
It’s time to get your feet wet and prepare to dive in. The first step is to open a demo account with a credible broker and start practicing. The second step is to keep learning as much as you can while you are not using any of your own money and then start using advanced techniques such as technical analysis.
The world of a Forex trader is fast-paced and exciting, but just like most NBA players had to start playing high school and college ball before earning big bucks as a professional, you will also need to put in the hours first. Once you start, though, you will discover how profitable the Forex market is and will learn how to take advantage of it with a great deal of success.
As with any career, it takes dedication and hard work in order to succeed at trading currency. The old Japanese proverb, “fall down seven times, stand up eight” is very applicable as you start out in Forex trading.
The three main things to consider as you establish a career as a Forex trader are education, responsibility, and expectations. If you are able to manage these three areas effectively then you will eventually do well in currency trading.
Seek Ye Knowledge
In order to survive as a beginning Forex trader, you must learn all you can about foreign exchange markets. Simple, right? Not so fast. So, how do you go about tackling this daunting task?
The first thing to do is start learning about the fundamentals of currency trading – which we assume you’ve started since you are visiting this site. It would also be wise to familiarize yourself with the basic principles of macroeconomics and to understand the current foreign policies affecting currency markets.
It is important to educate yourself about key economic indicators such as interest rates, employment rates, gross domestic product (GDP), gross national product (GNP), etc. In a sense, you must learn the lingo so you start to know what to look for when you are trading.
Another area of expertise you should look to develop is a keen understanding of technical analysis. This will give you the ability to analyze charts, identify trends, and forecast results. Much of Forex trading involves crunching numbers and trying to make sense out of mounds of data. Technical analysis skills will give you a distinct advantage as a beginning trader.
Buckle Your Seat Belt and Check Your Rearview Mirror
The Forex market is a relatively new market involving many speculators – all hoping to strike it rich. Since it has only been within the last few decades that the general public has access to currency trading, it has created an atmosphere which is somewhat akin to the gold rush of the 1840s and the dotcom hysteria of the late 1990s.
It is your responsibility as a new Forex investor not to get caught up in the hype. We strongly recommend that you open a demo account and set aside a long period of time – at least 6 months – during which you promise only to trade fake money. This should give you time to go through a few waves of different world and economic events in which you can see how the currency market reacts.
You must also be responsible not to exceed your financial limitations when you start trading. Forex offers unprecedented margin or leverage for an investing vehicle, and while this can eventually help you rack up big profits, it will also cause you to rack up big losses when you are first starting off.
Set aside an amount of money that you know you can lose – some people recommend saving the money you would have invested during your demo period – and do not put yourself in a position to trade more than that. Consider it a less glamorous Las Vegas trip when you tell yourself that you’ll only spend $500, no matter how quickly you lose it at the craps table.
Great Expectations
Many people say that money doesn’t buy happiness, but from our experience we’ve learned that it makes a great down payment. Most investors don’t start trading Forex because they’re bored or enjoy crunching mountains of numbers just for the fun of it. Most Forex traders start investing for one reason – to make money, lots of money.
It is vital that as you begin trading currency you keep your expectations reasonable. Don’t turn in your two weeks’ notice the day you place your first trade, and don’t take out a second mortgage on your house to fund your investments.
Most beginning Forex traders LOSE money. This is one of the main reasons we recommend opening a demo account first. Expect to lose money on the majority of your trades as you begin; however, make sure you evaluate why you were wrong and identify what you can do differently. For example, did you buy too early or sell too late? Or did you misread the impact a certain economic indicator was going to have?
Reasonable expectations will help you not to get discouraged as you start trading currency. This will allow you to avoid getting frustrated and instead learn from your mistakes and keep improving. If you are able to do this, than you can expect to become a very successful Forex trader.
Get Started
It’s time to get your feet wet and prepare to dive in. The first step is to open a demo account with a credible broker and start practicing. The second step is to keep learning as much as you can while you are not using any of your own money and then start using advanced techniques such as technical analysis.
The world of a Forex trader is fast-paced and exciting, but just like most NBA players had to start playing high school and college ball before earning big bucks as a professional, you will also need to put in the hours first. Once you start, though, you will discover how profitable the Forex market is and will learn how to take advantage of it with a great deal of success.
400% Profits in 3 Days!!- How to Spot a Forex Scam
Start researching Forex and you’re likely to see several ads proclaiming ridiculous guarantees such as “2,000 pips a Day!” or “400% Profits in 3 Days!!” Before you quit your day job and start trading Forex fulltime because of these outlandish claims, let’s evaluate how to spot a Forex scam.
Unfortunately, many people associate Forex trading with scams, and perhaps for good reason. The number of unscrupulous companies has been increasing. The number of Forex-related scams has increased abruptly over the last few years, and it is important for you to be able to identify a hoax.
Currency trading is an exciting and potentially profitable investment option, but as with anything involving money, there are people out there who will rob you blind if you don’t know what you’re doing. Let’s take a closer look at Forex scams, so you are properly equipped to spot one.
Understand Genuine Forex Operations
So, where are Forex scams likely to occur? Advertisements for scams can often be spotted in online pop-ups, newspaper advertisements, and the classified sections of financial magazines. How do you weed out the good from the bad?
A first step is to learn how legitimate Forex trading is conducted. Generally, Forex traders can place orders through an exchange or board of trade, a bank, insurance company, registered securities broker/dealer, or other financial institution.
This means that you should search out these types of institutions in order to trade currency. It also means that many scammers will masquerade as one of these types of companies in order to trick you. So where can you turn for help? Is there anyone out there tracking down and punishing these evil-doers? Never fear, the CFTC is here to help you.
Meet A powerful Ally – The CFTC
Even though Jack Bauer doesn’t work there (that’s CTU), the CFTC or Commodity Futures Trading Commission is a great source of information for Forex scams. They have been working tirelessly to crack down on the number of scams, and while it has taken longer than 24 hours, their efforts have produced solid results which Forex traders can utilize.
In the United States, the CFTC has federally mandated authority and jurisdiction to investigate and take legal action when appropriate against corrupt Forex brokers. Additionally, they have the ability to prosecute any firm registered with the CFTC if the firm’s actions violate any CRTC-mandated rules.
The CFTC was empowered in December 2006 with the passing of the Commodity Futures Modernization Act. Their efforts have centered on educating potential Forex traders about currency trading’s best practices as well as keeping tabs on the people who offer Forex services.
CFTC Guidelines
The CFTC has issued several reports concerning the offering and trading of foreign currency futures and options contracts. Some of the main points of advice from the advisory are the following:
Stay Away From Opportunities That Sound Too Good to Be True
Avoid Any Company that Predicts or Guarantees Large Profits
Stay Away From Companies That Promise Little or No Financial Risk
Don’t Trade on Margin Unless You Understand What It Means
Question Firms That Claim To Trade in the “Interbank Market”
Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise
Currency Scams Often Target Members of Ethnic Minorities
Be Sure You Get the Company’s Performance Track Record
Don’t Deal With Anyone Who Won’t Give You Their Background
Additionally, the CFTC warns to be careful of unsolicited phone calls about “can’t miss” investments from offshore salespersons or companies that don’t sound familiar.
The following are some of the steps prescribed to identify a potential scam by the CFTC, and we encourage you to follow them:
Contact the CFTC.
Visit the CFTC’s forex fraud Web page.
Contact the National Futures Association to see whether the company is registered with the CFTC or is a member of the National Futures Association (NFA). You can do this easily by calling the NFA or by checking the NFA’s registration and membership information on its Web site. While registration may not be required, you might want to confirm the status and disciplinary record of a particular company or salesperson.
Get all information about the company and verify that data, if possible. If you can, check the company’s materials with someone whose financial advice you trust.
Learn all possible information about fees charged, and the basis for each of these charges.
If in doubt, don’t invest. If you can’t get solid information about the company, the salesperson, and the investment, you may not want to risk your money.
No Free Lunch
One of the basic principles of economics is the concept that there is no such thing as a free lunch. This concept is for the most part true (soup kitchens excluded) and particularly applies to any type of investing, especially Forex trading.
If a Forex claim seems too good to be true and a broker is seemingly giving money away, then don’t invest. This doesn’t mean you shouldn’t try to find low commissions or low bid/ask spreads, but remember there is no invincible Forex formula or brokerage which will enable you to instantly make huge amounts of money trading currency.
Never Stop Learning
The only foolproof method to avoiding currency scams and to become a successful Forex trader is to gain as good an education as possible. The more you learn about Forex trading in general, the easier it will be to spot currency trading scams.
For example, what would happen if on your way into your favorite electronics store, someone stopped you and said not to buy that Plasma which you’ve been saving all year for, because they could guarantee you a better television at half the price? They explain all you have to do is give them $1000 in cash and they’ll present you with the TV.
Would this get your attention? Of course. Would this be a good idea? Not unless you want to wave goodbye to one thousand hard-earned dollars. How do you know? You’re a well-informed and responsible consumer with years of purchasing experience. In order to identify Forex scams you must also become a well-informed and responsible Forex investor.
Unfortunately, many people associate Forex trading with scams, and perhaps for good reason. The number of unscrupulous companies has been increasing. The number of Forex-related scams has increased abruptly over the last few years, and it is important for you to be able to identify a hoax.
Currency trading is an exciting and potentially profitable investment option, but as with anything involving money, there are people out there who will rob you blind if you don’t know what you’re doing. Let’s take a closer look at Forex scams, so you are properly equipped to spot one.
Understand Genuine Forex Operations
So, where are Forex scams likely to occur? Advertisements for scams can often be spotted in online pop-ups, newspaper advertisements, and the classified sections of financial magazines. How do you weed out the good from the bad?
A first step is to learn how legitimate Forex trading is conducted. Generally, Forex traders can place orders through an exchange or board of trade, a bank, insurance company, registered securities broker/dealer, or other financial institution.
This means that you should search out these types of institutions in order to trade currency. It also means that many scammers will masquerade as one of these types of companies in order to trick you. So where can you turn for help? Is there anyone out there tracking down and punishing these evil-doers? Never fear, the CFTC is here to help you.
Meet A powerful Ally – The CFTC
Even though Jack Bauer doesn’t work there (that’s CTU), the CFTC or Commodity Futures Trading Commission is a great source of information for Forex scams. They have been working tirelessly to crack down on the number of scams, and while it has taken longer than 24 hours, their efforts have produced solid results which Forex traders can utilize.
In the United States, the CFTC has federally mandated authority and jurisdiction to investigate and take legal action when appropriate against corrupt Forex brokers. Additionally, they have the ability to prosecute any firm registered with the CFTC if the firm’s actions violate any CRTC-mandated rules.
The CFTC was empowered in December 2006 with the passing of the Commodity Futures Modernization Act. Their efforts have centered on educating potential Forex traders about currency trading’s best practices as well as keeping tabs on the people who offer Forex services.
CFTC Guidelines
The CFTC has issued several reports concerning the offering and trading of foreign currency futures and options contracts. Some of the main points of advice from the advisory are the following:
Stay Away From Opportunities That Sound Too Good to Be True
Avoid Any Company that Predicts or Guarantees Large Profits
Stay Away From Companies That Promise Little or No Financial Risk
Don’t Trade on Margin Unless You Understand What It Means
Question Firms That Claim To Trade in the “Interbank Market”
Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise
Currency Scams Often Target Members of Ethnic Minorities
Be Sure You Get the Company’s Performance Track Record
Don’t Deal With Anyone Who Won’t Give You Their Background
Additionally, the CFTC warns to be careful of unsolicited phone calls about “can’t miss” investments from offshore salespersons or companies that don’t sound familiar.
The following are some of the steps prescribed to identify a potential scam by the CFTC, and we encourage you to follow them:
Contact the CFTC.
Visit the CFTC’s forex fraud Web page.
Contact the National Futures Association to see whether the company is registered with the CFTC or is a member of the National Futures Association (NFA). You can do this easily by calling the NFA or by checking the NFA’s registration and membership information on its Web site. While registration may not be required, you might want to confirm the status and disciplinary record of a particular company or salesperson.
Get all information about the company and verify that data, if possible. If you can, check the company’s materials with someone whose financial advice you trust.
Learn all possible information about fees charged, and the basis for each of these charges.
If in doubt, don’t invest. If you can’t get solid information about the company, the salesperson, and the investment, you may not want to risk your money.
No Free Lunch
One of the basic principles of economics is the concept that there is no such thing as a free lunch. This concept is for the most part true (soup kitchens excluded) and particularly applies to any type of investing, especially Forex trading.
If a Forex claim seems too good to be true and a broker is seemingly giving money away, then don’t invest. This doesn’t mean you shouldn’t try to find low commissions or low bid/ask spreads, but remember there is no invincible Forex formula or brokerage which will enable you to instantly make huge amounts of money trading currency.
Never Stop Learning
The only foolproof method to avoiding currency scams and to become a successful Forex trader is to gain as good an education as possible. The more you learn about Forex trading in general, the easier it will be to spot currency trading scams.
For example, what would happen if on your way into your favorite electronics store, someone stopped you and said not to buy that Plasma which you’ve been saving all year for, because they could guarantee you a better television at half the price? They explain all you have to do is give them $1000 in cash and they’ll present you with the TV.
Would this get your attention? Of course. Would this be a good idea? Not unless you want to wave goodbye to one thousand hard-earned dollars. How do you know? You’re a well-informed and responsible consumer with years of purchasing experience. In order to identify Forex scams you must also become a well-informed and responsible Forex investor.
Assinar:
Postagens (Atom)