Forex Trading 6

Who decides the dollar price?
Forex Trading 6

Government control of currency exchange rates has given way to a free-market approach.

Investors often hear about how the dollar is strong at one time or weak at another, but the mechanics of how the value of the U.S. dollar is determined are more complicated than many realize. The history of money in the U.S. has some interesting twists in this regard, and the way that the value of the dollar was determined as recently as 45 years ago is far different from the system that prevails today.

Foreign exchange markets

Since then, the U.S. dollar's value has been determined through trade in the foreign exchange markets. Participants in those markets tend to use a variety of factors in determining what positions to take, including the relative economic strength of the two countries, interest rates, and other macroeconomic factors.
From time to time, central banks will intervene in the currency markets to counteract volatility. For instance, in 2015, Mexico's central bank chose to sell $200 million in U.S. currency on a daily basis for a three-month period to purchase Mexican pesos. This move raised the value of the peso and reduced the relative value of the U.S. dollar. However, such interventions are now relatively rare in most free-market countries.
Similarly, some foreign countries have maintained a peg to the value of the U.S. dollar. For instance, Hong Kong has maintained a pegged rate since 1983, with 7.75 to 7.85 Hong Kong dollars equal to the value of one U.S. dollar.
There's no direct mechanism for establishing the value of the U.S. dollar. Although central-bank interventions in foreign exchange markets occur occasionally, the role of government in setting the dollar's value is a thing of the past.

The dollar and the gold standard

Prior to 1971, the U.S. government set the official value of the U.S. dollar by tying it to a fixed amount of gold. Congress set the amount of gold required in official money, and for a century, the Coinage Act of 1834 effectively set a fixed gold price of $20.67 per ounce. This set the official value of the dollar at 23.2 grains of gold, or about 1.5 grams, or 371.25 grains of silver, equal to just over three-quarters of a troy ounce.
That rate lasted until 1933, when President Franklin D. Roosevelt required all Americans to turn in gold coins to the Federal Reserve in exchange for paper money. In 1934, the government devalued the dollar to require $35 per ounce of gold.
In 1971, President Richard Nixon took the U.S. off the gold standard, saying that the U.S. would no longer convert dollars to gold at a fixed value. That move effectively delinked the dollar's value to the price of a tangible good and allowed it to float freely.

 Why do 90% of Forex traders lose in trading?

9 Reasons Why Most Traders Lose

1- Most traders lose, because they don’t treat forex trading as an investment

Sure, the forex market moves often and it is open 24 hours a day, 5 days a week. But this doesn't justify NOT treating forex trading as an investment. It is very tempting to get into way too many positions at once, without considering your risk-tolerance, just because the markets are open and moving.

However the fact is that reaching your targets take time and need just as much, if not more, analysis than investing in other markets such as stocks or ETFs.

2- You think trading forex is a get-rich-quick solution

This mindset doesn't work to begin with, in any type of market or business. You can not expect to consistently make great returns without carefully setting up your goals and taking the essential investment planning process to achieve those goals.

3- You don’t understand the risks of trading

Forex trading risks not only include incredible amount of volatility traders could face with no prior notice, but also the fact that traders have large amounts of leverage at their disposal. Using large leverage is one of the surest way to blow up your account in the minimal amount of time.

Other investment instruments have their own set of risks that can be identifies through Beta(β) and Standard Deviation (σ).

Traders must consider risk vs. return of their portfolio before developing an investment strategy.

4- You don't know your risk tolerance

Knowing the market risk is not sufficient when it comes to developing winning trading strategies. You must also know your OWN level of risk tolerance in order to develop an investment strategy suitable to YOUR needs. Your risk tolerance is calculated through identifying your ability to take risk, as well as your willingness.

5- You stick to your screen all the time

Day trading and staring at your charts all the time, bring out the worst fear and greed emotions out of people and you may end up losing ALL your money. We are all humen. And if we follow the markets ALL THE TIME, it is super easy to  get emotional about our losses, and just to prove that we are not a loser, get into another wrong trade. In our free workshop "3 Secrets to Making Your Money Work For You (Without Having to Stick to Your Screen All the Time)" we cover this thoroughly.

6- You only listen to the news when making a trading decision

Another deadly mistake many traders make, is listening to financial news all day long.

You've got to remember that most news channels get paid based on ratings, so they need to keep the audience engaged. Most of the time, they do so by creating unnecessary drama out of thin air. That will again, push traders to make speculative trading decisions, rather than decisions carefully developed based on their financial goals and risk tolerance.

7- You only follow your heart and intuition

You have a feeling the markets are going to move in a certain direction?

Good on you! But guess what. Your feelings are probably either mood swings or testosterone. Sure enough, there is a 50/50 chance that your feelings are correct -- after all, the markets can only move in one of two directions; Up or down.

However only following your intuition when trading is probably of the dumbest things you could do to your money. If your feelings were right, chances are, you're going to get overly excited about your wins , think you are the Nostradamus of the markets and place a foolish trade right after.

8- You only do technical analysis

Technical analysis is nothing but understanding the markets' psychological levels. Forex strategies rely more heavily on technical analysis comparing to other investment instruments. Personally I try to find minimum of 3 chart patterns to back-up the market direction, and then use the Ichimoku - Fibonacci combo to identify entry and exit levels.

However, technical analysis alone is not sufficient. Traders must have an understanding of the fundamental developments, as well as their risk tolerance, before incorporating technical analysis into their investment strategy.

9- You are not educated to trade

You watch a Wall Street movie, or hear a success story about a billionaire trader. You decide to give it a try. After all, how hard could it be? You'll simply make a bet on which direction the markets are going to move and go heads in.

Unfortunately, if this was how things worked, there would have been WAY more billionaire traders out there.

Is it rocket science? No.

But it sure is some sort of science. And without having proper education before trading, you might as well take a trip down to Las Vegas and spend $10,000 on a chip. The odds of you winning the jackpot are roughly the same as creating wealth through investment without proper education.

But it sure is some sort of science. And without having proper education before trading, you might as well take a trip down to Las Vegas and spend $10,000 on a chip. The odds of you winning the jackpot are roughly the same as creating wealth through investment without proper education.

Does binary options trading has more chances of making profits as compared to equity and Forex?

Balance of trade

The balance of trade, commercial balance, or net exports(sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain period. Sometimes a distinction is made between a balance of trade for goods versus one for services. "Balance of trade" can be a misleading term because trade measures a flowof exports and imports over a given period of time, rather than a balanceof exports and imports at a given point in time. Also, balance of trade does not mean that exports and imports are "in balance" with each other or anything else.
If a country exports a greater value than it imports, it has a trade surplus or positive balance, and conversely, if a country imports a greater value than it exports, it has a trade deficit or negative balance. About 60 out of 200 countries have a trade surplus. The notion that bilateral trade deficits are bad in and of themselves is overwhelmingly rejected by trade experts and economists.

What is 'Bilateral Trade'

A bilateral trade is the exchange of goods between two nations promoting trade and investment. The two countries will reduce or eliminate tariffs, import quotas, export restraints, and other trade barriers to encourage trade and investment. In the United States, the Office of Bilateral Trade Affairs minimizes trade deficits through negotiating free trade agreements with new countries, supporting and improving existing trade agreements, promoting economic development abroad, and other actions. 

What is a negative trade balance?

A trade deficit is an economic measure of international trade in which a country's imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets. It is also referred to as a negative balance of trade (BOT).

BREAKING DOWN 'Bilateral Trade'

The goals of bilateral trade agreements are to expand access between two countries’ markets and increase their economic growth. Standardized business operations in five general areas prevent one country from stealing another’s innovative products, dumping goods at a small cost, or using unfair subsidies. Bilateral trade agreements standardize regulations, labor standards, and environmental protections. 
 The United States formed bilateral, free trade agreements with Israel (1985), Jordan (2001), Australia, Chile, Singapore (2004), Bahrain, Morocco, Oman (2006), Peru (2007), and with Panama, Colombia, South Korea (2012). NAFTA replaced the bilateral agreements with Canada and Mexico in 1994.

Advantages and Disadvantages of Bilateral Trade

Compared to multilateral trade agreements, bilateral trade agreements are easily negotiated, because only two nations are party to the agreement. Bilateral trade agreements initiate and reap trade benefits faster than multilateral agreements. When negotiations for a multilateral trade agreement are unsuccessful, many nations will negotiate bilateral treaties instead. However, new agreements often result in competing agreements between other countries, eliminating the advantages the Free Trade Agreement (FTA) confers between the original two nations.

What Are Binary Options?

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

Foreign Versus U.S. Binary Options

Non U.S. binary options typically have a fixed payout and risk, and are offered by individual brokers rather than directly on an exchange. These brokers profit on the difference between what they pay out on winning trades and what they collect on losing trades. While there are exceptions, these instruments are supposed to be held until expiration in an "all or nothing" payout structure. Foreign brokers are not legally allowed to solicit U.S. residents unless registered with a U.S. regulatory body such as the SEC or Commodities Futures Trading Commission (CFTC). 

The Chicago Board Options Exchange (CBOE) began listing binary options for U.S. residents in 2008. The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Chicago-based Nadex also runs a binary options exchange for US residents, subject to oversight by the CFTC. These options can be traded at any time, with the rate fluctuating between one and 100 based on the current probability of the position finishing in or out of the money. There is full transparency at all times and the trader can take the profit or loss they see on their screen prior to expiration. They can also enter as the rate fluctuates, taking advantage of varying risk-to-reward scenarios, or hold until expiration and close the position with the maximum gain or loss documented at the time of entry. Each trade requires a willing buyer and seller. because U.S. binary options trade through an exchange, which makes money through a fee that matches counter-parties.

Characteristics of Binary Options trading and Forex trading

Binary options trading offers the following features
  • Binary options is fixed risk and fixed returns. Therefore traders know exactly the amount invested which is at risk of the market and they also know before they enter a contract the returns they can expect if the contract expires in-the-money.

  • Because of the derivative nature of binary options, there is no use of leverage. Traders familiar with forex would know that leverage can act both ways. While it can magnify the chances of making big profits, leverage can also be capable of decimating a trader’s equity. Because there is no need for leverage, the trader actually trades with the amount they have and thus be able to manage risk better. Click here to read about Leverag.

  • There are only two ways to trade binary options. A CALL option or a PUT option which is based on the directionality of the security. Therefore a binary option trading is much simpler. You purchase a CALL option if you think the price will rise or you purchase a PUT option if you think the price will fall; by the time the contract expires.

  • With binary options you do not own the actual underlying stock and therefore protected from any premiums (positive of negative) that you might be charged

  • Some Binary Options Brokers also allow for the trader to sell back their contract before expiry (known as buy-back) and allows for the trader to further minimize their risks.
In comparison, Forex trading offers the following features

·         Trading forex requires you to have a significant amount of capital. Although there are many Forex Brokers who allow for forex deposits for as low as $10 (but typically $100) the capital is not enough to make any substantial profits from the markets.

Use of leverage allows a forex trader to increase the profitability (but also increases their risk as well). Improper use of leverage can result in risking the capital and in some cases more than the invested amount.

·         Depending on the trading strategy if a trader buys or sells and holds the position overnight, they are subject to overnight rollovers or swaps which can be either positive or negative and can therefore affect the floating P/L of the position. Read more about swaps and rollovers.

·         A forex trader has the freedom to close their trade anytime they wish to, regardless if it is in profit or not.

·         There is no fixed risk (although this can be determined by the stop loss a trader has for a position) and fixed return (which can again be determined by the target limit order). Therefore unlike binary options, in forex both risks and rewards can increase or decrease.

·         Binary Options vs Forex – Which is better?

·         While both the above markets have their own distinct features, one cannot simply dismiss one market for the other. Of course, a complete beginner might find binary options easier to trader compared to forex, while a seasoned trader would know that binary options trading can complement their forex trading and vice versa.
·         Let’s assume that a Forex traderentered a BUY trade on EURUSD at 1.383 on 24/04. The trader sets their stop loss and target limits to 1.3792 and 1.38858 respectively. After entering the position, the trader waits for price to reach its target, which it eventually does on 01/05. 

Although the trade was profitable, during the course of the trade, EURUSD was volatile where it dropped back to below the entry price (which could have been risky for the trade). The forex trade lasted for 6 days. Depending on the number of lots bought (assuming it was 0.1); the trader’s profit would have been $55.

·         Now if a BinaryOptions traderwould have purchased a CALL option on EURUSD at 1.383 with an expiry of 24 hours, the trader would have made a quick profit. If the trader invested just $50 the profit they would have made would be $44 within 24 hours.
·         In terms of risk, with binary options the trader would have risked $50, while with forex, the risk was $38.

·         The same example will show different results if the option expiry was set to more than 24 hours or even a weekly option expiry date.
·         From the above example, we can therefore learn that we cannot simply state that binary options is better than forexor vice versa. However, an astute trader would take advantage of binary options and try to make additional profits during the course of the trade


Forex Versus Blue Chips

The foreign exchange market is the world's largest financial market, accounting for more than $5 trillion in average traded value each day as of 2016 (date of the most recent BIS Triennial Central Bank Survey). Many traders are attracted to the forex market because of its high liquidity, around-the-clock trading and the amount of leverage that is afforded to participants.

Blue chips, on the other hand, are stocks from well-established and financially sound companies. These stocks are generally able to operate profitably during challenging economic conditions and have a history of paying dividends. Blue chips are generally considered to be less volatile than many other investments and are often used to provide steady growth potential to investors' portfolios.

Volatility. This is a measure of short-term price fluctuations. While some traders, particularly short-term and day traders, rely on volatility in order to profit from quick price swings in the market, other traders are more comfortable with less volatile and less risky investments. As such, many short-term traders are attracted to the forex markets, while buy-and-hold investors may prefer the stability offered by blue chips.

Leverage. A second consideration is leverage. In the United States, investors generally have access to 2:1 leverage for stocks. The forex market offers a substantially higher leverage of up to 50:1, and in parts of the world even higher leverage is available. Is all this leverage a good thing? Not necessarily. While it certainly provides the springboard to build equity with a very small investment – forex accounts can be opened with as little as $100 – leverage can just as easily destroy a trading account.
Trading Hours. Yet another consideration in choosing a trading instrument is the time period that each is traded. Trading sessions for stocks are limited to exchange hours, generally 9:30 A.M. to 4pm Eastern Standard Time (EST), Monday through Friday with the exception of market holidays. The forex market, on the other hand, remains active round-the-clock from 5 P.M. EST Sunday, through 5 P.M. EST Friday, opening in Sydney, then traveling around the world to Tokyo, London and New York. The flexibility to trade during U.S., Asian and European markets – with good liquidity virtually any time of day – is an added bonus to traders whose schedules would otherwise limit their trading activity.

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