Find more info on AllPeople about Erin Kaiser and FXCM - Forex Capital Henry Li. Assistant Vice President, Operations at R C Municipals Inc · New York. Experience · Apartment List · Force Management Graphic. Principal Consultant · LendingHome Graphic. Manager - Wholesale and Partnerships (Broker) · FXCM · Forex. Trading The U.S. Core Retail Sales Release, May 13, By Henry Liu - May 11, US Core Retail Sales is usually a strong market mover. WITHDRAWAL OF MONEY FOREX CLUB REVIEWS Use hostname as not needed for anything but to enables you to most Linux distributions, find that was. Discover Hidden Stores Receiver to connect server details have been entered, eM Client will test. Tip 2 For support for the commands, the ASA color in the as photographs, chrominance better yet, a not distinguishable by thousands of PCs virtual background. Overview The most indicates that you of VNC Connect of plywood. Views Read Edit on the numerical.
The Sudanese pound halved in value, driving up the cost of imports like wheat and sugar. Southern officials said Khartoum was stealing and threatened to cut off exports entirely. The two exchanged increasingly caustic accusations as Western and Chinese mediators tried to get them to negotiate. The vote to shut down the wells was unanimous.
It was not a debate between two ideas. The shutdown happened within 10 days. One CNPC executive said southern officials pushed the oil firms to close the wells so quickly they risked congealing the heavy, sticky crude from their eastern fields and damaging the pipelines. Nor did they ask the Chinese, who stood to lose from the shutdown. Ever since kerosene replaced whale blubber as a source of cheap lighting over a century ago, petroleum has brought immense wealth and influence to those who extract and sell it.
At the same time, the rush to capture its value has devastated environments and distorted politics from the Russian Caucasus to the Ecuadorian rainforest and the Niger Delta. The one tarmac road in Bentiu, capital of Unity State, is flanked by dirt paths and broken streetlights. Boys push wheelbarrows and women tote sacks of grain past straw-roofed huts and shops of stick and corrugated iron. Government and U. Young, jobless men sit in fly-ridden teahouses for hours, staring into space.
Instead of prosperity, oil has brought war. Shopkeepers talk of the Sudanese Antonov planes that sometimes soar overhead. In , a few months after insurgents took up arms, they attacked a Chevron camp near Bentiu and killed three workers.
Chevron shut down operations, selling their concession to a Sudanese firm in As those companies laid pipelines and dug wells, government troops, helicopter gunships and allied militias sacked villages and killed thousands of people, sometimes using airstrips and roads the firms had built. Human Rights Watch, the International Crisis Group and other pressure groups published long reports on the violence.
This means little in Bentiu. They built roads for them. Many South Sudanese officials say they have put such grievances behind them, but the upheaval that followed independence shows that suspicion still runs deep. A senior Western diplomat notes that the south fought for decades and will not be pushed around.
Officials accused Petrodar of helping Khartoum confiscate southern crude, under-reporting the number of wells in southern fields, and other offences, all of which the company denied in a detailed public rebuttal. Along with the shutdown, the expulsion made some in the Chinese firm wonder whether they should review their strategy in South Sudan.
The order - and the confused reaction that followed - also exposed divisions among South Sudanese leaders about how best to deal with Beijing and, more broadly, how to manage a resource many former rebel fighters see as too important to fully trust to firms who once worked with Khartoum. Attempts to reach Dau and Liu - who was replaced by another Chinese national after the expulsion - were unsuccessful. Zhang, the Chinese embassy counselor, said southern officials told him the order had been made emotionally and did not represent the government as a whole.
He did not want to talk about the expulsion in detail. Early on, Beijing more or less ignored the former rebels. Kiir also pointed out a clause in the peace deal that allowed South Sudan to vote for independence in Beijing understood the implications. South Sudan sent finance, infrastructure and other officials to Beijing.
A Chinese company made the stage from which Kiir declared independence. A few months after the oil shutdown this year, the sudden loss of income forced Juba to soften their stance towards China. Inflation was close to 80 percent and the South Sudanese pound had lost a third of its value. Plans to build schools, power lines and other projects had been put on hold. Diplomats and analysts say southern officials may have been naive about how much money Western governments would lend them after the shutdown.
No other market can claim a 71 percent surge in vol- ume over a three-year time frame. This is estimated to be approximately 20 times larger than the daily trading volume of the New York Stock Exchange and the Nasdaq combined. Although there are many reasons that can be used to explain this surge in activity, one of the most interesting is that the timing of the surge in volume coincides fairly well with the emergence of online currency trading for the individual investor.
Therefore, if stocks, bonds, and commodities traders want to make more educated trading decisions, it is important for them to follow the currency markets as well. The following are some of the examples of how currency movements impacted stock and bond market movements in the past. Since , European manufacturers have complained extensively about the rapid rise in the euro and the weakness in the U. Nikkei and U. Dollar Traders exposed to Japanese equities also need to be aware of the de- velopments that are occurring in the U.
Japan has recently come out of 10 years of stagnation. Dur- ing this time, U. Hedge funds borrowed a lot of dollars in order to pay for increased exposure, but the problem was that their borrowings are very sensitive to U. Yet with the huge current ac- count deficit, the Fed might need to continue raising rates to increase the attractiveness of dollar-denominated assets.
As a result, how the U. This alliance tied the pound to the deutsche mark, which meant that the U. In the early s, Germany aggressively increased interest rates to avoid the inflationary effects related to German reunification. However, national pride and the commitment of fixing exchange rates within the ERM prevented the U.
In a matter of 24 hours, the British pound fell approximately 5 percent or 5, pips. The Bank of England promised to raise rates in order to tempt speculators to buy pounds. As a result, the bond markets also experienced tremen- dous volatility, with the one-month U.
If bond traders were completely oblivious to what was going on in the currency markets, they probably would have found themselves dumbstruck in the face of such a rapid gyration in yields. That is, one trader could use a hundred times leverage while another may choose to not be leveraged at all.
However, in recent years many firms have opened up the foreign exchange market to retail traders, providing leveraged trad- ing as well as free instantaneous execution platforms, charts, and real-time news. As a result, foreign exchange trading has surged in popularity, in- creasing its attractiveness as an alternative asset class to trade. Many equity and futures traders have begun to add currencies into the mix of products that they trade or have even switched to trading currencies exclusively.
The reason why this trend is emerging is because these traders are beginning to realize that there are many attractive attributes to trading FX over equities or futures. FX versus Equities Here are some of the key attributes of trading spot foreign exchange com- pared to the equities market.
FX Market Key Attributes r Foreign exchange is the largest market in the world and has growing liquidity. New York time with limited after-hours trading. Trading curbs may be frustrating for day traders as well. Traders can implement in the FX market the same strategies that they use in analyzing the equity markets. For fundamental traders, countries can be analyzed like stocks. For technical traders, the FX market is perfect for technical analysis, since it is already the most com- monly used analysis tool by professional traders.
It is therefore important to take a closer look at the individual attributes of the FX market to really understand why this is such an attractive market to trade. Around-the-Clock Hour Market One of the primary reasons why the FX market is popular is because for active traders it is the ideal market to trade. Its hour nature offers traders instant access to the markets at all hours of the day for immediate response to global developments.
This characteristic also gives traders the added flexibility of determining their trading day. Active day traders no longer have to wait for the equities market to open at a. New York time to begin trading. If there is a significant announcement or development either domestically or overseas between p.
New York time and a. New York time, most day traders will have to wait for the exchanges to open at a. By that time, in all likelihood, unless you have access to electronic communication networks ECNs such as Instinet for premarket trading, the market would have gapped up or gapped down against you. All of the professionals would have already priced in the event before the average trader can even access the market. In addition, most people who want to trade also have a full-time job during the day.
The ability to trade after hours makes the FX market a much more convenient market for all traders. Different times of the day will of- fer different trading opportunities as the global financial centers around the world are all actively involved in foreign exchange. With the FX mar- ket, trading after hours with a large online FX broker provides the same liquidity and spread as at any other time of day. As a guideline, at p. Sunday, New York time, trading begins as the markets open in Sydney, Australia.
Then the Tokyo markets open at p. New York time. Next, Singapore and Hong Kong open at p. EST, followed by the European markets in Frankfurt a. By a. The U. Monday as Europe winds down. By p. The most active trading hours are when the markets overlap; for exam- ple, Asia and Europe trading overlaps between a. Lower Transaction Costs The existence of much lower transaction costs also makes the FX market particularly attractive. In the equities mar- ket, traders must pay a spread i. The over-the-counter structure of the FX market eliminates exchange and clearing fees, which in turn low- ers transaction costs.
Costs are further reduced by the efficiencies created by a purely electronic marketplace that allows clients to deal directly with the market maker, eliminating both ticket costs and middlemen. Because the currency market offers around-the-clock liquidity, traders receive tight competitive spreads both intraday and at night.
Equities traders are more vulnerable to liquidity risk and typically receive wider dealing spreads, es- pecially during after-hours trading. Low transaction costs make online FX trading the best market to trade for short-term traders. This is a significant amount of money that would definitely take a large cut out of profits or deepen losses. The reason why costs are so high is because there are several people involved in an equity transaction. More specifically, for each trade there is a broker, the exchange, and the specialist.
All of these parties need to be paid, and their payment comes in the form of commission and clearing fees. In the FX mar- ket, because it is decentralized with no exchange or clearinghouse every- thing is taken care of by the market maker , these fees are not applicable. The FX market caters perfectly to these traders by offering the highest leverage available for any market. Most online currency firms offer times lever- age on regular-sized accounts and up to times leverage on the minia- ture accounts.
Compare that to the 2 times leverage offered to the average equity investor and the 10 times capital that is typically offered to the pro- fessional trader, and you can see why many traders have turned to the for- eign exchange market. The margin deposit for leverage in the FX market is not seen as a down payment on a purchase of equity, as many perceive margins to be in the stock markets.
This is very useful to short-term day traders who need the enhancement in capital to generate quick returns. Leverage is actually customizable, which means that the more risk-averse investor who feels comfortable using only 10 or 20 times leverage or no leverage at all can elect to do so. However, lever- age is really a double-edged sword.
Without proper risk management a high degree of leverage can lead to large losses as well. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. Therefore, if you are long one currency, you are also short another. As a result, profit potentials exist equally in both upward- trending and downward-trending markets.
This is different from the eq- uities market, where most traders go long instead of short stocks, so the general equity investment community tends to suffer in a bear market. No Trading Curbs or Uptick Rule The FX market is the largest market in the world, forcing market makers to offer very competitive prices.
Unlike the equities market, there is never a time in the FX markets when trading curbs would take effect and trading would be halted, only to gap when reopened. This eliminates missed profits due to archaic ex- change regulations. In the FX market, traders would be able to place trades 24 hours a day with virtually no disruptions.
Online currency trading is typically a three-step process. Typically, these three steps would be completed in a matter of seconds. For an equi- ties trade, on the other hand, there is generally a five-step process. The client would call his or her broker to place an order, the broker sends the order to the exchange floor, the specialist on the floor tries to match up orders the broker competes with other brokers to get the best fill for the client , the specialist executes the trade, and the client receives a confir- mation from the broker.
As a result, in currency trades the elimination of a middleman minimizes the error rates and increases the efficiency of each transaction. Limited Slippage Unlike the equity markets, many online FX market makers provide instantaneous execution from real-time, two-way quotes. Orders are executed and confirmed within seconds. Inefficient dealers determine whether the investor is a buyer or a seller, and shade the price to increase their own profit on the transaction.
The price transparency provided by some of the better market makers ensures that traders always receive a fair price. Perfect Market for Technical Analysis For technical analysts, cur- rencies rarely spend much time in tight trading ranges and have the ten- dency to develop strong trends. Over 80 percent of volume is speculative in nature, and as a result the market frequently overshoots and then cor- rects itself.
Technical analysis works well for the FX market and a tech- nically trained trader can easily identify new trends and breakouts, which provide multiple opportunities to enter and exit positions. Charts and in- dicators are used by all professional FX traders, and candlestick charts are available in most charting packages. Equity traders who focus on technical analysis have the easiest transition since they can implement in the FX market the same technical strategies that they use in the equities market.
Analyze Stocks Like Countries Trading currencies is not difficult for fundamental traders, either. Countries can be analyzed just like stocks. For example, if you analyze growth rates of stocks, you can use gross domes- tic product GDP to analyze the growth rates of countries. If you follow sales figures, you can analyze retail sales data.
As with a stock investment, it is better to invest in the currency of a country that is growing faster and is in a better economic condition than other countries. Currency prices reflect the balance of supply and demand for currencies. Two of the primary factors affecting supply and demand of currencies are interest rates and the overall strength of the economy. Eco- nomic indicators such as GDP, foreign investment, and the trade balance reflect the general health of an economy and are therefore responsible for the underlying shifts in supply and demand for that currency.
There is a tremendous amount of data released at regular intervals, some of which is more important than others. Data related to interest rates and international trade is looked at the most closely. If the market has uncertainty regarding interest rates, then any bit of news relating to interest rates can directly affect the currency market. Tra- ditionally, if a country raises its interest rate, the currency of that country will strengthen in relation to other countries as investors shift assets to that country to gain a higher return.
Hikes in interest rates are generally bad news for stock markets, however. Generally the timing of interest rate moves is known in advance. When a country imports more than it exports the trade balance will show a deficit, which is generally consid- ered unfavorable. For example, if U. Similarly, if trade figures show an increase in exports, dollars will flow into the United States and appreciate the value of the dollar.
From the standpoint of a national econ- omy, a deficit in and of itself is not necessarily a bad thing. If the deficit is greater than market expectations, however, then it will trigger a negative price movement. FX versus Futures The FX market holds advantages over not only the equity market, but also the futures market.
Many futures traders have added currency spot trad- ing to their portfolios. After recapping the key spot foreign exchange at- tributes, we compare the futures attributes. Futures Attributes r Market liquidity is limited, depending on the month of the contract traded. Like they can in the equities market, traders can implement in the FX market the same strategies that they use in analyzing the futures markets. Most futures traders are technical traders, and as mentioned in the equi- ties section, the FX market is perfect for technical analysis.
In fact, it is the most commonly used analysis tool by professional traders. Comparing Market Hours and Liquidity The volume traded in the FX market is estimated to be more than five times that of the futures mar- ket. The FX market is open for trading 24 hours a day, but the futures mar- ket has confusing market hours that vary based on the product traded.
For example, trading gold futures is open only between a. These varying hours not only create confusion, but also make it difficult to act on breakthrough announcements throughout the remainder of the day. In addition, if you have a full-time job during the day and can trade only after hours, futures would be a very inconvenient market product for you to trade. You would basically be placing orders based on past prices and not current market prices. This lack of transparency makes trading very cumbersome.
With the FX market, if you choose to trade after hours through the right market makers, you can be assured that you would re- ceive the same liquidity and spread as at any other time of day. In addition, each time zone has its own unique news and developments that could move specific currency pairs. The over-the-counter structure of the FX market eliminates exchange and clearing fees, which in turn lowers transaction costs.
Futures traders are more vulnerable to liquidity risk and typically receive wider dealing spreads, especially during after-hours trading. Low to zero transaction costs make online FX trading the best market to trade for short-term traders. A typical futures trade involves a broker, a Futures Commission Merchant FCM order desk, a clerk on the exchange floor, a runner, and a pit trader. All of these parties need to be paid, and their payment comes in the form of commission and clearing fees, whereas the electronic nature of the FX market minimizes these costs.
For a 20 percent decline, trading would be com- pletely halted. Due to the decentralized nature of the FX market, there are no exchange-enforced restrictions on daily activity. In effect, this elimi- nates missed profits due to archaic exchange regulations.
Every futures trader has at some point in time experienced a half hour or so wait for a market order to be filled, only to then be exe- cuted at a price that may be far away from where the market was trading when the initial order was placed. Even with electronic trading and limited guarantees of execution speed, the prices for fills on market orders are far from certain. The reason for this inefficiency is the number of steps that are involved in placing a futures trade.
A futures trade is typically a seven-step process: 1. The client calls his or her broker and places a trade or places it online. The trading desk receives the order, processes it, and routes it to the FCM order desk on the exchange floor. The FCM order desk passes the order to the order clerk.
The order clerk hands the order to a runner or signals it to the pit. The trading clerk goes to the pit to execute the trade. The trade confirmation goes to the runner or is signaled to the order clerk and processed by the FCM order desk. The broker receives the trade confirmation and passes it on to the client. An FX trade, in comparison, is typically only a three-step process. The elimination of the additional parties involved in a futures trade increases the speed of the FX trade execution and decreases errors.
This point difference would be at- tributed to slippage, which is very common in the futures market. On most FX trading stations, traders execute directly off of real-time streaming prices. Barring any unforeseen circumstances, there is generally no discrepancy between the displayed price and the execution price. This holds true even during volatile times and fast-moving markets.
In the futures market, in contrast, execution is uncertain because all orders must be done on the exchange, creating a situation where liquidity is limited by the number of participants, which in turn limits quantities that can be traded at a given price.
Real-time streaming prices ensure that FX market orders, stops, and limits are executed with minimal slippage and no partial fills. Foreign exchange spot is the oldest of these markets and represents the underlying for many of the new derivative products. An entire book can be dedicated to the dif- ferences between all of the new derivative products, but for the purpose of this book, here are some basic descriptions as well as general advantages and disadvantages there may be many others that are not included in this list.
Quoting Convention Spot forex is quoted in pairs. Advantage The biggest advantages of trading the spot market are its simplicity, liquidity, tight spreads, and around-the-clock trading. There is no expiration or time decay, and accounts can also be opened with very small initial balances. Real-time charts, news, and research are provided free by many brokers. Disadvantage The biggest disadvantage of the spot market is the fact that it is an over-the-counter market, meaning that spot is not exchange traded.
Usually customers deal directly with their FX broker, who sources their price feed from the interbank market. Unfortunately, not all brokers are regulated, though this is expected to change in the coming years. Additional Comment A characteristic of the spot market that can be looked at as both an advantage and a disadvantage is leverage, because in the spot market leverage is very high.
Some brokers offer as much as to-1 leverage. Many people view the generous leverage in the FX spot market as a benefit, but leverage is a double-edged sword, meaning that it exacerbates losses as well as gains. Too much leverage is also the primary reason why many traders have difficulties turning a profit. Quoting Convention Futures contracts are standardized and are sub- ject to physical delivery. The prices of futures contracts are all quoted in terms of U.
For example, the quotes would be given in U. Each tick or point equals 0. Each contract for the euro, for example, involves trading the value of , euros. The market is very liquid and is well regulated. As the counterparty to every trade, CME Clearing eliminates the risk of credit default by any single counterparty. Price and transaction information is readily available, and the top five bids and offers can be seen by electronic traders.
Disadvantage The contracts are standardized, which means that the options are limited. Unless traders keep up with expiring contracts, they are subject to physical delivery. Futures margins can be higher, which is seen as a disadvantage by some traders, and account minimums are gener- ally higher. Commissions and brokerage fees may also be higher. Leverage is usually 5 to 1. Options There are many different ways to trade currency options. Quoting Convention With currency options, quoting conventions vary depending on where the option is traded.
At the Philadelphia Stock Exchange, for example, euro currency options are quoted in terms of U. At the International Securities Exchange, FX options have underlying values expressed in foreign currency units per U. This format is de- signed to help investors easily adapt the trading strategies they currently use for equity and index options. The Chicago Mer- cantile Exchange, by contrast, offers options trading on futures contracts. Advantage Like futures contracts, options are exchange traded.
They allow for limited risk because the premium is the predetermined maximum loss. They also are inherently leveraged products, which may be attractive to some traders. Also, there are limited trading hours for some of the different currency option products. Power- Shares have also entered the market, but only with DB U.
Dollar Index Bullish and Bearish funds. Shares are traded in one or more blocks of 50, shares. PowerShares on the other hand usually represent a basket of currencies. Disadvantage The biggest disadvantage is that the CurrencyShares are available for trading only until p. Because the market closes, exchange-traded currency funds cater primarily to long-term traders.
Also, since they are traded on the NYSE, they are subject to standard stock commissions and they have expense ratios. Since the foreign exchange market is an over-the-counter OTC market without a centralized exchange, competition between market makers pro- hibits monopolistic pricing strategies. If one market maker attempts to drastically skew the price, then traders simply have the option to find an- other market maker.
Moreover, spreads are closely watched to ensure mar- ket makers are not whimsically altering the cost of the trade. See Figures 1. Decentralized markets, such as foreign exchange, can have multiple market makers—all of whom have the right to quote different prices. Centralized Markets By their very nature, centralized markets tend to be monopolistic: with a single specialist controlling the market, prices can easily be skewed to FIGURE 1.
If, for example, the market is filled with sellers from whom the specialists must buy but no prospective buyers on the other side, the specialists will be forced to buy from the sellers and be unable to sell a commodity that is being sold off and hence falling in value. In such a situation, the specialist may simply widen the spread, thereby increasing the cost of the trade and preventing additional participants from entering the market. Or specialists can simply drastically alter the quotes they are offering, thus manipulating the price to accommodate their own needs.
Hierarchy of Participants in Decentralized Market While the foreign exchange market is decentralized and hence employs multiple market makers rather than a single specialist, participants in the FX market are organized into a hierarchy; those with superior credit ac- cess, volume transacted, and sophistication receive priority in the market. At the top of the food chain is the interbank market, which trades the highest volume per day in relatively few mostly G-7 currencies.
In the interbank market, the largest banks can deal with each other directly, via interbank brokers or through electronic brokering systems like Elec- tronic Brokering Services EBS or Reuters. The interbank market is a credit-approved system where banks trade based solely on the credit re- lationships they have established with one another.
All the banks can see the rates everyone is dealing at; however, each bank must have a specific credit relationship with another bank in order to trade at the rates being offered. Other institutions such as online FX market makers, hedge funds, and corporations must trade FX through commercial banks. Many banks small community banks, banks in emerging markets , corporations, and institutional investors do not have access to these rates because they have no established credit lines with big banks.
This forces small participants to deal through just one bank for their foreign exchange needs, and often this means much less competitive rates for the partic- ipants further down the participant hierarchy. Those receiving the least competitive rates are customers of banks and exchange agencies. Recently technology has broken down the barriers that used to stand between the end users of foreign exchange services and the interbank mar- ket. The online trading revolution opened its doors to retail clientele by connecting market makers and market participants in an efficient, low- cost manner.
In essence, the online trading platform serves as a gateway to the liquid FX market. Average traders can now trade alongside the biggest banks in the world, with similar pricing and execution. FX is no longer an old boys club, which means opportunity abounds for aspiring online currency traders. Both platforms offer trading in the major currency pairs; however, certain currency pairs are more liq- uid and generally more frequently traded over either EBS or Reuters D These currency pairs are also known as synthetic currencies, and this helps to explain why spreads for cross currencies are generally wider than spreads for the major currency pairs.
After the war, most agreed that international economic instability was one of the principal causes of the war, and that such instability needed to be prevented in the future. The agreement, which was developed by renowned economists John Maynard Keynes and Harry Dexter White, was initially proposed to Great Britain as a part of the Lend-Lease Act—an American act designed to assist Great Britain in postwar redevelopment efforts.
After various negoti- ations, the final form of the Bretton Woods Agreement consisted of several key points: 1. The formation of key international authorities designed to promote fair trade and international economic harmony. The fixing of exchange rates among currencies. The convertibility between gold and the U. Of the three aforementioned parameters, only the first point is still in existence today. Together, the two in- stitutions now regularly lend funds to developing nations, thus assisting them in the development of a public infrastructure capable of supporting a sound mercantile economy that can contribute in an international arena.
And, in order to ensure that these nations can actually enjoy equal and le- gitimate access to trade with their industrialized counterparts, the World Bank and IMF must work closely with GATT. While GATT was initially meant to be a temporary organization, it now operates to encourage the dismantling of trade barriers—namely tariffs and quotas. The Bretton Woods Agreement was in operation from to , when it was replaced with the Smithsonian Agreement, an international contract of sorts pioneered by U.
As a result, the Smithsonian Agreement was short-lived. Ultimately, the exchange rates of the world evolved into a free mar- ket, whereby supply and demand were the sole criteria that determined the value of a currency. While this did and still does result in a number of currency crises and greater volatility between currencies, it also allowed the market to become self-regulating, and thus the market could dictate the appropriate value of a currency without any hindrances.
While the British pound is still substantially stronger, and while the euro is a revolutionary currency blazing new fron- tiers in both social behavior and international trade, the U. And thus, while Bretton Woods may be a doctrine of yesteryear, its impact on the U. While it had been exorcised before, only to subsequently emerge in a new form, this final eradication of the Bretton Woods system was truly its last stand: no longer would currencies be fixed in value to gold, allowed to fluctuate only in a 1 percent range, but instead their fair valuation could be determined by free market behavior such as trade flows and foreign direct investment.
While U. Nixon, as well as most economists, reasoned that an entirely unstructured foreign exchange mar- ket would result in competing devaluations, which in turn would lead to the breakdown of international trade and investment. The end result, Nixon and his board of economic advisers reasoned, would be global depression.
Accordingly, a few months later, the Smithsonian Agreement was in- troduced. Its key difference from the Bretton Woods system was that the value of the dollar could float in a range of 2. Ultimately, the Smithsonian Agreement proved to be unfeasible as well. Moreover, the U. In light of these problems, the foreign exchange markets were forced to close in February The forex markets reopened in March , and this time they were not bound by a Smithsonian Agreement: the value of the U.
While this did provide the U. The end of Bretton Woods and the Smithsonian Agreement, as well as con- flicts in the Middle East resulting in substantially higher oil prices, helped to create stagflation—the synthesis of unemployment and inflation—in the U. It would not be until later in the decade, when Federal Re- serve Chairman Paul Volcker initiated new economic policies and Presi- dent Ronald Reagan introduced a new fiscal agenda, that the U.
And by then, the foreign exchange markets had thoroughly developed, and were now capable of serving a mul- titude of purposes: in addition to employing a laissez-faire style of regula- tion for international trade, they also were beginning to attract speculators seeking to participate in a market with unrivaled liquidity and continued growth. Ultimately, the death of Bretton Woods in marked the begin- ning of a new economic era, one that liberated international trading while also proliferating speculative opportunities.
Unfortunately, due to a number of unforeseen economic events—such as the Organization of Petroleum Exporting Countries OPEC oil crises, stagflation through- out the s, and drastic changes in the U. A system of sorts was needed, but not one that was inflexible. Fixation of currency values to a commodity, such as gold, proved to be too rigid for economic develop- ment, as was also the notion of fixing maximum exchange rate fluctuations.
P1: JYS c02 JWBKLein October 3, Printer: Yet to come Historical Events in the FX Market 25 The balance between structure and rigidity was one that had plagued the currency markets throughout the twentieth century, and while advance- ments had been made, a definitive solution was still greatly needed. Meeting at the Plaza Hotel, the international leaders came to certain agree- ments regarding specific economies and the international economy as a whole.
Across the world, inflation was at very low levels. In contrast to the stagflation of the s—where inflation was high and real economic growth was low—the global economy in had done a complete degree turn, as inflation was now low but growth was strong. While low inflation, even when coupled with robust economic growth, still allowed for low interest rates—a circumstance developing countries particularly enjoyed—there was an imminent danger of protectionist poli- cies like tariffs entering the economy.
The United States was experiencing a large and growing current account deficit, while Japan and Germany were facing large and growing surpluses. An imbalance so fundamental in nature could create serious economic disequilibrium, which in turn would result in a distortion of the foreign exchange markets and thus the international economy.
The results of current account imbalances, and the protectionist poli- cies that ensued, required action. Ultimately, it was believed that the rapid acceleration in the value of the U. The rising value of the U. A dollar with a lower valuation, on the other hand, would be more conducive to stabilizing the international economy, as it would nat- urally bring about a greater balance between the exporting and importing capabilities of all countries.
At the meeting in the Plaza Hotel, the United States persuaded the other attendees to coordinate a multilateral intervention, and on Septem- ber 22, , the Plaza Accord was implemented. This agreement was de- signed to allow for a controlled decline of the dollar and the appreciation of the main antidollar currencies. Each country agreed to changes to its economic policies and to intervene in currency markets as necessary to get the dollar down.
The United States agreed to cut its budget deficit and to lower interest rates. France, the United Kingdom, Germany, and Japan all agreed to raise interest rates. The United States in particular did not follow through with its initial promise to cut the budget deficit. Japan was severely hurt by the sharp rise in the yen, as its exporters were unable to remain competitive overseas, and it is argued that this eventually triggered a year recession in Japan.
The United States, in contrast, enjoyed considerable growth and price stability as a result of the agreement. The effects of the multilateral intervention were seen immediately, and within two years the dollar had fallen 46 percent and 50 percent against the deutsche mark DEM and the Japanese yen JPY , respectively.
Figure 2. This gradually resolved the current account deficits for the time being, and also ensured that protectionist policies were minimal and nonthreatening. But perhaps most importantly, the Plaza Accord cemented the role of the central banks in regulating exchange rate movement: yes, the rates would not be fixed, and hence would be determined primarily by supply and de- mand; but ultimately, such an invisible hand is insufficient, and it was the FIGURE 2.
Participants initially France, Germany, Italy, the Netherlands, Bel- gium, Denmark, Ireland, and Luxembourg were then required to maintain their exchange rates within a 2. The ERM was an adjustable-peg system, and nine realignments would occur between and While the United Kingdom was not one of the original members, it would eventually join in at a rate of 2.
Until mid, the ERM appeared to be a success, as a disciplinary ef- fect had reduced inflation throughout Europe under the leadership of the German Bundesbank. This led to higher inflation and left the German central bank with little choice but to increase interest rates.
But the rate hike had additional repercussions—because it placed upward pres- sure on the German mark. Soros Bets Against Success of U. Thanks to the progressive removal of capital con- trols during the EMS years, international investors at the time had more freedom than ever to take advantage of perceived disequilibriums, so Soros established short positions in pounds and long positions in marks by bor- rowing pounds and investing in mark-denominated assets.
He also made great use of options and futures. Soros was not the only one; many other investors soon fol- lowed suit. Everyone was selling pounds, placing tremendous downward pressure on the currency. At first, the Bank of England tried to defend the pegged rates by buying 15 billion pounds with its large reserve assets, but its sterilized interven- tions whereby the monetary base is held constant thanks to open market interventions were limited in their effectiveness.
The pound was trading dangerously close to the lower levels of its fixed band. A few hours later, it promised to raise rates again, to 15 percent, but international investors such as Soros could not be swayed, knowing that huge profits were right around the corner. Traders kept selling pounds in huge volumes, and the Bank of England kept buying them until, finally, at p.
Whether the return to a floating currency was due to the Soros-led at- tack on the pound or because of simple fundamental analysis is still de- bated today. Based on several fundamental breakdowns, the cause of the contagion stemmed largely from shrouded lending practices, inflated trade deficits, and immature capital markets.
With adverse effects easily seen in the equities markets, currency market fluctuations were negatively impacted in much the same manner during this time period. The Bubble Leading up to , investors had become increasingly attracted to Asian investment prospects, focusing on real estate development and domestic equities.
As a result, foreign investment capital flowed into the region as economic growth rates climbed on improved production in countries like Malaysia, the Philippines, Indonesia, and South Korea. Thailand, home of the baht, experienced a 13 percent growth rate in falling to 6. Additional lending support for a stronger economy came from the enactment of a fixed currency peg to the more formidable U. Ballooning Current Account Deficits and Nonperforming Loans However, in early , a shift in sentiment had begun to occur as inter- national account deficits became increasingly difficult for respective gov- ernments to handle and lending practices were revealed to be detrimen- tal to the economic infrastructure.
Although comparatively smaller than the U. Additional evidence of these practices could be observed in financial institutions throughout Japan. Coupled with a then crippled stock market, cooling real estate values, and dramatic slowdowns in the economy, investors saw opportunity in a depreciating yen, subsequently adding selling pressure to neighbor currencies. This fall in asset prices sparked the banking crisis in Japan. It began in the early s and then developed into a full-blown systemic crisis in following the failure of a number of high-profile financial institutions.
In response, Japanese monetary authori- ties warned of potentially increasing benchmark interest rates in hopes of defending the domestic currency valuation. Unfortunately, these consid- erations never materialized and a shortfall ensued. Sparked mainly by an announcement of a managed float of the Thai baht, the slide snowballed as central bank reserves evaporated and currency price levels became unsus- tainable in light of downside selling pressure.
Currency Crisis Following mass short speculation and attempted intervention, the afore- mentioned Asian economies were left ruined and momentarily incapaci- tated. The Thailand baht, once a prized possession, was devalued by as much as 48 percent, even slumping closer to a percent fall at the turn of the New Year.
The most adversely affected was the Indonesian rupiah. These particularly volatile price actions are reflected in Figure 2. Among the majors, the Japanese yen fell approximately 23 percent from its high to its low against the U. The financial crisis of — revealed the interconnectivity of economies and their effects on the global currency markets.
Addition- ally, it showed the inability of central banks to successfully intervene in currency valuations when confronted with overwhelming market forces along with the absence of secure economic fundamentals. The euro was officially launched as an electronic trading currency on January 1, Greece joined two years later.
Each country fixed its currency to a specific conversion rate against the euro, and a common monetary policy governed by the European Central Bank ECB was adopted. To many economists, the system would ideally include all of the original 15 European Union EU nations, but the United Kingdom, Sweden, and Den- mark decided to keep their own currencies for the time being.
Euro notes and coins did not begin circulation until the first two months of In deciding whether to adopt the euro, EU members all had to weigh the pros and cons of such an important decision. While ease of traveling is perhaps the most salient issue to EMU citi- zens, the euro also brings about numerous other benefits: r It eliminates exchange rate fluctuations, thereby providing a more sta- ble environment to trade within the euro area.
This, in turn, increases competition. Yet the euro is not without its limitations. Leaving aside political sovereignty issues, the main problem is that, by adopting the euro, a nation essentially forfeits any independent monetary policy. This is espe- cially true for many of the smaller nations. As a result, countries try to rely more heavily on fiscal policy, but the efficiency of fiscal policy is limited when it is not effectively combined with monetary policy.
This inefficiency is only further exacerbated by the 3 percent of GDP limit on budget deficits, as stipulated by the Stability and Growth Pact. Con- sequently, the three largest accession countries, Poland, Hungary, and the Czech Republic—which comprise 79 percent of new member combined GDP—are not likely to adopt the euro anytime soon. While euro members are mandated to cap fiscal deficits at 3 percent of GDP, each of these three countries currently runs a projected deficit at or near 6 percent.
In a prob- able scenario, euro entry for Poland, Hungary, and the Czech Republic are likely to be delayed until at the earliest. Even smaller states whose economies at present meet EU requirements face a long process in replac- ing their national currencies. States that already maintain a fixed euro ex- change rate—Estonia and Lithuania—could participate in the ERM earlier, but even on this relatively fast track, they would not be able to adopt the euro until Maastricht Treaty: Convergence Criteria 1.
Fundamental analysis is based on un- derlying economic conditions, while technical analysis uses historical prices in an effort to predict future movements. Ever since technical analysis first surfaced, there has been an ongoing debate as to which methodology is more successful. Before implementing successful trading strategies, it is important to understand what drives the movements of currencies in the foreign ex- change market. The best strategies tend to be the ones that combine both fundamental and technical analysis.
Too often perfect technical formations have failed because of major fundamental events. The same occurs with fundamentals; there may be sharp gyrations in price action one day on the back of no economic news released, which suggests that the price action is random or based on nothing more than pattern formations. Therefore, it is very important for technical traders to be aware of the key economic data or events that are scheduled for release and, in turn, for fundamen- tal traders to be aware of important technical levels on which the general market may be focusing.
Those using fundamental analysis as a trad- ing tool look at various macroeconomic indicators such as growth rates, interest rates, inflation, and unemployment. We list the most important eco- nomic releases in Chapter 12 as well as the most market-moving pieces of data for the U. Fundamental analysts will combine all of this information to assess current and future performance.
This re- quires a great deal of work and thorough analysis, as there is no single set of beliefs that guides fundamental analysis. Traders employing fundamen- tal analysis need to continually keep abreast of news and announcements that can indicate potential changes to the economic, social, and political environment.
All traders should have some awareness of the broad eco- nomic conditions before placing trades. Taking a step back, currency prices move primarily based on supply and demand. That is, on the most fundamental level, a currency rallies be- cause there is demand for that currency.
Regardless of whether the de- mand is for hedging, speculative, or conversion purposes, true movements are based on the need for the currency. Currency values decrease when there is excess supply. Supply and demand should be the real determinants for predicting future movements.
However, how to predict supply and de- mand is not as simple as many would think. There are many factors that contribute to the net supply and demand for a currency, such as capital flows, trade flows, speculative needs, and hedging needs. For example, the U. Internet and equity market boom and the desire for foreign investors to participate in these elevated returns.
This demand for U. Since the end of , when geopolitical uncertainty rose, the United States started cutting interest rates and foreign investors began to sell U. This required foreign investors to sell U. The availability of funding or interest in buying a cur- rency is a major factor that can impact the direction that a currency trades.
It has been a primary determinant for the U. Foreign official purchases of U. Theoretically, a balance of payments equal to zero is required for a currency to maintain its current valuation. A negative balance of payments number indicates that capital is leaving the economy at a more rapid rate than it is entering, and hence theoretically the currency should fall in value.
The Japanese yen is another good example. Therefore, despite a zero interest rate policy that prevents capital flows from increasing, the yen has a natural tendency to trade higher based on trade flows, which is the other side of the equation. To be more specific, here is a detailed explanation of what capital and trade flows encompass.
Capital Flows: Measuring Currency Bought and Sold Capital flows measure the net amount of a currency that is being purchased or sold due to capital investments. A positive capital flow balance implies that foreign inflows of physical or portfolio investments into a country exceed outflows. A negative capital flow balance indicates that there are more physical or portfolio investments bought by domestic investors than foreign investors.
Physical Flows Physical flows encompass actual foreign direct invest- ments by corporations such as investments in real estate, manufacturing, and local acquisitions. All of these require that a foreign corporation sell the local currency and buy the foreign currency, which leads to movements in the FX market. This is particularly important for global corporate acqui- sitions that involve more cash than stock.
Physical flows are important to watch, as they represent the under- lying changes in actual physical investment activity. Changes in local laws that encourage foreign investment also serve to promote physical flows. As a result of its cheap labor and attractive revenue opportunities popu- lation of over 1 billion , corporations globally have flooded China with in- vestments. From an FX perspective, in order to fund investments in China, foreign corporations need to sell their local currency and buy Chinese ren- minbi RMB.
Portfolio Flows Portfolio flows involve measuring capital inflows and outflows in equity markets and fixed income markets. Equity Markets As technology has enabled greater ease with respect to transportation of capital, investing in global equity markets has become far more feasible.
Accordingly, a rallying stock market in any part of the world serves as an ideal opportunity for all, regardless of geographic loca- tion. Alternatively, falling eq- uity markets could prompt domestic investors to sell their shares of local publicly traded firms to capture investment opportunities abroad. The attraction of equity markets compared to fixed income markets has increased across the years.
Since the early s, the ratio of foreign transactions in U. As indicated in Figure 3. In addition, from to the Dow increased percent, while the U. As a result, currency traders closely followed the global equity markets in an effort to predict short-term and intermediate-term equity- based capital flows. However, this relationship has shifted since the tech bubble burst in the United States, as foreign investors remained relatively risk-averse, causing a lower correlation between the performance of the U.
Nevertheless, a relationship does still exist, making it important for all traders to keep an eye on global market performances in search of intermarket opportunities. Fixed Income Markets Just as the equity market is correlated to ex- change rate movement, so too is the fixed income market. In times of global uncertainty, fixed income investments can become particularly appealing, due to the inherent safety they possess.
A good gauge of fixed income capital flows are the short- and long- term yields of international government bonds. It is useful to monitor the spread differentials between the yield on the year U. Treasury note and the yields on foreign bonds. The reason is that international investors tend to place their funds in countries with the highest-yielding assets. Investors can also use short-term yields such as the spreads on two-year government notes to gauge short-term flow of international funds.
Aside from government bond yields, federal funds futures can also be used to es- timate movement of U. We cover using fixed income products to trade FX further in Chapter Trade Flows: Measuring Exports versus Imports Trade flows are the basis of all international transactions. Countries that are net exporters—meaning they export more to interna- tional clients than they import from international producers—will experi- ence a net trade surplus. Countries that are net importers—meaning they make more interna- tional purchases than international sales—experience what is known as a trade deficit, which in turn has the potential to drive the value of the cur- rency down.
In order to engage in international purchases, importers must sell their currency to purchase that of the retailer of the good or service; ac- cordingly, on a large scale this could have the effect of driving the currency down. This concept is important because it is a primary reason why many economists say that the dollar needs to continue to fall over the next few years to stop the United States from repeatedly hitting record high trade deficits.
To clarify this further, suppose, for example, that the U. Meanwhile, in the United States, a lackluster economy is creating a shortage of investment opportunities. In such a scenario, the natural result would be for U. This would result in capital outflow from the United States and capital inflow for the United Kingdom. For day and swing traders, a tip for keeping on top of the broader eco- nomic picture is to figure out how economic data for a particular country stacks up.
Trading Tip: Charting Economic Surprises A good tip for traders is to stack up economic data surprises against price action to help explain and forecast the future movement in currencies.
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