Top 4 Things Successful Forex Traders Do

Trading in the financial markets is surrounded by a certain amount of mystique, because there is no single formula for trading successfully. Think of the markets as being like the ocean and the trader as a surfer. Surfing requires talent, balance, patience, proper equipment and being mindful of your surroundings. Would you go into water that had dangerous rip tides or was shark infested? Hopefully not.

The attitude to trading in the markets is no different than the attitude required for surfing. By blending good analysis with effective implementation, your success rate will improve dramatically and, like many skill sets, good trading comes from a combination of talent and hard work. Here are the four legs of the stool that you can build into a strategy to serve you well in all markets.

Leg No. 1 - Approach
Before you start to trade, recognize the value of proper preparation. The first step is to align your personal goals and temperament with the instruments and markets that you can comfortably relate to. For example, if you know something about retailing, then look to trade retail stocks rather than oil futures, about which you may know nothing. Begin by assessing the following three components.

Time Frame
The time frame indicates the type of trading that is appropriate for your temperament. Trading off a five-minute chart suggests that you are more comfortable being in a position without the exposure to overnight risk. On the other hand, choosing weekly charts indicates a comfort with overnight risk and a willingness to see some days go contrary to your position.

In addition, decide if you have the time and willingness to sit in front of a screen all day or if you would prefer to do your research quietly over the weekend and then make a trading decision for the coming week based on your analysis. Remember that the opportunity to make substantial money in the markets requires time. Short-term scalping, by definition, means small profits or losses. In this case, you will have to trade more frequently.

Methodology
Once you choose a time frame, find a consistent methodology. For example, some traders like to buy support and sell resistance. Others prefer buying or selling breakouts. Yet others like to trade using indicators such as MACD and crossovers.

Once you choose a system or methodology, test it to see if it works on a consistent basis and provides you with an edge. If your system is reliable more than 50% of the time, you will have an edge, even if it's a small one. If you back-test your system and discover that had you traded every time you were given a signal and your profits were more than your losses, chances are very good that you have a winning strategy. Test a few strategies and when you find one that delivers a consistently positive outcome, stay with it and test it with a variety of instruments and various time frames.

Market (Instrument)
You will find that certain instruments trade much more orderly than others. Erratic trading instruments make it difficult to produce a winning system. Therefore, it is necessary to test your system on multiple instruments to determine that your system's "personality" matches with the instrument being traded. For example, if you were trading the USD/JPY currency pair in the forex market, you may find that Fibonacci support and resistance levels are more reliable in this instrument than in some others. You should also test multiple time frames to find those that match your trading system best.

Leg No. 2 - Attitude
Attitude in trading means ensuring that you develop your mindset to reflect the following four attributes:

Patience
Once you know what to expect from your system, have the patience to wait for the price to reach the levels that your system indicates for either the point of entry or exit. If your system indicates an entry at a certain level but the market never reaches it, then move on to the next opportunity. There will always be another trade. In other words, don't chase the bus after it has left the terminal; wait for the next bus.

Discipline
Discipline is the ability to be patient - to sit on your hands until your system triggers an action point. Sometimes, the price action won't reach your anticipated price point. At this time, you must have the discipline to believe in your system and not to second-guess it. Discipline is also the ability to pull the trigger when your system indicates to do so. This is especially true for stop losses.

Objectivity
Objectivity or "emotional detachment" also depends on the reliability of your system or methodology. If you have a system that provides entry and exit levels that you know have a high reliability factor, then you don’t need to become emotional or allow yourself to be influenced by the opinion of pundits who are watching their levels and not yours. Your system should be reliable enough so that you can be confident in acting on its signals.

Realistic Expectations
Even though the market can sometimes make a much bigger move than you anticipate, being realistic means that you cannot expect to invest $250 in your trading account and expect to make $1,000 each trade. Short-term time frames provide less profit opportunities than longer term, but the risk with longer-term time frames is higher. It's a question of risk versus reward.

Leg No. 3 - Discrimination
Different instruments trade differently depending on who the major players are and why they are trading that particular instrument. Hedge funds are motivated differently than mutual funds. Large banks that are trading the spot currency market in specific currencies usually have a different objective than currency traders buying or selling futures contracts. If you can determine what motivates the large players then you can often piggyback them and profit accordingly.

Alignment
Pick a few currencies, stocks or commodities and chart them all in a variety of time frames. Then apply your particular methodology to all of them and see which time frame and which instrument is most responsive to your system. This is how you discover a "personality" match for your system. Repeat this exercise regularly to adapt to changing market conditions.

Leg No. 4 - Management (Implementation)
Since there is no such thing as only profitable trades, no system will trigger a 100% sure thing. Even a profitable system, say with a 65% profit to loss ratio, still has 35% losing trades. Therefore, the art of profitability is in the management and execution of the trade.

Risk Control
In the end, successful trading is all about risk control. Take losses quickly and often, if necessary. Try to get your trade in the correct direction right out of the gate. If it backs off, cut out and try again. Often, it is on the second or third attempt that your trade will move immediately in the right direction. This practice requires patience and discipline, but when you get the direction right, you can trail your stops and usually be profitable at best, or break even at worst.


There are as many nuanced methods of trading as there are traders. There is no right or wrong way to trade. There is only a profit-making trade or a loss-making trade. Warren Buffet says there are two rules in trading: Rule 1: Never lose money. Rule 2: Remember Rule 1. Stick a note on your computer that will remind you to take small losses often and quickly - don't wait for the big losses.

Your way to success is always with Trust Capital !

Currency Exchange: Floating Rate Vs. Fixed Rate

Did you know that the foreign exchange market (also known as FX or forex) is the largest market in the world? In fact, more than $3 trillion is traded in the currency markets on a daily basis, as of 2009. This article is certainly not a primer for currency trading, but it will help you understand exchange rates and fluctuation.

What Is an Exchange Rate?

An exchange rate is the rate at which one currency can be exchanged for another. In other words, it is the value of another country's currency compared to that of your own. If you are traveling to another country, you need to "buy" the local currency. Just like the price of any asset, the exchange rate is the price at which you can buy that currency. If you are traveling to Egypt, for example, and the exchange rate for U.S. dollars is 1:5.5 Egyptian pounds, this means that for every U.S. dollar, you can buy five and a half Egyptian pounds. Theoretically, identical assets should sell at the same price in different countries, because the exchange rate must maintain the inherent value of one currency against the other.

Fixed Exchange Rates

There are two ways the price of a currency can be determined against another. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged.

If, for example, it is determined that the value of a single unit of local currency is equal to US$3, the central bank will have to ensure that it can supply the market with those dollars. In order to maintain the rate, the central bank must keep a high level of foreign reserves. This is a reserved amount of foreign currency held by the central bank that it can use to release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate fluctuations in the market (inflation/deflation) and ultimately, the exchange rate. The central bank can also adjust the official exchange rate when necessary.

Floating Exchange Rates

Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self-correcting," as any differences in supply and demand will automatically be corrected in the market. Look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods more expensive and stimulating demand for local goods and services. This in turn will generate more jobs, causing an auto-correction in the market. A floating exchange rate is constantly changing.

In reality, no currency is wholly fixed or floating. In a fixed regime, market pressures can also influence changes in the exchange rate. Sometimes, when a local currency reflects its true value against its pegged currency, a "black market” (which is more reflective of actual supply and demand) may develop. A central bank will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the black market.

In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation. However, it is less often that the central bank of a floating regime will interfere.

The World Once Pegged

Between 1870 and 1914, there was a global fixed exchange rate. Currencies were linked to gold, meaning that the value of a local currency was fixed at a set exchange rate to gold ounces. This was known as the gold standard. This allowed for unrestricted capital mobility as well as global stability in currencies and trade. However, with the start of World War I, the gold standard was abandoned.

At the end of World War II, the conference at Bretton Woods, an effort to generate global economic stability and increase global trade, established the basic rules and regulations governing international exchange. As such, an international monetary system, embodied in the International Monetary Fund (IMF), was established to promote foreign trade and to maintain the monetary stability of countries and therefore, that of the global economy.

It was agreed that currencies would once again be fixed, or pegged, but this time to the U.S. dollar, which in turn was pegged to gold at US$35 per ounce. What this meant, was that the value of a currency was directly linked with the value of the U.S. dollar. So, if you needed to buy Japanese yen, the value of the yen would be expressed in U.S. dollars, whose value in turn was determined in the value of gold. If a country needed to readjust the value of its currency, it could approach the IMF to adjust the pegged value of its currency. The peg was maintained until 1971, when the U.S. dollar could no longer hold the value of the pegged rate of US$35 per ounce of gold.

From then on, major governments adopted a floating system, and all attempts to move back to a global peg were eventually abandoned in 1985. Since then, no major economies have gone back to a peg, and the use of gold as a peg has been completely abandoned.

Why Peg?

The reasons to peg a currency are linked to stability. Especially in today's developing nations, a country may decide to peg its currency to create a stable atmosphere for foreign investment. With a peg, the investor will always know what his or her investment's value is, and therefore will not have to worry about daily fluctuations. A pegged currency can also help to lower inflation rates and generate demand, which results from greater confidence in the stability of the currency.

Fixed regimes, however, can often lead to severe financial crises, since a peg is difficult to maintain in the long run. This was seen in the Mexican (1995), Asian (1997) and Russian (1997) financial crises: an attempt to maintain a high value of the local currency to the peg resulted in the currencies eventually becoming overvalued. This meant that the governments could no longer meet the demands to convert the local currency into the foreign currency at the pegged rate. With speculation and panic, investors scrambled to get their money out and convert it into foreign currency before the local currency was devalued against the peg; foreign reserve supplies eventually became depleted. In Mexico's case, the government was forced to devalue the peso by 30%. In Thailand, the government eventually had to allow the currency to float, and by the end of 1997, the Thai bhat had lost 50% of its value as the market's demand and supply readjusted the value of the local currency.

Countries with pegs are often associated with having unsophisticated capital markets and weak regulating institutions. The peg is there to help create stability in such an environment. It takes a stronger system as well as a mature market to maintain a float. When a country is forced to devalue its currency, it is also required to proceed with some form of economic reform, like implementing greater transparency, in an effort to strengthen its financial institutions.

Some governments may choose to have a "floating," or "crawling" peg, whereby the government reassesses the value of the peg periodically and then changes the peg rate accordingly. Usually, this causes devaluation, but it is controlled to avoid market panic. This method is often used in the transition from a peg to a floating regime, and it allows the government to "save face" by not being forced to devalue in an uncontrollable crisis.

Although the peg has worked in creating global trade and monetary stability, it was used only at a time when all the major economies were a part of it. While a floating regime is not without its flaws, it has proven to be a more efficient means of determining the long-term value of a currency and creating equilibrium in the international market.


Experience trading the floating exchange markets through Trust Capital Mt4 Demo Account.

Playing the Gap

Gaps are areas on a chart where the price of a stock (or another financial instrument) moves sharply up or down, with little or no trading in between. As a result, the asset's chart shows a "gap" in the normal price pattern. The enterprising trader can interpret and exploit these gaps for profit. This article will help you understand how and why gaps occur, and how you can use them to make profitable trades.

Gap Basics

Gaps occur because of underlying fundamental or technical factors. For example, if a company's earnings are much higher than expected, the company's stock may gap up the next day. This means that the stock price opened higher than it closed the day before, thereby leaving a gap. In the forex market, it is not uncommon for a report to generate so much buzz that it widens the bid and ask spread to a point where a significant gap can be seen. Similarly, a stock breaking a new high in the current session may open higher in the next session, thus gapping up for technical reasons.

Gaps can be classified into four groups:

•    Breakaway gaps are those that occur at the end of a price pattern and signal the beginning of a new trend.
•    Exhaustion gaps occur near the end of a price pattern and signal a final attempt to hit new highs or lows.
•    Common gaps are those that cannot be placed in a price pattern - they simply represent an area where the price has "gapped."
•    Continuation gaps occur in the middle of a price pattern and signal a rush of buyers or sellers who share a common belief in the underlying stock's future direction.

To Fill or Not to Fill

When someone says that a gap has been "filled," that means that the price has moved back to the original pre-gap level. These fills are quite common and occur because of the following:

•    Irrational Exuberance: The initial spike may have been overly optimistic or pessimistic, therefore inviting a correction.

•    Technical Resistance: When a price moves up or down sharply, it doesn't leave behind any support or resistance.

•    Price Pattern: Price patterns are used to classify gaps, and can tell you if a gap will be filled or not. Exhaustion gaps are typically the most likely to be filled because they signal the end of a price trend, while continuation and breakaway gaps are significantly less likely to be filled, since they are used to confirm the direction of the current trend.

When gaps are filled within the same trading day on which they occur, this is referred to as fading. For example, let's say a company announces great earnings per share for this quarter, and it gaps up at open (meaning it opened significantly higher than its previous close). Now let's say that, as the day progresses, people realize that the cash flow statement shows some weaknesses, so they start selling. Eventually, the price hits yesterday's close, and the gap is filled. Many day traders use this strategy during earnings season or at other times when irrational exuberance is at a high.

How to Play the Gaps

There are many ways to take advantage of these gaps, with a few more popular strategies. Some traders will buy when fundamental or technical factors favor a gap on the next trading day. For example, they'll buy a stock after-hours when a positive earnings report is released, hoping for a gap up on the following trading day. Traders might also buy or sell into highly liquid or illiquid positions at the beginning of a price movement, hoping for a good fill and a continued trend. For example, they may buy a currency when it is gapping up very quickly on low liquidity and there is no significant resistance overhead.

Some traders will fade gaps in the opposite direction once a high or low point has been determined (often through other forms of technical analysis). For example, if a stock gaps up on some speculative report, experienced traders may fade the gap by shorting the stock. Lastly, traders might buy when the price level reaches the prior support after the gap has been filled. An example of this strategy is outlined below.

Here are the key things you will want to remember when trading gaps:

•    Once a stock has started to fill the gap, it will rarely stop, because there is often no immediate support or resistance.
•    Exhaustion gaps and continuation gaps predict the price moving in two different directions - be sure that you correctly classify the gap you are going to play.
•    Retail investors are the ones who usually exhibit irrational exuberance; however, institutional investors may play along to help their portfolios - so be careful when using this indicator, and make sure to wait for the price to start to break before taking a position.
•    Be sure to watch the volume. High volume should be present in breakaway gaps, while low volume should occur in exhaustion gaps.

Example

To tie these ideas together, let's look at a basic gap trading system developed for the forex market. This system uses gaps in order to predict retracements to a prior price. Here are the rules:

1. The trade must always be in the overall direction of the price (check hourly charts).
2. The currency must gap significantly above or below a key resistance level on the 30-minute charts.
3. The price must retrace to the original resistance level. This will indicate that the gap has been filled, and the price has returned to prior resistance turned support.
4. There must be a candle signifying a continuation of the price in the direction of the gap. This will help ensure that the support will remain intact.

Note that because the forex market is a 24-hour market (it is open 24 hours a day from 5pm EST on Sunday until 4pm EST Friday), gaps in the forex market appear on a chart as large candles. These large candles often occur because of the release of a report that causes sharp price movements with little to no liquidity. In the forex market, the only visible gaps that occur on a chart happen when the market opens after the weekend.

Let's look at an example of this system in action:

We can see in the Figure  that the price gapped up above some consolidation resistance, retraced and filled the gap, and finally, resumed its way up before heading back down. We can see that there is little support below the gap, until the prior support (where we buy). A trader could also short the currency on the way down to this point, if he or she were able to identify a top.



Those who study the underlying factors behind a gap and correctly identify its type, can often trade with a high probability of success. However, there is always a risk that a trade can go bad. You can avoid this, firstly, by watching the real-time electronic communication network (ECN) and volume. This will give you an idea of where different open trades stand. If you see high-volume resistance preventing a gap from being filled, then double check the premise of your trade and consider not trading it if you are not completely certain that it is correct.

Second, be sure that the rally is over. Irrational exuberance is not necessarily immediately corrected by the market. Sometimes stocks can rise for years at extremely high valuations and trade high on rumors, without a correction. Be sure to wait for declining and negative volume before taking a position. Lastly, always be sure to use a stop-loss when trading. It is best to place the stop-loss point below key support levels, or at a set percentage, such as -8%.

Remember, gaps are risky (due to low liquidity and high volatility), but if properly traded, they offer opportunities for quick profits.

Wait for the gap and trade it after watching the charts on the MT4 leading platform by opening a demo account with Trust Capital.

How Inflation Policy Affects You ?

How low can you go? If you're Ben Bernanke, the answer will remain zero for at least the next two years. The Federal Reserve Board Chairman (by some measures, the most powerful man in the world) recently announced that he plans to keep interest rates negligible through 2014. Bernanke thus estimates a long-term goal of 2% inflation for the near future. How will that impact you?

Low Rates

For starters, it means money will continue to be artificially cheap. It's been artificially cheap for three years now, the rationalization behind the low rates being that they make it easier for people to borrow money, invest it in expensive things of lasting value that require long-term financing (e.g. homes), and thus watch the economy rebound that much more quickly.

However, it hasn't quite worked that way, largely because unemployment remains at generational highs, and it's hard to take advantage of low rates when you don't have much income.

If you're trying to save, well, there isn't much incentive to put your money in a standard interest-bearing certificate of deposit (CD) or money market account when the payouts are so low. There are ultimately only two things you can do with a dollar - spend it now or defer spending it (the latter also known as saving and/or investing). Low interest rates, and by extension, low inflation, encourage people to spend those dollars faster.

"Inflation" is a word with a negative connotation, which makes some sense. When your money's purchasing power decreases, that's always going to be bad, isn't it? If $1 today becomes worth 90-something cents next year, then taken to the extreme that could ultimately mean carrying wheelbarrows of bills around just so you can buy everyday grocery items. (That's not a metaphor, by the way. It happened in post-World War I Germany and in Zimbabwe as recently as three years ago.)

A little inflation isn't necessarily negative (accent on "little"). If that sounds counter-intuitive - that your money gradually losing value can't possibly be beneficial - give it a few more paragraphs.

Contrast inflation with a zero change in price levels (or with inflation's rarely seen antimatter counterpart, deflation.) Yes, under the latter scenario your dollar buys as much as or more than it did before; but without at least a little inflation, lenders and borrowers would have to change their behavior so much that it could mean the end of banking.

No Inflation?

Over the last 20 years or so, three-year CD rates have averaged a little above 5%. Will your bank offer you a 5% CD if inflation is at zero? Keep in mind that inflation has averaged about 3.3% annually over the last century, and that a posted interest rate is essentially the inflation rate added to the real, constant-dollar interest rate. That nominal 5% then becomes a real interest rate of 5% without inflation; no inflation means the nominal rate and the de facto rate are identical.

If prices stayed the same from year to year, no bank would offer you a rate anywhere near as generous as 5% on a CD. (As proof of this, three-year CDs are currently going for around 1.4 %.) If lenders started offering 5% three-year CDs today, they'd have to lend money out at even higher rates in order to stay in business. Few people are going to borrow money from a bank if they have to pay it back at a real interest rate of 6 or 7%, especially today. The higher the (real) interest rate gets, the less chance the borrower has of being able to pay the loan back, which means that no one borrows money at all. Businesses can't grow and the economy stagnates, ultimately lowering GDP.

So why wouldn't a lender just lower the nominal interest rate, and charge the same real interest rate it always did? Because nominal interest rates can't get much lower than they already are. One-year CD rates are barely 1% right now. If they fell 100 basis points, there would be no appreciable difference between putting your money in a bank and hiding it in an empty tomato can in the pantry.

The Bottom Line

There's no formally defined level of "normal" inflation, but it makes sense for us to let that 3.3% number serve as one. With a normal level of inflation, it's more likely that borrowers and lenders can find that happy equilibrium. At a federally mandated 2%, we're still uncomfortably close to stagnation. Many experts think that raising inflation by a point or two could help people who are looking to maintain a constant income from their investments.

Regardless of whatever money professionals and a sense of justice would dictate the Fed should do, the Chairman has spoken. At the very least, if we can be somewhat certain that we'll have 2% inflation for the next couple of years, and then we should be able to make investment and saving decisions accordingly.


Check out the economic data release time at Trust Capital's economic calendar.

The Greatest Currency Trades Ever Made

The foreign exchange (forex) market is the largest market in the world because currency is changing hands whenever goods and services are traded between nations. The sheer size of the transactions going on between nations provides arbitrage opportunities for speculators, because the currency values fluctuate by the minute. Usually these speculators make many trades for small profits, but sometimes a big position is taken up for a huge profit or, when things go wrong, a huge loss. In this article, we'll look at the greatest currency trades ever made.

How the Trades Are Made

First, it is essential to understand how money is made in the forex market. Although some of the techniques are familiar to stock investors, currency trading is a realm of investing in and of itself. A currency trader can make one of four bets on the future value of a currency:

Shorting a currency means that the trader believes that the currency will go down compared to another currency.

Going long means that the trader thinks the currency will increase in value compared to another currency.

The other two bets have to do with the amount of change in either direction - whether the trader thinks it will move a lot or not much at all - and are known by the provocative names of strangle and straddle.

Once you're decided on which bet you want to place, there are many ways to take up the position. For example, if you wanted to short the Canadian dollar (CAD), the simplest way would be to take out a loan in Canadian dollars that you will be able to pay back at a discount as the currency devalues (assuming you're correct). This is much too small and slow for true forex traders, so they use puts, calls, other options and forwards to build up and leverage their positions. It's the leveraging in particular that makes some trades worth millions, and even billions, of dollars.

No. 3: Andy Krieger vs. the Kiwi

In 1987, Andy Krieger, a 32-year-old currency trader at Bankers Trust, was carefully watching the currencies that were rallying against the dollar following the Black Monday crash. As investors and companies rushed out of the American dollar and into other currencies that had suffered less damage in the market crash, there were bound to be some currencies that would become fundamentally overvalued, creating a good opportunity for arbitrage. The currency Krieger targeted was the New Zealand dollar, also known as the kiwi.

Using the relatively new techniques afforded by options, Krieger took up a short position against the kiwi worth hundreds of millions of dollars. In fact, his sell orders were said to exceed the money supply of New Zealand. The selling pressure combined with the lack of currency in circulation caused the kiwi to drop sharply. It yo-yoed between a 3 and 5% loss while Krieger made millions for his employers.

One part of the legend recounts a worried New Zealand government official calling up Krieger's bosses and threatening Bankers Trust to try to get Krieger out of the kiwi. Krieger later left Bankers Trust to go work for George Soros.

No. 2: Stanley Druckenmiller Bets on the Mark – Twice

Stanley Druckenmiller made millions by making two long bets in the same currency while working as a trader for George Soros' Quantum Fund.

Druckenmiller's first bet came when the Berlin Wall fell. The perceived difficulties of reunification between East and West Germany had depressed the German mark to a level that Druckenmiller thought extreme. He initially put a multimillion-dollar bet on a future rally until Soros told him to increase his purchase to 2 billion German marks. Things played out according to plan and the long position came to be worth millions of dollars, helping to push the returns of the Quantum Fund over 60%.

Possibly due to the success of his first bet, Druckenmiller also made the German mark an integral part of the greatest currency trade in history. A few years later, while Soros was busy breaking the Bank of England, Druckenmiller was going long in the mark on the assumption that the fallout from his boss' bet would drop the British pound against the mark. Druckenmiller was confident that he and Soros were right and showed this by buying British stocks. He believed that Britain would have to slash lending rates, thus stimulating business, and that the cheaper pound would actually mean more exports compared to European rivals. Following this same thinking, Druckenmiller bought German bonds on the expectation that investors would move to bonds as German stocks showed less growth than the British. It was a very complete trade that added considerably to the profits of Soros' main bet against the pound.

No. 1: George Soros vs. the British Pound

The British pound shadowed the German mark leading up to the 1990s even though the two countries were very different economically. Germany was the stronger country despite lingering difficulties from reunification, but Britain wanted to keep the value of the pound above 2.7 marks. Attempts to keep to this standard left Britain with high interest rates and equally high inflation, but it demanded a fixed rate of 2.7 marks to a pound as a condition of entering the European Exchange Rate Mechanism (ERM).

Many speculators, George Soros chief among them, wondered how long fixed exchange rates could fight market forces, and they began to take up short positions against the pound. Soros borrowed heavily to bet more on a drop in the pound. Britain raised its interest rates to double digits to try to attract investors. The government was hoping to alleviate the selling pressure by creating more buying pressure.

Paying out interest costs money, however, and the British government realized that it would lose billions trying to artificially prop up the pound. It withdrew from the ERM and the value of the pound plummeted against the mark. Soros made at least $1 billion off this one trade. For the British government's part, the devaluation of the pound actually helped, as it forced the excess interest and inflation out of the economy, making it an ideal environment for businesses.

A Thankless Job

Any discussion around the top currency trades always revolves around George Soros, because many of these traders have a connection to him and his Quantum Fund. After retiring from active management of his funds to focus on philanthropy, Soros made comments about currency trading that were seen as expressing regret that he made his fortune attacking currencies. It was an odd change for Soros who, like many traders, made money by removing pricing inefficiencies from the market. Britain did lose money because of Soros and he did force the country to swallow the bitter pill of withdrawing from the ERM, but many people also see these drawbacks to the trade as necessary steps that helped Britain emerge stronger. If there hadn't been a drop in the pound, Britain's economic problems may have dragged on as politicians kept trying to tweak the ERM.

A country can benefit from a weak currency as much as from a strong one. With a weak currency, the domestic products and assets become cheaper to international buyers and exports increase. In the same way, domestic sales increase as foreign products go up in price due to the higher cost of importing. There were very likely many people in Britain and New Zealand who were pleased when speculators brought down the overvalued currencies. Of course, there were also importers and others who were understandably upset. A currency speculator makes money by forcing a country to face realities it would rather not face. Although it's a dirty job, someone has to do it.

Look at the advantages of trading forex through Trust Capital.

Inflation and Economic Recovery

When prices rise for energy, food, commodities, and other goods and services, the entire economy is affected. Rising prices, known as inflation, impact the cost of living, the cost of doing business, borrowing money, mortgages, corporate and government bond yields, and every other facet of the economy.

Inflation can be both beneficial to economic recovery and, in some cases, negative. If inflation becomes too high the economy can suffer; conversely, if inflation is controlled and at reasonable levels, the economy may prosper. With controlled, lower inflation, employment increases, consumers have more money to buy goods and services, and the economy benefits and grows. However, the impact of inflation on economic recovery cannot be assessed with complete accuracy. Some background details will explain why the economic results of inflation will differ as the inflation rate varies.

GDP

Economic growth is measured in gross domestic product (GDP), or the total value of all goods and services produced. The percentage of growth or decline, compared to the previous year, is adjusted for inflation. Therefore, if growth was 5% and inflation was 2%, GDP would be reported at 3%.

As prices rise, the value of the dollar declines, as its purchasing power erodes with each increase in the price of basic goods and services.

The Cost of Borrowing

Low or no inflation, theoretically, may help an economy recover from a recession or a depression. With both inflation and interest rates low, the cost of borrowing money for investments or borrowing for the purchase of big ticket items, such as automobiles or securing a mortgage on a house or condo, is also low. These low rates are expected to encourage consumption, say some economists.

Banks and other lending institutions, however, may be reluctant to lend money to consumers when rates of return on loans are low, which decreases profit margins.

The U.S. Federal Reserve, which sets interest rates on government securities - mid- and long-term Treasury notes and shorter-term bills - has promised to keep rates at very low levels until 2014.

This assurance of low rates for the next two years is designed to stimulate the economy and keep inflation rates at a guaranteed level. The business community, including large, medium and small operations, knows that certain fixed costs will remain constant, at least for that designated time period.

Businesses can therefore plan their borrowing, hiring, marketing, improvement, and expansion strategies accordingly. Investors, likewise, know roughly what government and corporate bonds and other debt will return, since most of these instruments - if not so-called junk bonds - are pegged to Treasury yields.

However, economists differ notoriously in their opinions. Some economists claim that a 6% inflation rate for several years would help the economy by helping to resolve the U.S. debt problem, lifting wages and stimulating economic growth.

The Consumer Price Index

The standard measurement of inflation is the government's Consumer Price Index (CPI). Components of the CPI, a "basket" of certain elementary goods and services such as food - meat, vegetables and bread, for example - energy, clothing, housing, medical care, education, and communication and recreation. If the average price of all goods and services in the CPI were to go up 3% over the previous year's level, for example, then inflation would be pegged at 3%. This also means that the purchasing power of the dollar would have declined by 3%.

Hard assets, such as a home or real estate, often increase in value as the CPI rises; however, fixed income instruments - Treasuries or bank Certificate of Deposits, for example - lose value, because their yields don't increase with inflation. One notable exception, however, are treasury inflation protected securities (TIPS). Interest on these securities is paid twice yearly at a fixed rate as the principal increases in step with the CPI, thus protecting the investment against inflation.

The Bottom Line


Controlled inflation, no higher than 6% and perhaps somewhat lower, may have a beneficial impact on economic recovery, according to some economists, while inflation at 10% or above would have a negative impact. If the U.S. continues to increase its debt and continues to borrow money via Treasury issues, it may have to deliberately inflate its currency to eventually retire those obligations. Investors, retirees or anyone with fixed income investments will in effect be paying down those obligations, as their holdings decrease in value as prices rise.


You may know the economic data coming out daily, weekly, or even monthly through the economic calendar at Trust Capital.

Behind The Euro: History and Future

The euro is the commonly accepted currency for 17 of the 27 member states of the European Union; these countries combine to create the eurozone. To truly understand the euro as a currency is to understand the history of the eurozone.

The Positives

The eurozone is a negotiated partnership between participating countries of the European Union (EU), to share the economic and political benefits typically only associated with larger countries. The synergistic expectations and economies of scale projections from the agreements made between these countries were expected to have a positive, long-lasting impact for all member nations. The European Union itself began developing just after WWII as a way to foster a peaceful and economically stable Europe.

The European Union offered: peaceful coexistence; the reduction of border restrictions, allowing for free travel; combined strength and influence on a global scale; increased prosperity (though not equally among countries); a multilateral promotion of human rights; the promotion of new ideas to reduce global warming, and most notably, the use of a single European currency - the euro.

The euro was designed to ease the process of providing services, transporting goods and moving capital between euro-using nations. The goals of the euro were well thought-out with the highest of hopes, but the results have been mixed.

The initial rules regarding the requirements for a country to migrate from its home currency to the euro were well-defined and meant to exclude weaker countries, while creating a relatively stable relationship between countries meeting similar criteria. The official rules were spelled out in the Maastricht Treaty of 1992 that defined how members of the European Union could move into the European Economic and Monetary Union (EMU) and ultimately, the euro.

The Maastricht criteria, as they were coined, consisted of: inflation, a maximum of 1.5% above the average of all members; government debt and deficit restrictions; exchange rate rules and long-term interest rate level restrictions. Once all of the kinks were ironed out, the euro came to life in 2002 (although dates vary for a few countries) and is now the second-most traded currency behind the U.S. dollar, with which it was pegged at par at issuance.

Problems with the Countries Using the Euro

Part of the problem associated with the euro is the divergence from the original criteria for participation in the EMU. The most problematic issue has been debt. The original restrictions were set at a maximum of 60% of government debt as a ratio to gross domestic product (GDP); some countries (with the PIIGS as the worst offenders) have debt-to-GDP ratios reaching over 100% of GDP (see graph).

Source: European Commission Q2 2011


The irony is that the agreement between the EU countries and ultimately the EMU was to increase borrowing limits with the expectations that the leverage could be used to advance each country's specific needs. Debt always has a double-edged sword as its powers can be magical when used correctly. Italy, for example, was able to use its increased borrowing powers to increase both its national standard of living and its nationwide education level to become competitive in the global economy. However, this success has come at a serious long-term financial cost and may ultimately lead to Italy being required to restructure, redesign or possibly default on its debt.

Greece has a debt-to-GDP ratio similar to Italy and found its way into the doldrums by supporting its massive sovereign infrastructure through employing more than half of the population and taxing them at minimal levels.

Spain has not accumulated as much debt as Greece since it began using the euro, and has experienced rapid internal growth with its newfound access to capital. They chose yet another path; primarily in the form of private sector construction that had lain stagnant since the end of WWII. In Spain's case, instead of running an excessive debt-to-GDP ratio, its trade deficit ballooned since the construction pace was not sustainable and not a cross-border traded good. Spain faces the challenge of redirecting its efforts to a more balanced economy, including higher levels of exports that may take years to fine tune the balance.

Whatever the road traveled to, these debt levels have cast a shadow on the euro. The grand plan to provide some sort of simplicity and reversion towards the mean for the criteria on which the EMU and the euro were based on, seems to have actually had a reverse effect. In hindsight, one might easily wonder why and how so many different countries with so many different languages, customs and histories could ever share a common currency and be expected to progress and age at the same rate.

The Euro's Path

The euro was pegged in parity (1:1) with the U.S. dollar during its onset. At this point, all previous home currencies were abolished and the new euro was established and allowed to float with other currencies. While there were years of volatility, the immediate move was a divergence in price in favor of the euro, as the U.S. dollar weakened annually, peaking during the economic banking crisis at around 1.6:1. Since the 2008 crisis, volatility has continued but the general trend has been a stronger euro, even as debt and deficit levels have increased.

The Bottom Line

While the evolution of the EU seems to have been beneficial for the most part, the debate will rage on as to whether the assumption of a single currency for only part of the EU was the best idea. The ability for its participants to borrow more money at lower rates has helped each country in its own way to develop and grow, but at a great price.

The value of the euro has been high since its inception, and during the banking crisis it was considered a safe haven while investors fled from the U.S. dollar. Many countries have learned over the years that a strong currency is not always as good as it sounds. It can make your exportable goods more expensive, creating trade imbalances, which does not combine well with ever-expanding debt levels. Only time will tell the fate of the euro. While it is still one of the most attractive-looking currencies in the world, the grand design may be fading after over a decade of life.


Try trading the Euro by Trust Capital Demo account.