Speculation in the Foreign Exchange Market - Essay Example

speculation in the foreign exchange market Student Details Last Name First Name Student ID Wang Juan 210039296 Account Details Username Current Password PAPA12 Simeon12 Final balance (after all positions have been closed) Number of transactions (spot, forward, and options) $ 30000 Sport, 5, forward 4 option 2 Word count (excluding executive summary, footnotes and appendices to the report) Word count 2,351 Table of Contents Table of Contents 2 Executive Summary 2 1.1 Introduction 4 1.2 History of financial markets 4 2.0 Stock markets and terms used 5 3.0 Forex Market 6 3.1 Forex market trading platforms 9 3.2 Trading strategy that were used in the market 10 Appendices 12 Executive Summary Stock market and forex market has a long history dating several years back. Several million investors have invested in the stock markets and forex markets currently something that was not common in the past few decades. The first stock trading can be traced back over hundred years ago in Manhattan, a place where people would come together, trade sliver for slips of papers, and say that they own shares of cargo on ships that came into harbor on daily basis. With the new system of trade, the traded expanded. Stock market and forex market developed as a result of bond selling in the cold world war of America and currently absorbed many investors across the world. One can define a stock as a type of security that represent a unit of ownership in a company or a corporation and usually represent a claim on the side of the Corporations assets and earnings. Any individual who owns a stock in a company or its shares in technical terms owns a certain percentage of the Company assets and this depends on the share or amount of share that an individual owned while foreign currency trading exchange is another type of trading market. It is commonly known as forex trading. Normally forex trading works at the relative value of different currencies around the world. Trading in the forex market is normally done through a market maker or broker. It is usually done over the internet and with just some small clicks; a trader is capable of placing an order. This paper gives insight report on the development history and examples of forex market trading. It gives a comprehensive conclusion on the benefits of trading and being keen on trading 1.1 Introduction Developing complete understanding of forex market is the first step of everyone who wishes to trade in the forex market1. Having a clear understanding of the structure of the stock in the market and forex market is very important. There are several concept and terminologist, which are used in the market and one need to learn them before he or she can start trading in the market. This paper gives major break down of these terminologist involve in investment and trading before it can embark on report analysis of the various trading activities in the market. 1.2 History of financial markets Several million investors have invested in the stock markets and forex markets currently something that was not common in the past few decades. The first stock trading can be traced back over hundred years ago in Manhattan, a place where people would come together, trade sliver for slips of papers, and say that they own shares of cargo on ships that came into harbor on daily basis. With the new system of trade, the traded expanded. Another important happening that led to the development of stock exchange was the issuance of bonds more so the war bonds which dated back during American Colonial War, a time when the government was selling the war bond to raise more money to fund the war2. The bond would mature in value over time and the traded would exchange them for a profit in future date. Banks would also sell their shares to raise money, something that was similar with what the companies would do and sell their shares for more capital. By the time Wall Street was being developed, many transactions had already taken place leading to establishment of stock and forex markets. 2.0 Stock markets and terms used One can define a stock as a type of security that represent a unit of ownership in a company or a corporation and usually represent a claim on the side of the Corporations assets and earnings. Any individual who owns a stock in a company or its shares in technical terms owns a certain percentage of the Company assets and this depends on the share or amount of share that an individual owned. Companies in most cases opt for selling out shares instead of taking huge amount of loans in the financial institutions to raise capital for their use. Stock exchange therefore, is a place where people traded stocks and bond. In most cases the stock market hours operates between 9.30-4.30 pm and Monday through Friday in major cities across the world. An ordinary person would trade in the stock market by hiring a professional trader or stockbroker. The broker normally employs many different methodologies to make decisions on how to trade in the market. Several professionals are highly trained in economic, finance, mathematics and other areas to help traders in stock market decision-making process. Knowledge of the trading current events and affairs in the market is very important for a stock trader in making predictions. Some of the issues to predict about include market trends on the smart investments. Stock screens is what the traders are using to keep themselves updated and to constantly keep track of what is going on in the market. This will enable them to move whenever they have seen something attractive and desirable in the market. In the case of EasyForex, the screen is seen as it moves up and down you can either sell or buy according to the movement of prices in the market. The traders in the stock market use fundamental analysis, technical financial analysis or both combinations to make decisions in the stock market. The two methods are based on different types of indicators. The most basic and fundamental analysis is based on the economic knowledge while the technical aspect is mostly based on the trends on the stock market. Someone who uses fundamental approach of analysis would base his or her arguments on the current trends hence will struggle to keep himself or herself most updates as much as possible. In the case of easyforex, most decision to buy or sell is based on the fundamental principle approach. Other economic factors that any fundamentalist would look at is financial statement of the company, though this part was not available in our case as we only focused on the movement of stock prices. Individuals who are using technical approaches in decision marking would base their decisions on price changes and use these to predict whether the stock market would be effective or not. 3.0 Forex Market Foreign currency trading exchange is another type of trading market. It is commonly known as forex trading. Normally forex trading works at the relative value of different currencies around the world. Trading in the forex market is normally done through a market maker or broker3. It is usually done over the internet and with just some small clicks; a trader is capable of placing an order. The broker is then will pass the order to the associate in the interbank market, and when the trade is closed, the loss or gain will be credited to the traders account. It is a very quick and fast process. Fundamental and technical analysis used in the stock market can also be used in the forex market depending on the economic factors that surrounds a particular scenario. One must be very keen as to what factors would affect economic currency of a country hence dropping or rising. One also needs ability to read and interpreted charts in order to carry out technical analysis of the forex market movement.4 Oscillators are just but one of the indicators used in the forex market, another one is Larry Williams indicators, moving average and the momentum indicators. Oscillators are normally based off of identifying highs and lows also the turning points. Like in our scenario of easyforex, when certain stock has been declining for sometimes and the reaching of its all –time low, an investor may view this as a good time to buy. This is because it is due for a rebound, hence the approach we were using to make profit or fail in the process. It might be a riskier business, though, since sometimes these downward trends if do not stop, can lead to bankruptcy. Using Larry Williams indicators are just but a bunch of the technical tools that are developed by Larry Williams in early 2980. It was not used in our case. Moving average is another method used through measuring moving average to measure momentum and velocity through which the market are moving in a particular trends. Moving average normally compare the current market values to the market averages, believing that at a particular price, the fluctuation around the average over a given period of time will be of great importance. Momentum indicators are normally kind of a mixture of oscillators and the moving average combined. Some of the market traders who are using this kind of mixture pin point where the price action is at its height to make large gains within a short period. In order for a trader to understand the forex market, terminologist like spread, pip, margin and leverage are very fundamental. Spread can be defined as the difference between buy and sell price for the same things from the same market maker. In short, a market maker normally buys for one price and sells for another price. Like in the easyforex case, I could by for a specific dollar price and sell it for another price hence spread and in case, the price does not change during that time, the market trader will lose the money like in the same case. In the forex market, one pip is equivalent to 0.0001 unless for yen in which one pip is 0.01. this happens due to the fact that the currency rates do not normally change with a lot, so it is easier to express it in pips. The market margin on the other hand can be defined as a type of collateral used by trading providers to make sure that any investor pays up in the case of large losses. It is usually a deposit on the trading account used to cover any potential future losses. In the forex market, the term leverage is a term used to refer to the condition in which a trader can be allowed to play with higher amount of money more than his or her actual deposit. Leverage can allow a trader to play with amount and control the range anywhere from 50-400 times the actual amount he or she has deposited but at the same time putting that money at risk. Going long in the market refers to the process of buying low and selling high in the forx market if a trader expect a certain value of stock to increase in future , he will be persuaded to buy a certain number of shares in anticipation of increase in price and whenever the prices reached desirable level, he will sell them. Selling short in the other hand is trickier than selling long. If a market trader suspect that a particular stock will depreciate, they will try to sell it short in order to make profit out of this. Traders will borrow shares of the depreciating stock from the brokers, sell that at the current market price, and then use this money to buy shares back once the prices have fallen to target level that has been estimated using different software. Sometimes selling short can be very risky in the market, however because of unpredictability of the stock market trends5. 3.1 Forex market trading platforms From the exercise, there are varieties of trading platforms one can use for forex trading. Meta Trader4 is one of the trading platforms and very common since it is user friendlier. Is the same platform that easyforex are using in trading. In using it, first if one wants to set up graphs and the currency, he or she needs to right click on the side with the symbols and click chart window to see on chart window of it, it will appear as below One can change and adjust the color as per ones wish after opening a window as shown above. It also gives a room of changing background as one wish. Appendix 1 shows how the window will appear after the set up. Trade Statin 9.0 This is another common type of trading platforms in forex market. It offer less similar feature like Meta Trader, but also has little to offer, though it is more complex and difficult to use. Figure 2 in the Appendices gives a brief look on this trading platform. 3.2 Trading strategy that were used in the market During trading period, I stack to major currencies including (EURUSD, GBPUSD, USDCHF, and USDJPY) that are more reliable and with lower spread. I used to trade in the morning and not in the afternoon as the market is more reliable in the morning than in the afternoon, it also adds more liquidity to the market, allowing for lower spread that helps in preventing big players from manipulating the price. Most of the trading in the market were based on the off the 15 minutes interval chart since the chart was capable of showing all the trading of the day hence one can make reasonable judgment. It is also capable of showing short-term trends that are moving in similar direction as the day trends tend to be stronger that those that moves against it6. The currency pairs were narrowed down as this did help us utilizing time properly as we ignored other currencies that were not useful for us in the market. Narrowing down was also very important as it was easier to concentrate in one or two currencies than several currencies. Management of money In the starter money was $ 50,000 hence a good rule of thumb used was not to risk more than 2%of the total equity. In case there are two or more bad trades, one should stop trading until the following day to avoid frustration in the process7. Management of loss It follow similar management approach as money management. The main way to ensure one does not lose big is to set up a stop loss determined by the six of your trade. 4.0 Conclusion With a wide experience in forex market after studying its tendencies, a successful investor money management is now a real responsibility which each and every individual has to take. Through practicing and research with prop account, I have learned how forex market works on different levels. It includes the real world problem on the market as well as the technical factors that shows how the company will invest its client money. There are several plans, which the investor can use depending on the level of risk that is associated with the kind of investment and the client is comfortable with. Included in this plan is the percentage the company will expect to make based on the off of the amount of money invested and the level of risk associated with the type of the investment chosen Appendices Appendix 1 MT4 Figure 2Trade 9.9 Figure 3 Read More