The FX trader conducts business in the same way that doctors, lawyers and accountants do, it’s a practice that never becomes perfect. However highly trained and experienced a trader, some trades lose while others win, the objective is to be right more often than wrong. FX trading consists of trading one type of currency for another and is denoted as pairs with the first listed being the base currency and assigned the value 1. Usually the US dollar (USD) forms the base excepting against the British pound (GBP), Australian dollar (AUD) and the Euro (EUR) and is expressed in percentage in point (PIP) of 1/100^th of 1% or one basis point. Only the Japanese yen among the major currencies is taken to 1/100^th of the second currency pair (yen) or to two decimal points.

Executing a trade involves the simultaneous buying and selling of the currency pair which is offered at a “bid” and “ask” price, the difference being the spread or commission. The “bid” is always lower than the “ask” and is the price at which the base currency can be sold and the “ask” the buying price of the base currency.

Trading strategy

The single most important factor that affects the price of a currency is interest rate. International funds in search of better returns tend to seek out countries with high interest rates thereby creating a demand for that country’s currency and the resultant increase in its price.

A trader should decide at the outset whether he/she intends to trade on fundamentals, technical indicators or a mix of both. Trading on fundamentals require a thorough understanding of interest rate and market expectations. Underlying this is inflation, particularly in the United States but also Britain, Japan and the Euro zone (especially Germany). The key to all this is information; knowing when it’s due and its effect on inflation and credit (money supply) through data on employment, productivity, housing etc. Trading on technical requires a basic understanding of the Exponential Moving Average (EMA) and the Moving Average Convergence Divergence (MACD) as a minimum. Knowing what it signals is critical, for example when the short term EMA crosses up from below that is a bullish signal while for the MACD it signifies a bullish trend when it crosses above the trigger line. 

Practice account

Most if not all on-line foreign exchange brokers offers free practice account. Any person with a computer and Internet access can sign-up and it affords the same leverage as a real account. A mini account allows leverage of 200:1 and the standard account 100: 1 for $250- $5,000 and greater than $5,000 respectively. The potential gains or losses are magnified as a result of the leverage, so an investment of say $5,000 would allow the investor to trade $1,000,000 in value. And assuming that the investor utilized 60% of the available margin ($600,000) in one trade to buy say the GBP:USD at the rate of 2.0000 for GBP 300,000. Without any movement in the rate the investor is already down $150 (3% of principal) on the spread, so the rate would have to move up 5 pips to breakeven. However, if the trade works in favour of the investor and the pound gained 100 pips to 2.0100 against the dollar, the net gain is $2,850 or 57%, all possible in a day.

Know your customer

Foreign exchange brokers like banks are required in their jurisdiction to know their customers, hence personal information and photo identification is required to establish an account. They in turn provide trading policies and procedures, customer agreement and risk disclosure, the latter two requiring the customer’s signature.

Self-regulation

The NFA regulates and support its members. Each week member brokers that offers contracts to retail investors are required to report certain information to the NFA, including customers funds on deposit, total liability to customers and open forex positions.

In a number of countries FX trading is not regulated, however the Securities Commission does provide investor alerts to advise the public of the risk involved and notify them that persons or companies selling securities or offering investment advice must be registered.

Investment clubs

Investments clubs in the United Kingdom are not regulated but the Treasurer, Secretary or other officials of the club are required to notify the local tax office of the club’s existence and its address for official correspondence. It is in the interest of the members of the club to have a constitution and set up proper books and records.

Individual members are charged to tax on their proportionate share of any income or gain.

OLINT and the FSC

The Financial Services Commission (FSC) ought to be aware that there are companies on the web that offers similar services to that of Olint; so what, is the next thing to block access to those websites? Independent Partner Brokerage is just one, and they offer returns of between 3% and 6.75% simple interest every two weeks.

Approximately ten years after the raid on Century National Bank (CNB), the Ministry of Finance, inept to cope with developments in the financial market has reacted with another raid. It is ironic that the former Minister of State in the Ministry of Finance, having served four Finance Ministers inclusive of his incumbency during the July 1996 raid on CNB has just found voice. Self-interest is a wonderful thing!