Advanced Option Strategies » FOREX

Arbitrage: Bonds, Stocks, Derivatives, Commodities and Currencies

admin — Sun, 24 Jan 2010 07:13:29 +0000

Arbitrage is the purchase or sale of any financial instrument and the simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, a risk-free profit.Arbitrage has existed in various forms probably since the beginning of time, but in modern times it is now mainly associated with financial marketsA person who engages in arbitrage is called an arbitrageur—such as a bank or brokerage firm. The term is mainly applied to trading in financial instruments, such as bonds, stocks, derivatives, commodities and currencies.Arbitrage has been regarded as the “holy grail” of the capital markets and options arbitrage certainly is the holy grail of free profits for the privileged options traders in options trading. If the market prices do not allow for profitable arbitrage, the prices are said to constitute an arbitrage equilibrium or arbitrage-free market.Currency arbitrage opportunities arise when currency prices go out of sync with each other. There are numerous forms of arbitrage involving multiple markets, futures deliveries, options, and other complex derivatives.Arbitrage describes a transaction that can be set up with zero outlays and a sure profit, unambiguously a “free lunch.” For example, if 100 yen are selling in Miami for $1.00, but $1.00 simultaneously costs 99 yen in Tokyo market, arbitrage would obviously be possible if there are no trading costs; you could arrange to sell 99 yen in Tokyo, receive a dollar ($1.00), and buy 100 yen in Miami, paying the dollar.From the above example the transaction costs nothing and nets one (1) yen. Even on a good day no one will be this lucky, and arbitrage opportunities, if they exist at all. Are likely to be fleeting and a good deal will be more complicated.More complicated foreign exchange arbitrages, such as the spot-forward arbitrage are much more common. Arbitrage helps to keep the value of a commodity or currency consistent worldwide. The activity of other arbitrageurs can make this risky. Arbitrage is recommended for experienced investors only.

Economists use the term “global labor arbitrage” to refer to the tendency of manufacturing jobs to flow towards whichever country has the lowest wages per unit output at present and has reached the minimum requisite level of political and economic development to support industrialization.

Sports arbitrage – numerous internet bookmakers offer odds on the outcome of the same event. One problem with sports arbitrage is that bookmakers sometimes make mistakes and this can lead to an invocation of the ‘palpable error’ rule, which most bookmakers invoke when they have made a mistake by offering or posting incorrect odds.

Exchange-traded fund arbitrage – Exchange Traded Funds allow authorized participants to exchange back and forth between shares in underlying securities held by the fund and shares in the fund itself, rather than allowing the buying and selling of shares in the ETF directly with the fund sponsor. When a significant enough premium appears, an arbitrageur will buy the underlying securities, convert them to shares in the ETF, and sell them in the open market. When a discount appears, an arbitrageur will do the reverse.As a result of arbitrage, the currency exchange rates, the price of commodities, and the price of securities in different markets tend to converge to the same prices, in all markets, in each category. More generally, international arbitrage opportunities in commodities, goods, securities and currencies, on a grand scale, tend to change exchange rates until the purchasing power is equal. At the heart of the Arbitrage philosophy is the belief that a man must capitalize on opportunities and take calculated risks in order to be successful. In the end, we all must engage in Arbitrage. ” In this sense, any trader who buys something in one market—whether it is a commodity like grain, financial Securities such as stock in a company, or a currency such as the Japanese yen—and sells it in another market at a higher price is engaged in arbitrage. In economic theory, arbitrage is a necessary activity in any market, helping to reduce price disparities between different markets and to increase a market’s liquidity (ability to buy and sell).

Triangular arbitrage is a trading strategy involving placing three concurrent trades in three markets in an attempt to profit from imbalances between the markets. Triangular arbitrage forces the cross-rates to be internally consistent.As indicated above, triangular arbitrage is a specific trading strategy that involves three currencies, their correlation, and any discrepancy in their parity rates. Thus, there are no arbitrage opportunities when dealing with just two currencies in a single market. Their fluctuations are simply the trading range of their exchange rate.

Triangular arbitrage opportunities do not happen very often and when they do, they only last for a matter of seconds. Triangular arbitrage among currencies, once only a theory, is now common practice for those with access to large amounts of money

Using triangular arbitrage strategies on forex market has one salient advantage: Predetermined profits can be realized if the trades are executed smoothly. Unfortunately, the disadvantages of this strategy are numerous:• Higher Transaction Costs• Higher margin requirements• Precision timing is required• Complexity• Advanced monitoring techniques are usually required

***This article is strictly for informational proposes and does not provide individual, customized investment advice. The money you allocate to futures or forex should be strictly the money you can afford to risk. Detaileddisclaimer can be found at http://www.prolificinvestment.com/prolific.php?page=riskwarning

How To Select An Investment Strategy

admin — Thu, 21 Jan 2010 07:18:51 +0000

There are several critical factors that need to be considered in selecting the right trading system for you. Investors are always looking for a trading edge to exploit. Finding such an edge is akin to the quest for the Holy Grail and many would be traders spend their time bouncing from one system to another, constantly looking for the perfect system. If this sounds like you, let me suggest that you change your ways, quit searching, and start making money.
First, realize that every system will have loosing trades and there will be a series of such trades. The draw down is always a challenging time. You have to be prepared mentally and financially to ride out the draw downs. The way to prepare is to check the historical performance. The historical performance period should be appropriate for the number of trades and the rules in the system. What this means is that a system with many rules will need more trades to prove its validity. I like at least 50 trades per rule and be very conservative on the number of rules. For example, if the system is:
“Go long when the current price is greater than the 20 period moving average. Close when the price drops below the 20 period average.”
There are two rules in the above. One for the entry and one for the exit, which means I’d want to see a historical performance of at least 100 trades.
Another consideration is the average holding period and frequency for trading. Both these need to match your preferences or you will be soon looking for some other trading system. Some investors want a “set and forget” type of trading plan where they enter their trades and just make updates on a weekly, monthly or annual basis. For others this approach would be far too boring.
The major consideration is return on investment. There is no one answer as to what a reasonable number might be. It depends on several factors. First is the leverage used in the investment vehicle. For example, the least use of leverage would be to pay cash for shares of stock and own them outright. More leverage would be to purchase the stocks on margin or buy options on the stocks.
Even greater leverage would be commodities or currency trading. As the leverage goes up, returns should be greater to offset the increased risk.
Another consideration for acceptable returns is the frequency of trading. One would expect day trading to produce higher returns than a long term buy and hold approach, for example.
Let’s say that you’ve found the right combination of risk and reward. A strategy with trading frequency that suits your personality. What next? Paper trade! Always start by paper trading the strategy. The length of time to paper trade isn’t as important as the number of trades. Refer back to the previous section on number of trades to validate. The more the better, but at some point you just need to leap in. Ideally I’d like to see 25% or more of the total trades as calculated above.

Stock Market Trading – Top 4 Trading Myths That Jeopardize Your Success

admin — Sat, 16 Jan 2010 19:21:56 +0000

Do you believe buy & hold is safe? Or that selling short is risky? Read below the top 4 myths that are widely believed, and keeping people from their trading potential. When you properly understand these myths, you will be leaps ahead of everyone else.Myth #1 Selling Short Is RiskyThis trading myth comes from the fact that some stocks can trade down to zero while there is no limit to how high that stock can trade. So losses for long positions are limited on the downside, but short positions can suffer unlimited losses.But the belief that short selling is risky is preventing you from minimizing risk and preventing you making money. You see, selling short works just as well as buying long if done properly. The level of a positions risk depends on good money management methods.A small percentage of traders have realized this and have developed a trading strategy to sell short and profit easily regardless of which way the stock market is moving.Myth #2 Buying & Holding is SafeThis would have to be the most common trading myth, that stems from the belief that the stock market always goes up in the long run. This is true enough, but it can also take an extremely long time. Some markets have been known to drop dramatically, and not return for 25 years! Like the Dow Jones Industrial Average from 1929 to 1954.It dropped so low during this time that no one would sit through it. Money managers who can duplicate the performance of the general market are very rare. You need an exit strategy that limits risk for every strategy, whether investor or trader.A small percentage of traders are using a trading method that will actually apply to any market. This potentially gives them a winning edge. They aren’t simply buying, holding, and hoping like most traders do.Myth #3 Trading is easyIf making money consistently from the stock market was easy, everyone would be doing it, and all be wealthy from it. Yeah, the physical part is easy enough, but many people have this idea that trading is easy, but they were never given the tools that make it easy. It’s not that trading needs to be difficult, but it requires a solid trading method, and diligence on the traders part to stick with it. And unless you also trade with discipline and use good money management principals like the most successful traders, you can only hope to be less than successful.Myth #4 The existence of the Holy GrailI see far too many traders hopping from method to method, pursuing the next guaranteed thing only to be repeatedly let down. Newbies tend to think they should be able to win practically every trade. Thinking they should be having a straight line of wins without any major setbacks. When armatures try something, they conclude that their system doesn’t work after the first few losses in a row. So they jump on something else. How can anyone expect to succeed this way. Unless you want to continue to suffer losing trades, and eventually give up, stop chasing this holy grail nonsense.The holy grail of trading doesn’t exist. It would seem more than 90% of traders are wasting years of their life with this myth. Think of the progress, the money that could have been made, if they had spent that time and energy on a solid trading system, and a good trading method.

Where to go from here:Well first, simply understand and clear your head of the above stock, and trading myths. Free yourself from these beliefs that restrain your potential as a trader. This will automatically put you in front of most traders.There are a few traders however, less than 1%, who understand the above and more. who are quietly making a killing from the stock market, and are spending no more time trading than you. A lot of them keep their winning system and their successful trading secrets to themselves, but there are a few who will share this information with the publicJust remember, none of these super traders are born geniuses. And they don’t have a crystal ball forecasting the stock market. They simply have found a winning system that isn’t restricted to any time frame or market. The most successful traders are nobody special, apart from the stock market secrets they learned and diligence to put them in action.Regardless of whether you trade Stocks, Options, Futures or Forex, or your level of experience, you can’t afford to keep buying and hoping. Stop leaving your success to chance when you can take control. It isn’t necessary to keep wasting all this time and money on the common trading methods. Even if you are ahead, the average trader could trade far more efficiently.You too can become one of the very small percent of traders. Seriously, you just need to learn how to properly, plot the chart, the right setup conditions, the best entry point, stop loss point, and place your profit target point. To learn how to do the things listed above, and for actual insider trading secrets on how the most profitable traders really do it – Read on.

The Value of Market Sentiment to Win in Forex Trades

admin — Sat, 16 Jan 2010 07:20:03 +0000

If you want to win in the Forex trades, there is one (1) important factor to consider when applying your Forex trade strategy that is market sentiment. Often overlooked, market sentiment is the sum of the views of Forex traders that equals the price.

This means that given the same facts in the trade, people will have their own conclusions on what the facts mean determining the price. It can be said therefore that spikes in the price are actually peaks in market sentiment.

This is not to say that the basics of the trade are not important. They are, but being able to spot market sentiment is one (1) tool that will far empower you to win in the Forex trades.

Market sentiment can either be bullish or bearish. The general rule is, market tend to rally at their most bearish and crash at their most bullish condition. Forex charts generally reflect sentiments to a certain degree. They will allow you to determine what the people in the trade collectively think. Yet, the charts may not be sufficient to foretell what people may think or do next in the future.

It will help you significantly to get a tool that will enable you to look into the market sentiment in order to win big at Forex trades. You must learn how to use market sentiment as a potent addition to your Forex strategy arsenal.

When you look into market sentiment and use it as an important component in your Forex trade strategy, you can cash in on huge profits.

Win at Currency Trading – Before You Trade Consider This Fact Or Lose

admin — Sun, 10 Jan 2010 19:17:15 +0000

Most forex traders lose and only around 5% win yet, many new traders think its easy to win and someone can give them success. If you want to win, answer the enclosed question correctly…

This question will determine whether you are likely to win or burn your cash quickly.

What is Your Trading Edge (defined) that means you can enter the elite 5% of winners?

Simple enough question – but I am shocked and amazed, at the answers I have been given at forex trading seminars, when I have asked it to pupils. Here are some common answers and there ALL Wrong.

- I bought a forex robot with a simulated track record

- I am trusting a guru to give me success

- I trade breaking news

- I have a system that predicts the market in advance

- I am day trading and scalping to keep risk low and profits high

- I am clever so bound to win

- I have a complicated trading system and its better than a simple one

- I work hard so my effort will be rewarded

- Buy low sell high is a great way to make money.

If you believe any of the above is an edge, your in for an equity wipe out.

A forex trading edge is something that is based on a logical assessment of how prices move and a simple robust currency trading strategy is applied with discipline.

If you want to win at currency trading, understand success comes from within – no one can give you success and you must have ultimate confidence in what your doing as you are going to need the discipline, to keep going when your losing until you ht a home run.

The Right Education and Mindset = Success

Forex trading looks easy and anyone can learn to do it, where most traders go wrong is – they believe myths and can never trade through a losing period, because they don’t have confidence in their edge to deliver them long term gains and they throw in the towel early.

If you want to win at currency trading, you need an edge and the confidence and discipline to apply it – so get the right forex education and mindset and your all set for success.

Forex Trading Strategy â Six Parameters of Trading Strategy

admin — Wed, 06 Jan 2010 07:42:01 +0000

I would like to present six major parameters of a trading system that you can use to judge their performance in live trading. Backtest your system and look for the following:

1. Maximum value of losses you get during the test of your system. Avoid any system that gives significant drawdown in a single trade, for example 20% of your trading account.

2. The maximum value of profit you get in a single trade. If there is one trade that gave you profit that greatly exceeds the average profitability of the system exclude such a trade. Probably that was just a coincidence. The maximum loss can also be a coincidence but you cannot exclude it since it can be fatal to your account.

3. The next value is the average profit to loss ratio per trade. By average I mean the sum of all the profit divided by number of profitable trades. The average loss is sum of all losses divided by the number of losing trades. You want this parameter to be around 2:1. It actually can be smaller.

4. Win to lose ratio is your next parameter. It is the ratio of total number of profitable trades to the number of losing trades. If you have profit to loss ratio 2:1 then win to lose ratio can be 40% and you can still make money with this system. Usually win to lose ratio rarely exceeds 60%, even though there can be some exceptions. I would like to emphasize that these parameters are for pure mechanical systems when trades are executed based on formal signals of a trading system. For an advanced trader who takes discretionary trades this parameter becomes more individual.

5. The maximum number of consecutive winning trades and maximum number of consecutive losing trades are our next parameters. I explain why these numbers are important. When we start trading the system and number of winning trades approaches the maximum we will expect a losing trade. Knowing these parameters will allow us to avoid overtrading by increasing our lot size because of euphoria from a winning streak. If the number of losing trades exceeds the maximum number then it’s a sign that market conditions are changing and we need to adjust and test the system again.

6. The frequency of signal generation. High frequency will require executing trades very often. That can lead to discomfort and nervousness. On the other hand low frequency will lead to low profitability of the system. Which one you chose depends entirely on your personal preferences.

Based on these six parameters you can test trading systems and pick the one that suits your personality.

Forex Automoney – Automatic Trading System

admin — Mon, 04 Jan 2010 20:11:13 +0000

An Introduction

Forex Automoney is a trusted signal service which has been providing it’s members with automatic signals for the past 7 years. The expert traders, mathematicians and investment experts at the company developed the trading system by creating an automated software which analyzes the market and, using complex mathematical analysis, is able to predict, quite accuratly I must say, future market conditions & trends.

The Membership

As a member based site, Forex Automoney provides an exclusive membership to everyone who signs up for the service. This allows you to customize your experience, set your own trading risk level, profit potential & specific strategy. Members also have easy access to customer service, Forex education materials and special graphs & charts which point out probable pivot points and breaks in the trend so you can trade like an expert.

The Choices

Once you become a member with this trading system, you have a lot of choices. You can select how often you trade, how the signals are delivered, which type of Forex education(if any) you would like to have and which currency pair you prefer to trade. Forex Automoney trades every major currency pair on autopilot so your options really are open.

The Signals

It’s time for the most important part, the trading signals. Forex Automoney’s advanced software delivers signals that tell you when to enter a trade & when it’s time to get out with your profits. The signals are easy to follow, even for traders with little experience, and there are several methods of delivery which are all explained once you’re a member. Along with ease of use, accuracy is a huge part of the Forex Automoney experience. The signals are very accurate as well as profitable and, unlike with other trading systems, this accuracy is consistent across currency pairs.

Online forex trading platform

admin — Mon, 04 Jan 2010 07:52:54 +0000

Every trader know what is an online forex trading platform . For the sake of the beginners, forex platforms are software designed in order for forex brokers and investors to make trades and perform daily forex trading from anywhere and everywhere around the world. New-age platforms offer highly technological and advanced unique features that can actually change the traditional image of forex trading. A good online forex trading platform is a combination of functional usage and ease of use. This allows brokers and investors to perform in the market without any limits. This is designed to help investors execute their trades in the most effective way as possible.

Most online forex trading platform are powered with unique analysis and strategy-testing features which are single-mindedly created to test all buy and sell rules. This provides 100% convenience for traders, brokers, and investors. Imagine, with just a click on your mouse, you can automatically access strategy performance reports with other useful details like simulated results, annual rates of return and all other essential information. By simply looking at these information on the online forex trading platform, you can easily modify your trading strategies with even incurring losses. If you are looking for a good platform, there are plenty out there and all it takes is your keen sense of choosing which the best is.

Keep in mind that when looking for an online forex trading platform , it should be fully automated and provide real-time online streaming of data from the market. This way, you can take advantage of the liquidity of the market as well as allow you to make your trade at the most profitable state as possible. A good platform will connect you to the markets and ensure that you get execution prices in virtually every type without slippage. Once you have in your hand the best platform, this sure will offer you the most robust backbone to handle transaction.

Are you looking for the best online forex trading platform? Get foolproof information on the most reliable, user-friendly, and functional forex platform here. We offer you professional guidelines on what to look for a perfect forex trading platform. Online forex trading can never be much enjoyed without having an automated trading platform that provides instant dealing in currencies, options, trend analysis, and everything that construes forex trading. If you want to have an edge over other traders, it is a must to get an online forex trading platform that is easy to use, offers great support, and provides all necessary features that will make trading as convenient and as profitable as possible. Get the right information on trading platforms here.

Forex strategies revealed

admin — Sat, 02 Jan 2010 07:57:26 +0000

Forex strategies are essential for a forex trader to profit from the market. Forex trading strategies make a trader more sophisticated and confident by helping him in making right calculations about the market. In a market with always changing exchange rates it is foolishness to trade hysterically by just following the emotions or advices from unreliable sources.

There are lots of forex trading strategies followed by forex traders. They can be broadly classified in to two type of strategies are profit maximizing strategies and risk minimizing strategies. The strategy differs with individuals as each trader has unique needs and has unique trading abilities. A trader must design a forex trading strategy according to many factors such as his or her initial investment, account size, trading ability, risk tolerance, currency pairs trading, geographical limitations/advantages, the broker to which he is affiliated, the trading system he/she uses, the profit goal (short-term profit or long-term profit), etc.

The most followed forex profit maximizing strategy is the leverage. Leverage allows forex traders to trade with more funds than in his or her account. The leverages are provided by the forex brokers to their clients. The usual leverage is 100:1 – i.e., for $1 in account the trader can borrow $100 from his broker. Day traders get much more leverage than other traders and the ratio leverage differ with brokers and also with the account minimum, type of contract trading etc.

The most popular forex risk minimizing strategy is the stop loss order. Stop loss orders help traders to limit their loss by stopping a trade at a preset price. Forex trading systems allows traders to set their stop loss order prices. One related strategy is the trailing stop losses, which are proportional stop loss prices that come into play only when the prices are falling. There are also many other types of stop loss orders available which mainly depends on the broker to which the trader is affiliated to.

One another related strategy is the automated order entry. Automated order entry enables a trader to enter into a trade at a preset price rate automatically. The trader can set the price at his trading platform. Automated order entry methods help traders to enter the market at most favorable time. Apart from these strategies forex traders can use forex futures and forex options to cover the loss and well as to cover the profit. These contracts help forex traders to buy or sell currencies at a predetermined rate at a point of time in future.

Apart from these trading strategies, forex trader follow many other strategies for choosing currency pairs, trading hours, entrance and exit prices etc. Irrespective of the type of the strategy, all forex strategies involve risks. The success of a forex strategy depends on many factors like the market condition and the discipline of the trader.

The Importance of Money Management in Forex Trading

admin — Wed, 30 Dec 2009 09:33:08 +0000

In forex trading the application of technology and complicated mathematical formulas has not increased the chances of success and here we will explain why and also how you can win with a simple forex trading strategy…

The answer is simple – because forex markets don’t move with mathematical accuracy and if they did, we would all know the answer in advance and there would be no market!

Why You Cannot Predict Forex Prices

It’s a fact that you cannot predict markets in advance and all the people who say you can are wrong. You will see numerous forex robots that tell you can trade on auto pilot and win all the time – but they base there assumptions on a back tested track record – that means knowing the closing prices.

All they do is bend there system to fit the price sequence and make a profit. In real trading though, the same price sequence never repeats again and the system loses and you cannot bend the system rules going forward.

Learn the Odds Trade them and Win Big

Forex trading is an odds game – sure you can’t trade with mathematical accuracy but you can make money just like a successful poker player does. He doesn’t win all the time and has losing periods but he knows, if he plays the odds and uses sensible money management he will win.

Be Complex and Clever and You Will Lose

Complex theories are developed and used all the time but it’s a myth that a complex theory will beat a simple one – it won’t. Simple systems work best and always have because they are more robust with fewer elements to break.

Think about all the advances in computers software and theories, we have had in the last 30 years yet, despite all these advances, 95% of traders lost money in yester year and they still do today. Advances in technology and forecasting simply didn’t change the odds.

This shows that you don’t need to be complicated to win.

Keep it Simple and Win

Forex trading doesn’t require that your clever or make a lot of effort – it requires you to use a simple robust system which you understand and will have the discipline to trade through losing periods, with good money management, until you hit a home run. Its discipline to apply a robust system that’s the key and the system can be very simple

Forex trading is an odds game and will never change, so keeping it simple is the best way to trade. Don’t complicate something that’s simple, accept it and build your forex strategy around the odds and you will achieve currency trading success.