4.10.2009

Traders Are Taking Greater Risk Despite Deteriorating Fundamentals

It has been over six months since the financial markets last suffered a seizure that was born of panic selling or a collapse in liquidity; but does this mean the waters are once again safe for risk taking? Considering the timid recovery in equity markets and high yielding currencies through the past few months, it would seem so.

• Traders Are Taking Greater Risk Despite Deteriorating Fundamentals
• The Financial Sector Makes Progress, But Crisis Not Over Yet
• Is The Market Finding Unwarranted Strength In The G20’s Promises?

It has been over six months since the financial markets last suffered a seizure that was born of panic selling or a collapse in liquidity; but does this mean the waters are once again safe for risk taking? Considering the timid recovery in equity markets and high yielding currencies through the past few months, it would seem so. Indeed, in the absence of immediate risk, foregone returns become too much for traders to bear. Looking at the broader gauges for investor sentiment, dormant threats haven’t held back the clear desire to reinvest in the speculative market. A recover in equities has been paced by the benchmark Dow’s 25 percent advance from its early March lows. The index is now pushing two month highs. Elsewhere, junk bond spreads are the lowest they have been since November, the CRB Commodity Index is attempting to break three months highs and credit default risk – the crux of market fears through the crisis – has making a steady recover to levels not seen this anytime this year. For the currency market, the carry strategy seems to have finally found a balance between risk reward that has allowed for speculative headway. Though yield differentials are pushing near-historical lows (and are expected to tighten even further), the extended period of calm has ellicted strength from the more prominent carry pairs – perhaps spurred by the hope of early entry on capital gains through the exchange rate. Despite all this however, caution will remain an indelible element of broader market sentiment for as long as economic recessions bear down on growth and the circulation of capital through the markets is curbed by the potential for another seismic event.

Gauging the balance of risk and reward that would draw investors back into the market is difficult; but given enough time, stable markets will stoke any traders appetite for return. This is the best way to sum up the steady recovery we have been seeing in so many different risk-loving assets. It isn’t that the potential for returns has been amplified or fundamental risk has largely disappeared; but rather, relative calm has opened the door to diversification away from Treasuries, money markets and other relatively low-risk instruments (that are themselves over-extended). On the other hand, considering the health of the credit markets and the outlook for global activity; it is clear that the natural course for investment is for a steady decline in a natural bear market. Recession is still a common label throughout the global market space; and forecasts are predicting conditions to worsen before they begin to improve. The more realistic forecast for traders would not be for a recovery to develop in the next few months or quarters; but rather the absence of economic accelerants that can lead to ‘feedback effects’ or tip a recession into a prolonged depression. These are the threats that theG20 objectives are attempting to head off – though confidence derived from their statement will quickly evaporate without clear evidence that major economies are treating the recession as a global one.

Written by John Kicklighter, Currency Strategist
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What is Forex?

If you would go out on a dinner with your friends or family and you mentioned that you were trading on the Forex market most of them wouldn’t know what you were talking about. The worst thing is that most of the Forex traders that join the Forex market don’t know what they are doing. Understanding what Forex is, is the first good step to your success at Forex trading.


The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Today, the Forex market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.

Forex Turnover

Forex Turnover
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
The purpose of Forex market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, Yen, etc., and the need for trading in such currencies. Since you aren’t buying anything physical this kind of trading can be confusing. When buying a currency think of it as buying a part in that particular country’s economy because the currency rate reflects the economical situation of the country when compared to others.

Currencies

Currencies
List of most popular currencies on the Forex market

Forex used to be a closed market because only the “big boys” because you needed between 10 and 50 million $ to open an account. But today, with the development of internet, online Forex brokers have the possibility to offer their services to “little” traders. All you need to start is a computer, fast internet connection and information which you can find on this page also.

This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.

This is certainly hypothetically because a lot of newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase "be careful!" in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.

The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit and less than 1% of traders make large fortune at Forex. You shouldn't produce, sell or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.

This market is a platform for banks, transnational corporations and individual traders to change the currencies they possess into other ones. This is the spot Forex market. At this market you can trade with up to 1:400 leverage which means that you'll get $400 on your account for each dollar invested. So, you can trade with the $400,000 sum having invested $1,000 onto your account.

Forex is unique among other world markets because in any time of day and night, somewhere in the world, a financial centre is open for business, banks and corporations exchange currency all the time, with a little lower frequency during the weekend.

Why to trade on Forex?

1. There is no commission fee for trading at Forex.
2. There is no intermediary, you can trade directly at Forex.
3. Forex is open 24-hours a day.
4. Nobody can influence the market for a longer period.
5. High liquidity.
6. Free demo accounts, analysis and charts.
7. Small accounts that allow everyone to try out his luck.

Hope this has answered a lot of questions you were asking yourself about Forex and that you can now start trading. Also make sure that you check out other articles on this blog which can help you earn your fortune.

Good luck to everyone!