Today we are going to uncover some of the key misconceptions around leverage and how you can use it in a sensible manner.

So what is leverage?

Leverage is used by the majority of the western world’s population in their day-to-day lives without barely a thought of the potential risk involved – I’m talking specifically about your home loan. Lenders require a small deposit of around 10% in order to secure a $500,000 home, so your $50,000 is now leveraged (10 times) and controlling a hefty half a million dollar asset. Major metropolitan house prices in Australia have continued to rise recently, so let’s say your home appreciates by 10%. At this stage your home is now worth $550,000 (albeit on paper) and you’ve made $50,000 (or 100%) on your initial $50,000 outlay. This is leverage, and the concept applies in a similar fashion when trading forex.

Leverage in the forex and CFD market

Leverage in the forex and CFD market allows you the opportunity to access larger positions with your initial capital than what you might normally be able to when trading unleveraged instruments such as stocks. Archimedes once said: “Give me a lever long enough and the fulcrum on which to place it, and I shall move the world”. Despite this potential, initially your goal is to appreciate the power of leverage, understand how it may fit in with your financial objectives and use just enough to meet your financial goals.

Leverage example on the AUDUSD

When trading forex there are three main position sizes you will need to consider when taking a position.

Position sizes are extremely flexible and allow you to trade as little as 1 micro lot or a total position size of $1,000 (with a mere $10 held with your broker to cover the margin), which is perfect for those looking to test their strategies without risking the farm so to speak. Nothing beats live trading (as opposed to a free demo account) as the lessons learned are heightened due to real money in the game.

400 times leverage? This is not how you work out your leverage!

A common misconception we hear time and time again is that the forex market is risky because you can trade up to 400 times your account size. Many forex brokers only require you to place a 0.25% margin up front (as opposed to 1% in the table above) in order to control your full position, so trading a $100,000 position would require $250 of your own money.

The only thing that truly matters is how much your account is leveraged and how much risk you have relative to your overall account size. So let’s consider how to apply leverage on your account in a sensible fashion whilst keeping your overall risk on the account at low levels.

Broadly speaking, if you were to find a Forex, CFD or even a share trading system that achieved a 5 per cent return per annum and applied 3 times leverage, then your end-of-year return on investment (ROI) would be 15%. Similarly if the system lost 5% at 3 times leverage then you would be down 15% at the end of the year.

Out of control

So why do we occasionally hear stories in the newspaper about how leveraged products are apparently considered risky? This doesn’t seem right when:

• The trader controls how much leverage they access
• The trader chooses the market(s) they trade
• The trader chooses the trade setups
• The trader sets the stop loss levels
• The broker simply offers a platform and leverage opportunity for traders to access.

Unfortunately we gloss over the real reasons as to how the trader got in this position, which often comes down to greed, lack of a trading plan and an expectation that trading is a sure-fire path to untold riches.

As a reader of Trader Plus you are already positioned as someone with a sound mindset and the ability to think for yourself, so here are some tips on how you can use and access leverage in a sensible fashion.

Five tips to use leverage in a responsible manner

1. You control how much you leverage your account. The broker does not control this. Understand how much leverage you are using and maintain discipline in keeping that low.
2. Understand how much you are risking per trade relative to your overall trading account and never risk more than 1-2% of your account on any one trade at any one time.
3. Never over leverage, as this is the fastest way to wipe out your trading account. It is your responsibility to keep your account intact and trade within the guidelines you set in your trading plan.
4. Pretend that every trading decision you make has to be approved by an investment panel whereby you are controlling the funds of hundreds of trading accounts. Capital preservation should be your top priority.
5. Plan for worst case scenarios and set daily and monthly limits. Understand your daily exposure levels and be disciplined to not exceed these.

Trading the forex markets is a lot more interesting when you are trading within your limits and executing a well thought out trading plan, which will hopefully allow you to incrementally head towards your trading goals.

Ashley Jessen is the author of CFDs Made Simple and Director of Communications at Invast Financial Services, one of the largest global markets brokerage firms offering Forex, CFDs, Direct Equities and their proprietary ST24 platform.

The first part of a plan is to decide what forex pairs you would consider trading. Not all forex pairs are created equally. While the USD/JPY and USD/CHF see very little volatility (and could well bore you do death), the GBP/JPY and EUR/JPY are so volatile they are known as the ‘trader killers’.
Instead, look for currency pairs that have moderate levels of volatility, like the AUD/USD or the EUR/USD. And don’t be afraid to trade just one pair.

The second part of the plan is to decide what why you would consider going long – or why you might go short. This is one of the most crucial parts of the plan. There needs to be a strategy behind this – and it needs to be a lot more than “it can’t fall much further”.
This part of the plan while take you a while to develop; in fact, you should continue to work on your plan until the day you stop trading.

The third part of your plan is to decide where you will enter and your two exit levels: the stop to protect losses and your profit target. The most common level to execute a trade entry could be to buy on a break above resistance or sell on the break of support.

The fourth part is your lots size. How large will you position be? This is the final part of the trade construction puzzle and there’s a reason we leave it until the end. The size of your position should be reliant on where your stop is placed. The reality is, if you don’t know how far away your stop should be, you have no idea how large your position should be.

Finally, the last part of the plan it to execute and then monitor your trade. The vast majority of amateur traders will usually make this right at the beginning. It’s your classic case of “shoot first and ask questions later”.
Make it mechanical
Many traders find that even after all their planning they still fall prey to the whims of emotion. But that’s no reason to give up.
In fact, many of the best traders had to overcome this difficulty. And, moreover, it’s this problem that helped them make the major breakthrough.
They do this by giving up on participating in the minute-to-minute frenzy of trading. Instead, the advances in modern technology allow you to place your orders, turn off the computer and let the market take care of itself.
If you’re not watching the market it far reduces the opportunity for you to sabotage yourself.
Many traders fear leaving the market to do its thing. They’re desperate to watch the action in case they have to make a decision to exit early. But you have to weight up whether you actually make good decisions those circumstances. If you don’t, accept the fact. Set your stops and targets and take yourself out of the equation.
Once you’ve made this decision, you can really start exploring your options.
There’s a world of opportunity for traders that take a mechanical approach to the market. Many brokers allow you to program orders to execute day after day after day.

The risk / reward balance is not unique to the carry trade. It is the underpinning of all markets; and this connection offers a relatively straightforward analysis of whether a possible loss in the exchange rate exposure will offset the interest that can be earned. Given the fixed nature of the carry income and variable exchange rate risk; when traders are concerned that volatility will rise and capital will move away from investments, the result is an unwinding of carry trades. Part of this reversal of flow comes because it is simply expected that others will unwind their positions; and there is also the reality that market participants need to draw the capital out of this FX trade to place it in a safe place or cover losses in other exposures. In the end, this leads to a remarkably strong correlation between carry trade and global equities (as evidenced in the charts at right). Both are driven by expectations of ‘risk appetite’.
Moving forward, we should consider the global scene to assess what the carry trade holds in store. Starting on the reward or return side of the column, interest rate differentials around the world are rather anaemic. Australian and New Zealand dollars have the highest rates among liquid currencies; however both of these yields are under pressure as a global cooling in economic activity curbs activity locally and the threat of financial contagion from Europe strains nerves. This in itself wouldn’t necessarily be an issue as the potential for returns is drawn through the differential between the high and low rates. Yet, the low rates don’t have any further to fall as the US, Japanese and Swiss yields (all currencies used to fund carry trades during the good times) are essentially at zero. That means a global decline in rates will reduce spreads.
From the risk perspective, conditions are visibly worsening. The reduced capacity for return further amplifies the reality that the ‘reward’ component of the carry trade simply cannot compensate for the growing threat of a global financial crunch. Trouble seems to be growing out of the Euro Zone periphery countries; but the threat is truly a global one (similar to how the 2008/2009 crisis began in the US subprime market and spread from there). As fear takes over, volatility increases as panic is far more contagious than greed. The need to raise capital to cover margin on losses with other trades and the simple need to protect funds will draw capital out of the passive carry trade. This certainly looks like the path that the global financial markets are on now (not withstanding a few central bank interventions along the way).
Perhaps the carry trade isn’t as easy as it seems…

By DailyFX senior currency strategist John Kicklighter

Power of Average Volatility

Knowing the average daily volatility of a currency can be extremely powerful for a handful of reasons. First it helps traders understand which currencies are more suitable to trade based upon their risk profile. For traders that love volatility, EUR/NZD, GBP/JPY and GBP/CHF could be extremely attractive. We like to consider these the equivalent of “Google” shares, which can rise and fall by as much as $15 a day, a value that exceeds the overall share price of many listed companies.
A pair such as GBP/JPY can be attractive for intraday traders because of its wild swings. In the 15 minute chart (above) of the currency pair, we can see that GBP/JPY fluctuated within a 140 pip trading range during the day. Even though this range is less than the average daily range for the currency pair (which means that it is a below average day), the price action is very characteristic of GBP/JPY – which sold off aggressively only to recover quickly during the trading day. For a day trader, this volatility can be looked at as opportunity to take advantage of both up and down moves on an intraday basis. In contrast, a currency pair such as EUR/CHF has an average daily range of 74 pips only, which means that even if the currency pair reversed intraday, the move may not be large enough for day traders to find interesting.
Another way to look at it is that the EUR/NZD and GBP/JPYs of the world tend to be more suitable for intraday breakout or trend trading and more attractive to volatility seekers. EUR/CHF and EUR/GBP on the other hand may be more suitable for investors who fear volatility and who would rather focus on trading ranges leisurely.
Knowing the average daily range of a currency pair also helps investors determine the right place to put a stop. Given that EUR/GBP has an average range of 57 pips, a stop of 75 pips, for example, is much more significant for a EUR/GBP position than it is for a EUR/NZD position. This is even true on an intraday basis because a quick 35 pip drop in EUR/CHF would be considered a big move while the same decline in GBP/JPY could happen much more easily. This means that when trading GBP/JPY or GBP/CHF a wider stop may be more appropriate for traders holding positions overnight because this would allow them to “ride out the volatility.” EUR/GBP and EUR/CHF on the other hand does not necessarily need as wide of a stop as currency pairs with more volatility.
The volatility of a currency pair can also vary based on the time. In the GBP/JPY chart, the big swing happened shortly after the European open and lasted until lunch time in NY. Before and after the big moves, GBP/JPY traded quietly and in a relatively tight range. In general, volatility in currencies tends to increase between the European trading session and the first half of the New York trading session which lasts from 4pm to 2am in Sydney. If Australia has economic data scheduled for release, we could see some volatility in the Australian dollar during the morning hours in Sydney but usually it tends to be quiet.

1. Set Stops Carefully
The golden rule of trading is: “Keep your losses small and let your profits run”. Stop losses provide a sign that it is time to exit your position, as the trade is no longer co-operating with your initial view. Every successful trader has
pre-meditated the point of exit, before entering the trade.
You may remember that there are several methods available to set a stop loss. Volatility and pattern-based systems tend to work well for short-selling, or trading shares. Hard dollar stops are terrific for option/warrants and futures positions.
Pattern-based stops are a very popular way to set a stop loss. When the share is no longer trending upwards, exit your position. An appropriate exit can be made if the share’s price closes below a trendline or below a support/resistance line.
Volatility is a measure of movement, not a measure of direction. Shares can be heading in an overall direction upwards, or downwards, but this general direction is characterised by dramatic peak to trough drawdowns. This is typically characteristic of the current market that we are experiencing.
Volatility based stops imply that you should to exit your position when the volatility of the instrument increases dramatically, or beyond a pre-defined level. To assist in this goal, an indicator called Average True Range (ATR) can be used. For an exact definition of the ATR indicator, refer to the glossary in the FAQ’s at www.tradingsecrets.com.au.
A simple definition of ATR is the move in cents that a share could reasonably be expected to make during a particular period. On a daily chart, it shows how much the share price is likely to go up or down in a day. It typically shows a figure compiled from the last 15–20 days’ price activity. You may choose to exit if the share goes up (for short positions), or down (for long positions) by greater than a multiple of three or four times ATR. For example, if the ATR is 10 cents, and the share goes up by 30 cents, you could exit your short position. A drop in share price of 30 cents, would suggest that you should exit your long position.
During volatile periods, set a wider stop loss. Otherwise you will exit your position only to see the share continue in the expected direction, without your involvement.
A hard-dollar stop can be effectively used for bought options/warrants, or futures. For example, when you’ve lost a maximum of 2% of your allocated trading equity in any particular trade, exit that position immediately. You may decide to exit when your position has a drawdown of $1000, for example. Alternatively, for a trailing stop, you could exit when the option has pulled back your equity $500 from the maximum profit peak that you had attained in that position at any time. This is an effective method of controlling your losses, and letting your profits run. A wide initial stop, but a tighter trailing stop, tends to be the best strategy in the present market conditions.

2. Learn How To Trade Long and Short
I moderate a trading forum for traders where members can ask trading questions and receive answers (located at www.tradinggame.com.au ). Recently I was asked a question regarding searches. A particular trader was wondering whether he should loosen up his search parameters as he could not find any shares to buy that fitted his criterion. Previously, he had identified numerous opportunities. However, in the current market he was struggling to find two or three potential positions a month. Obviously he was frustrated.
Can you see the problem with applying more liberal searches during periods of volatility? By changing our trading system to supposedly more accurately reflect market conditions, sometimes we just end up kidding ourselves about the calibre of opportunity available.
If your trading system is telling you to buy shares – you should buy them. If your system is suggesting that it would be more effective for you to sit on the sidelines and not trade because of insufficient opportunities in the market, ignore this advice at your own peril.
Alternatively, learn how to recognise a downtrend. Reverse the parameters of your usual searches. Use an option or short sold position to capitalise on your observations.

3. Use Margin Wisely
I recently had lunch with a trader who could be characterised as a bit of a “cowboy”, but had managed to generate a good trading plan and consistent profits without the benefit of margin. From the first few minutes of the conversation, I knew that he had a problem. He excitedly explained to me about a new online system that he had discovered that allowed him to trade long and short, using minimal margin to open substantial positions. The conversation went something like this:
“They only want to take 20% margin from my account to open any position. Oh my gosh – do you realise what this means… I can leverage myself up to the hilt! I can open up as many positions as I want. My $100,000 will allow me to trade up to $500,000 worth of shares! I’m going to be rich!!”
Now, at risk of bursting his bubble, I decided to curb his enthusiasm, (lest he couldn’t afford to pay for his own coffee – the next time we wanted to meet). Too many traders decide to position-size based on the margin that they are requested to deposit, instead of the total exposure of their position. If you do not immediately recognise the drawbacks of this rationale, you owe it to yourself to work through this example.
Let’s say that your system suggests that you can short sell $15,000 of a particular share, but your broker only requests a 20% margin. The logical thing to do would be to reserve $15,000 in your equity account, and give your broker $3000 in margin to open your position. (Brokers require a margin in order to open short sold positions and written option positions). Imagine that you had identified a $4 share that you wanted to short sell. This means that you could short sell 3750 shares at $4, which equates to a total position size of $15,000 (even though the broker is only going to take $3000 in margin).
If the share did not co-operate, then at least you would have the remaining $12,000 of liability available at a moment’s notice to answer any potential margin calls. This is a conservative approach. It works. It means that you won’t end up losing your house if the market ricochets upwards against your position with meteoric speed.
On the other hand, you could consider the $15,000 that you have available for this trade to be the margin. Rather than selling $15,000 of the share, now you could short sell a position size of $75,000… Yikes!! Instead of short selling 3750 shares at $4, you would now short sell 18,750 shares! Think of the implications of this move. It is five times the exposure of your original calculation. It leaves no room for error, and opens you up to the threat of a very nasty margin call that you are unlikely to be able to cover.
The current market chews up and spits out non-conservative traders with ruthless efficiency. Position size based on the position itself, not the margin required to open your position. Only use leverage when you have developed your skills as a trader. If you insist on doing otherwise, your career as a trader will be short-lived, but spectacular.

4. Limit Contingent Liability Positions
Writing naked options involves collecting a small fixed premium, yet incurring a theoretically unlimited loss. This is the meaning of contingent liability. Written naked option can surprise novices with their effectiveness to deplete trading equity.
Many traders are attracted to this concept because the chances of success of this strategy are high. Approximately 80% of options are only traded once and never exercised. On the surface, this sounds like a great chance to make money. When you look at the risks involved however, which contain contingent liability, this strategy should be left to sophisticated traders.
With any position that has the ability to wipe out your bank account within one foul swoop, apply caution, limit the number of this type of position, as well as limit position sizes.
To trade “spreads” in options, it is essential to understand both sides of the transaction – both buying and writing options. By spending some time learning about these types of strategies, you can work out creative ways to minimise your risk and maximise your profit.
Trading during volatile times can multiply your rewards. Take advantage of this trading environment, but remember to use caution and common sense.

If you haven’t yet got an effective written trading plan – you need one. Traders who trade without a written trading plan deserve to starve. The game is on. Nobody knows how long your ride will last, but I can tell you – without a trading plan, your chances of survival are zip.
 

Louise Bedford (www.tradinggame.com.au) is a full-time private trader and author of four best-selling books – The Secret of Writing Options, The Secret of Candlestick Charting, Charting Secrets and Trading Secrets. Register on her website to receive a free trading plan template and a 5-part e-course to get you trading like a machine.

High Probability versus High Profit
In order for a 1:1 risk reward ratio to work, you would need to have a high probability trading strategy that is successful at least 65 to 70% of the time. This is not impossible especially if you are an ultra short term trader that is only looking to make a small amount of pips. However, in order for it to be net positive, more than half of your trades would need to be winners. For example, if you plan to risk 20 pips on every currency trade, with a return of only 20 pips, 50% of your trades would need to hit their profit targets in order for you to breakeven. Sixty percent of the trades would need to hit their profit targets for you to make 40 pips. If 70% of the trades were winners, then you would be up 80 pips on every 10 trades.
Here is an example of a high probability trading strategy that is loosely based off of the ‘Momentum Strategy’ in the second edition of my new book Day Trading the Currency Market. In this strategy, we are simply looking for the price to break the 20 Simple Moving Average on a closing basis and for the MACD to confirm the direction of the trade within the past five bars (the strategy uses five minute charts).
More specifically if the currency pair closes above the moving average and MACD has crossed from negative to positive within the last five bars, then we go long the currency pair. If price closes below the moving average and MACD has crossed from positive to negative within the last five bars, then we short the currency pair. Thirty pips are risked on each trade for a return of 30 pips.
As you can see in the following example of the GBP/USD four out of the five trades were profitable for a net return of 90 pips and an accuracy rate of 80%.

List of Trades

Trade #1 – LONG GBP/USD Entry at 1.4914, take profit at 1.4944 +30 pips
Trade #2 – SHORT GBP/USD Entry at 1.4925, take profit at 1.4895 +30 pips
Trade #3 – LONG GBP/USD Entry at 1.4930, take profit at 1.4960 +30 pips
Trade #4 – SHORT GBP/USD Entry at 1.4915, take profit at 1.4885 +30 pips
Trade #5 – LONG GBP/USD Entry at 1.4905, stopped at 1.4975 -30 pips

With a high-profit trading strategy however, the success rate can be far lower as long as the risk reward ratio is high. If you had a trading strategy that risked 50 pips for a return of 150 pips on every currency trade, you would only need to be successful 30% of the time to be net positive. In other words, if seven out of 10 trades were losers and three were winners, the net return would still be 100 pips.
A moving average crossover strategy is typically a high profit but low probability trading strategy. The following chart is an example of a strategy that is based upon a 10 and 20-simple moving average (SMA) crossover. In this strategy, we go long the currency pair when the 10-hour SMA crosses above the 20-hour SMA. The trade remains open until the currency pair breaks the 20-SMA. For a short trade, the guidelines are reversed. The currency pair is sold when the 10-hour SMA crosses below the 20-hour SMA; the exit rule remains the same. As you can see in the following example in the AUD/USD four out of the five trades were unprofitable for an accuracy rate of only 20%, but the net return was still 25 pips.

List of Trades

Trade #1 – SHORT AUD/USD Entry at 0.6465, exit at 0.6485 -20 pips
Trade #2 – LONG AUD/USD Entry at 0.6530, exit at 0.6470 -60 pips
Trade #3 – SHORT AUD/USD Entry at 0.6470, exit at 0.6495 -25 pips
Trade #4 – LONG AUD/USD Entry at 0.6520, exit at 0.6470 -50 pips
Trade #5 – SHORT AUD/USD Entry at 0.6380, exit at 0.6200 +180 pips

The difference between a high probability and a high profit trading strategy is that one focuses on small consistent wins while the other swings for the fences. Both can yield positive results in their own right, but swinging for the fences is the most common way to trade and may also be the reason why many novice traders have a tough time staying alive in the currency market. With a high profit trade which is characteristic of picking tops and bottoms, one may need to be able to survive a lot of misses before the big winner is hit. Unsurprisingly, high probability trading is usually synonymous with shorter trade trading while high profit trading usually applies to longer term trades.
Of course everyone hopes to find a trading strategy that is both high probability and high profit but doing so may be as difficult as finding the Holy Grail.

Two Lot Method

One way to increase the probability of winning trades is to follow the two lot method that I use in my forex signal service, BKTraderFX. In 2008, 80 out of the 103 trades were winners, for an accuracy rate of approximately 78%. With each trade, there is always a short target and a long target which means that I trade in multiples of two. The first target is usually easily achievable while the long target is two to three times risk. I always trail the stop as the trade progresses to lock in profits along the way because my trading motto is to never let a winner turn into a loser. The trades are always based on a combination of fundamental and technical analysis.

By trading more than two lots, you expose yourself to double the risk because if your stop is 50 pips away from your entry for example and you are stopped out on two lots, the real loss is 100 pips. This is why it is absolutely necessary to make sure that you are confident in your high probability trading strategy. If you are relatively certain that you can make 10 pips a day for example, then stick with that target and just adjust your trading size.

Two Different Traders, One Result
The type of trading strategy that you have is just as important as trade management. In the currency market, technical analysis is probably, hands down, the most popular way to analyse currencies. Both new and seasoned traders will spend the majority of their time looking at chart patterns, drawing Fibonacci levels, counting Elliott Waves or creating their own combination of indicators with the ultimate goal of developing a trading strategy that gives the perfect entry signal. Based upon my experience however the exit is just as important as the entry. A few years ago, I remember talking to Rob Booker, a fellow currency trader about the importance of entries and exits and he said to me that asking him this question is like asking a pilot what is more important – the take-off or the landing? I am sure that almost anyone who has been on a plane will agree that BOTH are important. This is why every single one of my trading strategies uses the two lot method.
While working at JPMorgan Chase, I once traded alongside two extremely talented FX traders. They went long and short the EUR/USD at the same time and interestingly enough both ended up making money. The trader who went long Euros traded off five minute charts and held his position for no more than 20 minutes while the trader who went short Euros traded off one hour charts and held his position for four hours. The reason why both traders were able to make money even though they had conflicting positions is because of trade management. I strongly believe that the management of the trade is critical to successful trading regardless of whether you practise high probability or high profit trading. How many times have you kicked yourself wishing that you had locked in profits or moved your stop?
As in cooking there is always more than one recipe for trading success and if you are frustrated with trying to adhere to a 2:1 risk reward ratio, high probability trading may be right for you.

How many years has the broker been in business?
As a rule of thumb, the longer a forex broker has been in business, the more likely it is that it will stay in business. It may be useful to consider brokers that have been offering forex trading for 10 years or longer over those that have been doing so for five years or less. The longer a broker has been in business, the more familiar it will be with the market, regulatory changes and requirements. It will also have had time to adapt and expand its product offerings.

Is it regulated by the Australian Securities and Investments Commission? If so, for how many years?
The job of the Australian Securities and Investments Commission is to protect investors in Australia. Therefore, it is generally more prudent to use a broker that is regulated by ASIC. This means ASIC is keeping an eye on the forex broker, making sure it is meeting the guidelines enacted by the Australian government to protect investors. If a forex broker is not regulated in Australia, yet tries to solicit Australian customers, then you may want to ask why. Is it trying to skirt the law, or are its internal practices insufficient to meet ASIC’s guidelines? If either is true, you may want to consider whether you really want to do business with that broker.

In what other countries does it have offices, and is it regulated in all places it does business?
Many global foreign exchange providers are regulated not only in Australia, but in the United States, the United Kingdom, Singapore, Dubai and Japan. In the US, the Commodity Futures and Trading Commission publishes capital numbers for brokers that are regulated there, so you can gauge the broker’s size. The more countries a broker is regulated in, the better. That means more eyes are on the company and are reviewing its practices to make sure it is being honest. Different countries use different guidelines, so if a broker can meet all of those guidelines, it is likely a better candidate to trade with than a broker regulated in only one country.

Is there an office in Australia?
There is a lot to be said about face-to-face interaction. Being able to meet a live person and visit an office can be extremely important, especially to some new traders. Foreign exchange brokers who have an office in Australia can generally provide more intimate support than a company which only has offices thousands of kilometres away. Local offices also may occasionally hold educational seminars for their clients and provide other meet and greet opportunities.

Do they provide 24-hour customer service?

Do you hate it when your computer breaks down after hours and there is no one to call for help? When you are trading and have open positions, that annoyance is magnified ten-fold. The forex market is open for trading 24 hours a day, because when it is 12am in Sydney, it is 8am in New York. When trading such an active market, it is essential to trade with a broker that has 24-hour customer support. This includes being able to talk to a dealer and place trades over the phone in case your computer or its trading station ever goes down. You never want to be stuck with a trade and have no way to get out.

Using due diligence in choosing a broker is extremely important and not all that difficult. For example, it only takes 15 minutes to pick up the phone and call a broker to ask the questions above. It is important to speak to a live person at least once, because at a minimum, someone should be on the other line to pick up, and that person should speak in an easy-to-understand manner.
Once you feel satisfied with the answers, it is time to ask about account-opening minimums and value-added services such as training and education, free, real-time news, and the ability to trade from your iPhone or Blackberry. Finally, don’t forget to do a walk-through of the trading platform, which can help you understand not only how the broker’s software works, but also its level of customer service.
As you can see, the process of choosing a broker is not very different from the process of choosing a spouse – without the need for a long-term commitment, of course. Before settling on the person that we want to marry, most of us will date a number of different people. Some will be short, some tall, some quiet and some who can’t stop talking. With each person, we learn a little more about ourselves, our needs and our desires. Eventually, we settle on that one person who we hope to be happy with for the rest of our lives.
Before choosing a forex broker, it is also important to date, or test-drive, a few different providers to determine which does the best job of meeting your needs and desires. It may be helpful to open up small accounts with a few brokers, test-drive their trading software, see if their quotes are competitive and determine whether the charting package is simplistic or complex enough for your needs. Only after reviewing a few brokers should you settle on one – but unlike a marriage, there is no need to compromise! Divorce with a broker is not very messy – so if, for one reason or another, a forex broker fails to satisfy your needs, then find someone else.

Don’t trust the media

If you have keep abreast of the financial media over the past six months, you would have heard about the storming Aussie dollar, the rise in gold and other commodities, and the push higher in the Dow Jones Index (now only 10% down from its all-time highs).

But these movements have all been driven by the US dollar. The US government’s move to jump-start economic growth through the devaluation of its currency has become the single biggest factor in not just currency markets, but right through the global financial industry.
And the next instalment of this long-running saga is just around the corner…

What the Fed giveth…

There is plenty of speculation at the moment that the reason we have seen a sharp fall in the prices of most major asset classes since the start of May is down to US government policy.
As we discussed earlier, the strong move higher in a number of asset classes has been driven by the US governments quantitative easing program.
In a nutshell, quantitative easing is the next step a government takes when it can’t cut interest rates any further. And, with interest rates in the US now below 0.25%, there isn’t any room for further cuts.
Instead, the US government, through their central bank, the Federal Reserve, has decided to inject more money into their economy by printing more money and using that money to buy back many of the government bonds that have been issued by the US government.
This has the impact of injecting more new cash into the economy.
The Federal Reserve has embarked on two periods of quantitative easing. The first period started in November 2008 and, while halted briefly last year, continues to this day.
The second stage, known ubiquitously as QE2, began in November 2010 and is scheduled to finish on June 30.
According to many analysts, this deadline to expiry could be one of the driving factors behind the recent weakness in financial markets.

 Is the end nigh?

Orb Investment Management managing director Akhilesh Kamkolkar is one of the more bearish market participants.
“Starting in January 2011, the Fed left a paperweight on the print button,” he said. “Since that time, it’s put $500 billion into the system. When you combine the $100 billion in liquidity provided by QE2, we’re talking about $800-900 billion entering the financial system in 2011 alone.
“Consider that during the first stages of quantitative easing, the Fed was putting roughly $50 billion into the system. But once QE2 was announced in November, the Fed began putting $100 billion into the market. And the Fed is now pumping $200 billion into the system!
“Small wonder then that the US Dollar is falling off a cliff. Indeed, the way things are going, the Fed will push into a full-scale inflationary collapse within three to six months.
“If you’re not preparing for mega-inflation already, you need to start doing so now. The Fed will continue to pump money into the system 24/7 and it’s going to result in the death of the US dollar.”

When will it turn?

When will the US dollar turn? First of all, there’s no reason why it has to.
The US dollar could remain in a weakening phase for years, decades or, if some of the gloomiest analysts are to be believed, until the US currency and economy both collapse and the country is forced to issue new currency – which could well be made out of rock.
However, many analysts believe that like all market movements, sentiment toward the US dollar will ebb and flow. From this perspective, the US dollar is likely to remain in this extremely weak position only until the market sees a decisive pick up in the US economic growth.
According to Riccardo Briganti, the head of research at Macquarie Private Wealth, there are a number of factors that could continue to weigh on the US dollar.
“When we hear that the Fed is looking to rein in inflation, then we might see the US dollar start to move higher,” he said.
Briganti believes we are unlikely to hear such commentary from the Fed until later this year. “Until then, the most likely trajectory for the greenback is sideways or lower.”

Trading US Dollar weakness

What are some of the markets that will do best from long-term US dollar weakness? Clearly, taking positions against the US is the major way to trade this viewpoint.

In the foreign exchange markets, traders have been selling the US dollar against reserve-type currencies such as the Japanese yen and the Swiss franc.
The Australian dollar versus US dollar (AUD/USD) pair has been one of the best-performing trades over the past year as the Aussie dollar was helped by the developed world’s highest level of interest rates.
The commodities markets have also been helped by the falling US dollar.
Commodities are usually priced in US dollars so any fall in the value of the greenback will result in gains in the price of US dollar denominated commodities.
As a result, we have seen both silver and gold double over the past couple of years, while soft commodities have also increased by close to double.
Analysts believe that these movements are likely to continue as long as the US dollar continues to weaken.
So traders should be looking to keep a close eye on the US dollar for signs that this mighty move in equity markets, commodities, and risky currencies, which has dominated trade for the past 10 months, is coming to an end.

Debt Laden Divisions – Greece, Ireland, Spain, Italy, Portugal

Unfortunately, the Eurozone can’t just have a Board of Directors meeting to propose shutting down its laggard countries weighed down by high interest debt. Or can they? The EU Economic Council Meeting the weekend of March 11th seemed a few steps removed from just that. It is fitting that Spain’s credit rating was downgraded by Moody’s to Aa2 the day before the meetings commenced. This just days after Greece’s credit rating was cut three notches. We saw in 2010 the Euro take a couple big hits when the potential for a sovereign debt crisis turned into a reality. In May last year the Euro plunged from 1.3300 to 1.1900 (1,400 pips) in a little over a month after it was learnt a rescue package of $144 billion to bail out Greece would be required. While it has since regained that loss in value and then some, when looking for a trading opportunity it is important we keep that event and its impact on the Euro in our memory bank. It is also events like this that leverage Merkel and Sarkozy’s largely uncompromising position at the EU Economic Council meeting when dealing with their fiscally irresponsible friends to the south. The European Stability Mechanism (ESM) while largely funded by Germany (contributing roughly 27%) looks to have stringent conditions embedded within it to begin the slow process of financially rehabilitating countries such as Portugal, which at the moment looks to be the EU member most in need of attention.

The Balance Sheet

In the liability category, it has been well documented that the high interest debt now working to be re-financed takes the cake. Rightfully given recent developments, this gets most of the public attention. If you look at the price action of the EUR/USD recently however, there has been an overall uptrend. On March 18 we witnessed the Euro pair break the significant 1.4000 level and then trade up as high as 1.4250 early in the same week as the March 24-25 EU meeting in Brussels. This disparity between debt concerns and recent Euro strength begs the question: Which elements within the Eurozone conglomerate economy are buoying the currency amid crisis discussions? In short, Germany and France (Europe’s two largest economies) are humming along like finely tuned engines. Inflation in the region is also ticking upwards. In Germany at the moment you get the impression that skilled workers are enjoying the luxury of choosing among multiple job offers. On the macroeconomic front, the capital flow outlook looks improved after ECB President Jean Claude Trichet’s recently reiterated hawkish comments on interest rates. Knowing full well this news would not be well received by bad debt countries, Trichet did not waver. This is the best reminder in recent memory of every central bank’s primary mandate: to control inflation. Stubbornly high inflation forced Trichet’s hand. Your opinion on whether an upcoming 25 basis point hike in April by the ECB (taking the target rate to 1.25%) will be enough to temper an inflation rate that is currently above acceptable levels will have a critical impact on any long term position you are considering taking in the EUR/USD.

Strength In Our Diversity

Often times when you read an annual report on a particular company or listen to a public address from their CEO you will hear this phrase. It means the synergies, ideas and opportunities that arise from a diverse workforce spanning different territories and focusing on various revenue streams makes the company an increasingly greater force over time. That diversity and flexibility also better prepares the company to absorb the occasional financial loss – expected or unexpected. Can the same be said for the Eurozone and its currency? When you see the somewhat inspiring action being taken here in March to help their “brothers by currency”, the logic seems to hold largely the same. While there will be some publicized drama regarding the concessions that will have to be made around the table at these meetings, each member country took a blow in one way or another from the required bailout of Greece and Ireland in 2010. Those wounds are still fresh and they will now go collectively to greater lengths to prevent a collapse or near collapse of one of its members in the future. And while the immediate measures are preventive in nature, they have a long-term growth vision behind it that cannot be lost. As you consider whether to become a “shareholder” in this currency by taking a long EUR/USD position, you have to view these meetings as a big positive. Unlike the political wrangling that too often occupies a weekend G-10 summit, there looks to be an accepted determination here to put policies in place that whether popular or unpopular in the short term, will almost assuredly provide more stability and predictability across the region. Significantly, this is the case when it comes to items such as loan terms and conditions, labour laws, welfare policy and any other areas where visible holes need to be filled. While there appeared to be some tension presenting itself during the March 11th weekend meetings and likely again when they meet at the end of the month, that shouldn’t be mistaken for lack of progress. Quite the opposite actually, and long term Euro bulls should be encouraged by these events.

Taking a Position

Once we have the full picture of the most critical factors affecting the value of the Euro relative to other currencies we’re approaching trade decision time. We’ve been highlighting EUR versus the USD here because this, hands down, is the most heavily traded currency pair in the market. In deciding whether to take a position, looking into the short history of the Euro would also appear to be a useful exercise. It is often forgotten that shortly after the Euro was first introduced in 1999, the IMF had to organize a joint intervention to prop up the currency as it plummeted fast and furiously after launch. At the time there were serious questions about the currency’s longevity. Since then the Euro’s time below parity against the USD (last seen in December 2002) is a distant memory. As the Euro now enters adolescence, there are certainly risks associated with being long the currency, namely no comprehensive solution resolution or a poor one at the conclusion of these debt-focused meetings. Remember that was the goal pinned up when this meeting schedule was first announced. While sounding lofty, EU leaders appear determined to not eat their words, least of all Merkel. At this moment, Euro bullishness should still be favoured despite the possible land mines that will have to be navigated between now and the end of April. For the Euro bull who has profited in recent weeks, but is concerned about the event risk the end of March and month of April poses, there is logic to sitting on the sidelines until a final resolution is released and consider resuming your long position. A break of 1.4200 again would present an attractive long entry point as a heavy number of stop orders on short positions should get tripped – accelerating the move upwards and setting sights on a target of 1.4500. With Libya tensions coming to a head after a UN sanction was approved supporting a limited form of military intervention, yet a dubious exit strategy, the coming days are certainly not light on event risk. For this reason, it is likely we will see the periodic flight to safety in the coming days, which encourages USD longs. Despite that, the Eurozone’s historic resiliency in troubled periods, the continued strong growth in its two largest economies, its upward outlook on interest rates, and a begrudging willingness to become a more financially responsible conglomerate points towards more gains for Euro longs heading toward the middle of the year.