FOREX vs Stock Market

[Diamondflip]

I'm at the point in my life where I wanna start investing and planning for the future cause they say 2008 is going to be a costly year. I have some knowledge about the stock market and its risks and how volatile it is. I also have a very good business friend I've known for years who used to be a big time broker and is now in the FOREX field. From the research I've done it seems as if FOREX is slightly more stable than NYSE and/or NASDAQ. I've also noticed the gains aren't as big nor as quick as stock markets.

Does anyone else have any info/comments to share??

[greenparrot]

Read up on forex scams.


The CFTC [U.S. Commodity Futures Trading Commission] tips:

1. Stay away from opportunities that seem too good to be true
2. Avoid any company that predicts or guarantees large profits
3. Stay Away From Companies That Promise Little or No Financial Risk
4. Don't Trade on Margin Unless You Understand What It Means
5. Question Firms That Claim To Trade in the "Interbank Market"
6. Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise
7. Currency Scams Often Target Members of Ethnic Minorities
8. Be Sure You Get the Company's Performance Track Record
9. Don't Deal With Anyone Who Won't Give You His Background




But all in all it sounds interesting. I need to read up on it a bit too lol.

[tit$]

i'm reading up on forex now, there is just as much income potential in currency trading than the stock market - but less information to look at, which i like.

you can make as much as you want in currency trading, as its dependent on how much of one currency you buy (or bet on). if you bet $10 you won't win a whole hell of a lot, if you bet $1,000,000 obviously you stand to gain/lose more.

just sign up with one of the free ones that allow you to trade for free, i believe there are quite a few that allow you to trade play money for stocks as well.

[Diamondflip]

I'm running a simulation robot right now that uses real-time values/trades/numbers. It's basically a program that allows you to invest 'play' money into the actual FOREX market. Pretty much like those Poker sites with play money.

My financial analyst (happens to be my cousin) set up a linear robot to trade against the British Pound & European Dollar (currently the strongest in market) and so far we've made a 1% profit each day trading (4 days a week; never trade on Fri)

If I can find a way to upload this program I will. its a neat way to experience the market without losing 'real' money

[greenparrot]

I'm running a simulation robot right now that uses real-time values/trades/numbers. It's basically a program that allows you to invest 'play' money into the actual FOREX market. Pretty much like those Poker sites with play money.

My financial analyst (happens to be my cousin) set up a linear robot to trade against the British Pound & European Dollar (currently the strongest in market) and so far we've made a 1% profit each day trading (4 days a week; never trade on Fri)

If I can find a way to upload this program I will. its a neat way to experience the market without losing 'real' money


Hook it up bro!

[mekrew]

+1

[tit$]

this is what i've been reading sparatically throughout the day, good FAQ:

A Brief Tutorial on FX Markets - courtesy of Trendways.com
Foreign exchange rates
A foreign exchange rate is the parity between two currencies i.e. the amount of one currency needed to sell (or buy) in order to buy (or sell) one unit of the other currency. There are two ways to express such a rate. The most common (or international way) quotes the amount of any currency that corresponds to one U.S.Dollar. So when we see USD/DEM at 1.5000 this means that one dollar can be exchanged for 1.5 Dmarks. Among the major currencies it is only British sterling which is quoted the other way i.e. GBP/USD at 1.5500 means that one pound is exchanged for 1.55 dollars. The American way of quoting rates uses the opposite direction, that is it expresses the dollar amount that can be exchanged for one unit of foreign currency. So when we see for example the Dmark at 0.6625 this means that one mark can be exchanged for 0.6625 dollars (or the same at 66 1/4 cents). The term "cross rate" is usually used to express the parity between two nondollar currencies like DEM/SFR.
Bid and offer
Exchange rates in practice are quoted as two-way rates. Thus a dollar/mark quotation will read something like 1.5000/10. The bank or company which quotes this rate understands that it buys marks (selling dollars) at 1.5010 and sells marks (buying dollars at 1.5000). In other words it buys cheaper and sells dearer a given currency in exchange for the other one. Of course, the opposite is true for the person that asks for a quotation. The difference between the purchase and the sale rates is called "spread". Such spreads vary in size according to market volatility.

Rate direction and currency direction
One needs to keep very clear in mind the idea of market direction. First of all, in the foreign extern market it is a mistake to say that the market is going up or down. In the stock market one can use this expression as stocks either go up or go down. However, in the FX market a rate as we said defines the parity of two currencies, hence at any time one goes up , so the other goes down. Therefore we can talk about the dollar going up or down but not about the market doing so. Another issue that often confuses people (even traders and bankers) is the difference between a currency moving up and its rate going up. We have to explain this in more detail as any misunderstanding can lead to painful surprises when trading in the real market. For simplicity reasons let us forget for the time being the bid/offer spread. So let us suppose that dollar/mark moves from 1.5000 to 1.5010. In this case the rate goes up whereas the value of the mark goes down (simply because the value of the dollar goes up). In other words one needs more marks at 1.5010 to exchange for one dollar.
Basis points or pips
A foreign exchange rate usually consists of an integer part and 4 decimal points (or 2 decimal points when expressed per 100 units like e.g. dollar/yen). Thus the decimals are expressed either at 10th thousands or hundreds. Each such 0.0001 or 0.01 is called basis point or pip. E.g. a 50 pips change of 1.5000 is either 1.5050 or 1.4950.

Spot and forward rates
To some people these concepts are more easily understood as cash rates and futures. As a matter of fact we would not like to use the term "futures" here as this may lead to confusion with the typical futures contracts. Instead, let us use a more descriptive approach. A spot rate is the exchange rate which is valid for a transaction (purchase of currency A and sale of currency B) that must be concluded within the next two working days. Thus the value date (i.e. the day of actual delivery of currencies) of a transaction performed on a Monday is Wednesday. For Thursday it is Monday (weekend days are not counted). On the other hand, a forward transaction regards a deal which is concluded today and actual effect will take place on a fixed future date In the next paragraph we describe the relationship between a spot and a forward rate.

Interest rates, swap rates and forward rates
Many people, even in the financial sector think that a forward rate is an expectation or forecast of a future foreign exchange movement. This is a big mistake. Actually, a forward rate is nothing else but a mirror of the currently prevailing spot rate, allowing for the interest rate differential between the two currencies and the time period at the expiration of which the actual transaction will be concluded. So the spot rate is adjusted by the so called swap rate to give the forward rate. For the unsophisticated investor it is enough to say that the swap rate is there to compensate the low interest currency holder for the time period involved in a forward transaction. The best way to explain these strange sounding terms is an example. We shall keep the simplistic approach and will not get involved here with FX rate spreads and interes rate spreads. Suppose person X buys $ 100,000 against Dmarks from bank B at spot rate 1.5000 for value 30 days forward. Furthermore let us assume that the dollar interest rate for this period is 5% and for the mark 3%. This means that during these 30 days A will earn interest on the marks he keeps until delivery and B will earn interest on the dollars for the same reason. The forward rate must allow for the compensation of A so that on balance no party is better or worse off. Investor A will receive interest in marks= (150,000x3x30)/36,000 = 375. On the other hand bank B will receive interest in dollars = (100,000x5x30)/36,000 = 416.67. This dollar amount calculated by prevailing spot rate 1.5000 is equivalent to 625 marks. It is evident that bank B has to compensate investor A through the forward rate, i.e. A will pay a lower price for the dollars he is buying forward to equalise the difference of 250 marks. Through a formula we can reach the swap rate 0.0025 This is subtracted from 1.5000 and the forward rate 1.4975 prevails. Indeed, the investor will finally deliver 149,750 marks to receive 100,000 dollars.

The need for a forward market
The actual need for the existence of a foreign market is not speculation, although as we explain in another article (see Why get involved in the foreign exchange market) today there is no clear-cut line between hedging and speculating. However, there are a couple of characteristic categories of people who use the forward market in order to cover for time lags. The first group includes exporters and importers. As receipts and payments do not usually coincide timewise, these people buy forward the currency that they will have to pay and sell forward the currency that they will receive. In this way they overcome undesirable market fluctuations and take care of future cash flows. The second group consists of people who use the forward market to preserve the value and nature of their assets without speculating against future trends. These operators use both the spot and forward market through swaps, which are explained below.

Swaps
A swap transaction (not to be confused with the swap rate) is a double-leg deal, in which one buys spot currency X selling currency Y and simultaneously sells forward currency X buying currency Y. Let us give an example to show the rational of such a transaction. Assume that an American investor has a future receipt in Dmarks. In addition, assume that he thinks that German bonds are presently a good investment. So he has dollar assets but does not hold cash in marks. In plain words he needs marks right now and cannot wait for the future receipt marks to come. One solution would be to sell dollars and buy marks in the spot market. However, suppose he does not wish in a foreign exchange adventure for he cannot forecast the exchange value of the future receipt. In this case he sells dollars against marks spot getting his marks and buying his bonds. Simultaneously he buys dollars forward against marks matching the value date of the receipt. Upon expiration of the forward period, the investor cashes the receipt, pays back the marks that he owes and gets his original dollars. Hence he has been able to overcome the time lag problem.

FX market and Money market
The last issue to be discussed in this brief walk is the non-difference between two markets that are the flip side of each other. We have already mentioned earlier that a swap rate is basically based on interest rate differentials. We have also explained in the previous paragraph the nature of a swap transaction. The investor who uses marks bought in the forward market to buy German bonds has another option. He can place his dollars on deposit and borrow from the bank the marks he needs.Hence, he will have a dollar deposit and a mark loan. Indeed, the interest between what he gets and what he pays is also expressed through the swap rate Therefore, both ways lead to the same result. The only advantage going though the foreign exchange market rather than through the money market is simplicity i.e. usually it is faster and easier to obtain an FX facility rather than obtaining a loan, even one based on a collaterilised deposit.

[Diamondflip]

^^ that's alot of info to comprehend along with so much more than that. That's why I let a robot do the trading. Manual trades is too risky for me since I'm not so experienced/trained yet

[tit$]

^^ that's alot of info to comprehend along with so much more than that. That's why I let a robot do the trading. Manual trades is too risky for me since I'm not so experienced/trained yet

robot trading? can you send me a link to what you're talking about - never heard of it -

[grnlude97]

robot trading? can you send me a link to what you're talking about - never heard of it -

Why did I get a weird image of Johnny #5 at a computer? I also have no idea what he's talking about.

Daniel :)

[tit$]

Why did I get a weird image of Johnny #5 at a computer? I also have no idea what he's talking about.

Daniel :)

LOL - if there was truly a robot trader the market would cease. would love to see what he's talking about though.

[Diamondflip]

it's a program that my partner uses. There's a few out there. It's the program I was referring to in my previous post above. You can set the trade positions however you want.

again, when I can find a way to upload it I will

[Diamondflip]

here's a pretty similiar platform that you can 'play' around with using simulated funds

http://www.interbankfx.com/Accounts/OpenDemo.aspx

[Diamondflip]

robot trading? can you send me a link to what you're talking about - never heard of it -

Why did I get a weird image of Johnny #5 at a computer? I also have no idea what he's talking about.

Daniel :)

guys, a robot pretty much means the same thing as a program. Even the stock market has 'trading robots'

[Limeade]

Forex is scary guys, train on a sim but realize that for some reason sims usually allow people to achieve higher results than the real world.

[Diamondflip]

Forex is scary guys, train on a sim but realize that for some reason sims usually allow people to achieve higher results than the real world.

the sims are based on real-time market positions. It's all up to the trader

[Limeade]

Yeah I realize.... but people don't car if the trade in margins on a fake account. They get lucky a few times, feel good, make a little bit of fake money and then they jump into the real thing and..... boom

[tit$]

Yeah I realize.... but people don't car if the trade in margins on a fake account. They get lucky a few times, feel good, make a little bit of fake money and then they jump into the real thing and..... boom

i agree - you really need to practice for six months or so before you start on the real thing. it's a VERY easy thing to lose money at - i've seen it first hand.

[Diamondflip]

i agree - you really need to practice for six months or so before you start on the real thing. it's a VERY easy thing to lose money at - i've seen it first hand.

+1 million on that. These sims aren't really made for noobs. I use the sim by myself but my broker is the one that trades the real currency. It's a little more complex than the stock market and I wouldn't suggest someone to just jump in it.

This may not be everyone's cup of tea but it's just another option for investing.....it's not better/worse than the other stuff that's out there