The way profit is measured of a currency is by “pips” or point. PIP is the acronym for price interest point. If the EUR/USD moves from 1.4394 to 1.4444 that is 50 pips. A pip or 0.001 is the last decimal place of a currency quotation with the exception of the Japanese Yen and Yen cross rates. A price movement for the USD/JPY from 111.10 to 111.60 will be 50 pips.
Company: Societe Generale (2008) Detail: Lost 4.9 billion euros ($7.2 billion) before taxes after trader went beyond permitted limits on European stock index futures.
Company: Bank of Montreal (2007) Detail: Wrong-way bets on natural gas led to a pretax loss of about C$680 million ($663 million).
Company: Amaranth Advisors LLC (2006) Detail: Trader Brian Hunter's bad bets on natural gas triggered $6.6 billion of losses.
Company: Refco Inc. (2005) Detail: Declared bankruptcy after hiding $430 million of debt
Company: China Aviation Oil (2004) Detail: Lost $550 million on (Singapore) Corp. speculative oil-futures trades, forcing debt restructuring.
Company: Allied Irish Banks Plc (2002) Detail: Trader hid $691 million in currency market losses.
Company: Plains All American (1999) Detail: Lost $160 million because of Pipeline LP unauthorized crude-oil trading by an employee.
Company: Long-Term Capital (1998) Detail: Lost $4 billion after a debt Management default by Russia
Company: Peregrine Investments (1998) Detail: Collapsed from at least Holdings Ltd. $300 million of debt bought from insolvent companies.
Company: National Westminster (1997) Detail: Disclosed $125 million charge Bank Plc to cover options-trading loss.
Company: Deutsche Morgan (1996) Detail: Fired fund manager Peter Young Grenfell for unauthorized trading and paid $279 million to bail out investors.
Company: Sumitomo Corp. (1996) Detail: Disclosed a $2.6 billion loss on unauthorized copper trades by Yasuo Hamanaka.
Company: Daiwa Bank (1995) Detail: Disclosed a $1.1 billion loss from unauthorized trades.
Company: Barings Plc (1995) Detail: Collapsed after trader Nick Leeson racked up $1.4 billion in losses.
Company: Orange County (1994) Detail: Lost $1.7 billion from debt California and derivatives used to expand its investment fund.
Company: Kidder Peabody & Co. (1994) Detail: Took a $210 million charge to reflect what it said were false bond trading profits by trader Joseph Jett.
Company: Codelco (1994) Trader Juan Pablo Davila lost more than $200 million speculating on copper
Company: Metallgesellschaft AG (1993) Detail: Lost more than $1.5 billion trading oil futures contracts
Company: Drexel Burnham (1990) Detail: Filed for bankruptcy after Lambert Inc. pleading guilty to charges of insider trading and stock manipulation.
The world's currencies are on a floating exchange rate and are always traded and quoted in pairs. The most often traded currencies are those of countries with relatively stable governments, respected central banks, and low inflation. The major currencies in today’s market are - US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.
The first listed currency is known as the base currency (With a value of 1), while the second is called the counter or quote currency; If a trader buys a EUR/USD position for example, he/she has bought the base currency, EURO and simultaneously sold USD, believing that the base currency in this case, EURO, will increase in value. (If a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening).
Currency pairs that do not involve the U.S. dollar are called cross currencies, but they are valued the same. Currency pairs are quoted either Direct (GBPUSD, EURUSD, AUDUSD, NZDUSD), Inverse (USDJPY, USDCHF, USDCAD, USDZAR) or Cross (EURGBP, EURJPY, EURCHF, GBPCHF, GBPJPY, CHFJPY) rate terms.
A forex quote will include a “Bid / Ask” spread; the 'bid' is the price at which you can sell the base currency (At the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (At the same time selling the counter currency).
The calculation of the value of a single PIP (The movement unit of a currency pair), a trader will utilize the following methods:
Exchange rate quotes are given as five digit numerals. For example, USDJPY = 108.25 signifies that US$1 equates to 108.25 Yen, and EURUSD = 1.2525 signifies that 1 EURO equates to US$1.2525.
For a quote expressed as AAABBB = C, 1 Unit of AAA = C Units of BBB.
| Symbol | | Currency Pair | | Nickname |
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| EURUSD | Euro / US Dollar | "Euro" | ||
| EURGBP | Euro / British Pound | "Euro Sterling" | ||
| EURJPY | Euro / Japanese Yen | "Euro Yen" | ||
| EURCHF | Euro / Swiss Franc | "Euro Swiss" | ||
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| USDJPY | US Dollar / Japanese Yen | "Dollar Yen" | ||
| USDCHF | US Dollar / Swiss Franc | "Dollar Swiss" or "Swissy" | ||
| USDCAD | US Dollar / Canadian Dollar | "Dollar Canada" | ||
| USDZAR | US Dollar / South African Rand | "Dollar Zar" | ||
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| GBPUSD | British Pound / US Dollar | "Cable" | ||
| GBPCHF | British Pound / Swiss Franc | "Sterling Swiss" | ||
| GBPJPY | British Pound / Japanese Yen | "Sterling Yen" | ||
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| AUDUSD | Australian Dollar / US Dollar | "Aussie Dollar" | ||
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| CHFJPY | Swiss Franc / Japanese Yen | "Swiss Yen" | ||
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| NZDUSD | New Zealand Dollar / US Dollar | "New Zealand Dollar" or "Kiwi" | ||
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In this report, we will look at the history and background of Fibonacci numbers and The Golden Ratio. We will then outline three specific money management tips that can help increase your profit potential.
Support and resistance levels are an important consideration for most traders to help identify entry and exit points when trading. Fibonacci percentage "retracement" levels based upon the Fibonacci number sequence and golden ratio are very popular with many traders but what are they exactly?
What are Fibonacci Numbers and the Golden Ratio?
The Fibonacci sequence first appeared as the solution to a problem in the Liber Abaci, a book written by Leonardo Fibonacci in 1202 to introduce the Hindu-Arabic numerals used today to a Europe still using Roman numerals.
The original problem in the Liber Abaci posed the question: How many pairs of rabbits can be generated from a single pair, if each month each mature pair brings forth a new pair, which, from the second month, becomes productive.
The Golden Ratio
After the first few numbers in the Fibonacci sequence, the ratio of any number to the next higher number is approximately .618, and the lower number is 1.618. These two figures are the golden mean or the golden ratio.
Its proportions are pleasing to the human senses and it appears throughout biology, art, music, and architecture. A few examples of natural shapes based on the Golden Ratio include DNA molecules, sunflowers, snail shells, galaxies, and hurricanes.
Important Retracement Levels
The two Fibonacci percentage retracement levels considered the most important in trading are 38.2% and 62.8%. Other important retracement percentages include 75%, 50%, and 33%. Three Profit Tips for Using Fibonacci Numbers
1. Fibonacci Defines Stop Loss Levels
A trader can use Fibonacci numbers to set stop loss orders.
For instance, if at least three Fibonacci price levels come together in a relatively tight zone, a stop loss placement just below or above the zone may be set.
A Fibonacci number helps define stops in the following way, if a trader trades against a support zone, if the support zone is violated and the price trades below that zone, the reason for the trade is negated and the position should be closed.
Setting stops using Fibonacci retracements takes the emotion out of trading and gives a pre defined exit point.
2. Fibonacci Defines Position Size
Depending on the risk you are prepared to take per trade, Fibonacci numbers can also define position size. For instance, if prices are right on a specific level, you may wish to have more positions than if the price is further away.
3. Fibonacci Defines Objectives
With Fibonacci numbers, once a pattern completes against a Fibonacci price zone you can use them to set profit objectives to bank partial profits or tighten stop loss levels. This clear objective for traders helps them to lock in profits. The great advantage of Fibonacci numbers and the golden ratio is the fact that they take the emotion out of trading and can define not only stop losses to exit a market, but also set profit objectives as well.
W D Gann and Fibonacci - The Perfect Trading Combination!
One trader who incorporated Fibonacci numbers and The Golden Ratio into his trading was the legendary trader W D Gann. We feel that the use of Fibonacci numbers with the Gann trading method provides traders with the best possible combination to seek long term trading profits.
Last week, the New York Times published an article with the byline "Is the Federal Reserve’s chairman, Ben Bernanke too nice for the job?" Apparently, talk had been building on Wall Street that Bernanke was not tough enough to deal with the growing problems faced by the world's largest economy. Bernanke responded publicly in a speech in which he promised that the Fed would act quickly and decisively to confront such problems. Then on Tuesday, the critics were silenced peremptorily by a Fed rate cut of 75 basis points, the largest single cut in two decades. Moreover, Bernanke intimated that additional rate cuts could come as soon as next week.
It's unclear how this activity will affect the Dollar. On the one hand, it implies beyond a reasonable doubt that the US economy is indeed headed for recession. Bond yields are declining and the stock market has lost 15% of its value since October. On the other hand, the Fed has demonstrated that it is willing and able to take the necessary steps to avoid a hard landing at any cost. At the same time, investors around the world fear that a US recession will have an adverse impact on the global economy. And where do investors park their money during periods of global economic uncertainty? Answer: USA. Sure enough, the Dollar has already begun to rally after taking a big hit immediately following the rate cuts.
For those unfamiliar with the term, FOREX (FOReign EXchange market), refers to an international exchange market where currencies are bought and sold. The Foreign Exchange Market that we see today began in the 1970's, when free exchange rates and floating currencies were introduced. In such an environment only participants in the market determine the price of one currency against another, based upon supply and demand for that currency.
FOREX is a somewhat unique market for a number of reasons. Firstly, it is one of the few markets in which it can be said with very few qualifications that it is free of external controls and that it cannot be manipulated. It is also the largest liquid financial market, with trade reaching between 1 and 1.5 trillion US dollars a day. With this much money moving this fast, it is clear why a single investor would find it near impossible to significantly affect the price of a major currency. Furthermore, the liquidity of the market means that unlike some rarely traded stock, traders are able to open and close positions within a few seconds as there are always willing buyers and sellers.
Another somewhat unique characteristic of the "forex money market"is the variance of its participants. Investors find a number of reasons for entering the market, some as longer term hedge investors, while others utilize massive credit lines to seek large short term gains. Interestingly, unlike blue-chip stocks, which are usually most attractive only to the long term investor, the combination of rather constant but small daily fluctuations in currency prices, create an environment which attracts investors with a broad range of strategies.
How FOREX Works
Transactions in foreign currencies are not centralized on an exchange, unlike say the NYSE, and thus take place all over the world via telecommunications. Trade is open 24 hours a day from Sunday afternoon until Friday afternoon (00:00 GMT on Monday to 10:00 pm GMT on Friday). In almost every time zone around the world, there are dealers who will quote all major currencies. After deciding what currency the investor would like to purchase, he or she does so via one of these dealers (some of which can be found online). It is quite common practice for investors to speculate on currency prices by getting a credit line (which are available to those with capital as small as $500), and vastly increase their potential gains and losses. This is called marginal trading.
Marginal Trading
"Marginal trading" is simply the term used for trading with borrowed capital. It is appealing because of the fact that in FOREX investments can be made without a real money supply. This allows investors to invest much more money with fewer money transfer costs, and open bigger positions with a much smaller amount of actual capital. Thus, one can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital. Marginal trading in an exchange market is quantified in lots. The term "lot" refers to approximately $100,000, an amount which can be obtained by putting up as little as 0.5% or $500.
EXAMPLE: You believe that signals in the market are indicating that the British Pound will go up against the US Dollar. You open 1 lot for buying the Pound with a 1% margin at the price of 1.49889 and wait for the exchange rate to climb. At some point in the future, your predictions come true and you decide to sell. You close the position at 1.5050 and earn 61 pips or about $405. Thus, on an initial capital investment of $1,000, you have made over 40% in profits. (Just as an example of how exchange rates change in the course of a day, an average daily change of the Euro (in Dollars) is about 70 to 100 pips.)
When you decide to close a position, the deposit sum that you originally made is returned to you and a calculation of your profits or losses is done. This profit or loss is then credited to your account.
Investment Strategies: Technical Analysis and Fundamental Analysis
The two fundamental strategies in investing in FOREX are Technical Analysis or Fundamental Analysis. Most small and medium sized investors in financial markets use Technical Analysis. This technique stems from the assumption that all information about the market and a particular currency's future fluctuations is found in the price chain. That is to say, that all factors which have an effect on the price have already been considered by the market and are thus reflected in the price. Essentially then, what this type of investor does is base his/her investments upon three fundamental suppositions. These are: that the movement of the market considers all factors, that the movement of prices is purposeful and directly tied to these events, and that history repeats itself. Someone utilizing technical analysis looks at the highest and lowest prices of a currency, the prices of opening and closing, and the volume of transactions. This investor does not try to outsmart the market, or even predict major long term trends, but simply looks at what has happened to that currency in the recent past, and predicts that the small fluctuations will generally continue just as they have before.
A Fundamental Analysis is one which analyzes the current situations in the country of the currency, including such things as its economy, its political situation, and other related rumors. By the numbers, a country's economy depends on a number of quantifiable measurements such as its Central Bank's interest rate, the national unemployment level, tax policy and the rate of inflation. An investor can also anticipate that less quantifiable occurrences, such as political unrest or transition will also have an effect on the market. Before basing all predictions on the factors alone, however, it is important to remember that investors must also keep in mind the expectations and anticipations of market participants. For just as in any stock market, the value of a currency is also based in large part on perceptions of and anticipations about that currency, not solely on its reality.
"Make Money with Currency Trading on FOREX"
FOREX investing is one of the most potentially rewarding types of investments available. While certainly the risk is great, the ability to conduct marginal trading on FOREX means that potential profits are enormous relative to initial capital investments. Another benefit of FOREX is that its size prevents almost all attempts by others to influence the market for their own gain. So that when investing in foreign currency markets one can feel quite confident that the investment he or she is making has the same opportunity for profit as other investors throughout the world. While investing in FOREX short term requires a certain degree of diligence, investors who utilize a technical analysis can feel relatively confident that their own ability to read the daily fluctuations of the currency market are sufficiently adequate to give them the knowledge necessary to make informed investments.
