The Hindu Business Line : Forex market follows the sun around the world

WALL Street's `best-kept secret' is revealed in Raghee Horner's "Forex Trading for Maximum Profit" from Wiley (www. wiley. com). If you think the subject is new, you aren't alone, assures the author. "No one is born knowing how to trade; we all must begin the journey somewhere."

So, begin with chapter 1 to know that there are no gaps in this market, and that stops are guaranteed. "The 24-hour trading and massive liquidity virtually guarantees that your stops will be executed without slippage," writes Horner. "The futures and stock markets simply can't offer traders this guarantee mainly because of limited trading hours that result in frequent gap opens."

A `gap' open occurs when a market opens higher or lower than the last trading session's close resulting in a literal jump or `gap' in prices, explains the author. "Any stop-loss orders priced within this gap will not be executed at the stop-loss price but rather will become market orders at the next available price." Not so in forex trading. Forex reacts so logically to news and fundamentals, because the market is "continually open, starting in Sydney and moving on to Hong Kong, Tokyo, Singapore, Frankfurt, London, and New York".

As one time zone finishes trading for the day, another is just beginning or already underway. Each time zone digests news, she explains. "Moving from one time zone to another `dilutes' any sudden or extreme reaction that is typically found in domestic markets where there are limited trading hours and where reactions are often exaggerated because many of the participants react to news or fundamentals all at one time."

Market is one of the greatest teachers, you'd realise in chapter 2. "Market reveals itself to all of us each and every day if we are willing to pay attention. Too many times we try to box it, label it, or beat it," says Horner. Three questions she insists that all traders must ask themselves are: "Where to enter the market? Where to set my profit targets? And where to set my stop-loss?"

Learn then about the `five mistakes traders and investors make', because history repeats itself, cautions Horner, and "we all tend to make the same dumb mistakes when we lose money". First mistake is to try to pick tops and bottoms, driven by the adrenaline rush that is better left to "more adventurous pursuits like skydiving and motorcycles". Second flaw is `not selling a losing position' without realising that unrealised losses are still losses. Third blunder is `getting emotionally involved in a trade', putting in our egos and taking losses personally. Fourth error is `not making your own decisions', because "it's easy to be swayed by the news, CNBC, chat rooms, forums and so on". And the fifth fault is to put all your eggs in one basket.

"Only just over 5 per cent of the activity is generated by companies and governments that do business in a foreign country and covert one currency to another to buy and sell goods and services," states Horner, to highlight the fact that 90 plus per cent of forex trading is speculation. And many companies are into the game.

If New York is considered the centre of the stock universe, then London is the centre of the forex universe, writes Horner.

Many market players get a pulse of the trading day from what happens during Tokyo's trading hours. Then, they begin scaling into positions, informs Horner. The most active pairs are JPY/USD and AUD/USD, while in London the active pairs are EUR/USD, JPY/USD and GBP/USD.

Forex is traded in pairs because exchange rate, as you know, is "the value of one currency against another". What is the meaning of selling the EUR/USD? In this, EUR is the base currency and the USD is the second or counter currency, explains Horner. Thus, selling EUR/USD means "simultaneously selling the euro and buying the US dollar, which means that I believe that the US dollar will increase in value versus the euro."

Which is perhaps what Warren Buffett believed when betting against the buck "to a position of $22 billion," as Jon D. Markman writes in a June 15 posting on http:// moneycentral. msn. com, to explain how Berkshire Hathaway lost because of `wrong-way wager against the greenback'.

If you are still thinking of building your portfolio only with stocks, bonds, and real estate, Horner reasons: "Think of currencies like the stock of a country." That currencies don't have accounting scandals or wayward CEOs is another line to entice.

A book you'd love to pair with!

BookValue@TheHindu.co.in

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