• Content count

  • Joined

  • Last visited

Community Reputation

0 Neutral

About adamsmiths

  • Rank
  • Birthday
  1. Hedging is a tool which is often used by lots of traders in order to avert losses by way of diversifying the investment portfolio of a trader. While not recommended for newbies, it is a widely known tool for averting losses. In order to understand better the benefits of hedging, scroll down to read the comments below: 1. Get rid of all Risk in Long Term If you are based in Britain and trade on the currency pair of the US Dollar and the Pound, then you would eventually want to buy off the shares and stocks of well-performing companies in the UK. Thus, your trade would be hugely dependent upon the existing rate of exchange between the Dollar and the Pound. However, this exchange rate will keep changing over time owing to the various economic-political developments which are bound to take place over time. Due to this reason, there is a need to hedge the currency risks to gain in the long term. (Points from CornerTrader) 2. You can diversify Your Portfolio You would gain a lot from diversifying portfolio, which as I mentioned at the outset is one of the main reasons why people like to engage in hedging. The emerging markets are attractive to investors who would wish to risk more and achieve higher returns. Since a majority of investors make use of foreign-based investments, they reduce their exposure to risk making use of currency-hedged mutual funds. 3. You Get to Hedge by Using Forward Contracts A lot of exchange-traded funds use forward contracts in order to hedge currency risks and these contracts can be purchased by almost every kind of major currency. A forward contract or currency forward, enables the purchaser to lock in the price that needs to be paid in exchange for a currency. To describe in other words, the exchange rate is frozen in place for a particular period of time. However, buying forward contracts comes for a price. The contract protects towards the portfolio value if exchange rates were to shift in order to make the currency a little less valuable than before. Let’s take the United Kingdom as an example. Here, a forward contract acts as a protection to an investor when the pound’s value declines in relation to the dollar. On the contrary, if the pound’s value were to increase, one would really not require any forward contract. So this is actually a double-edged sword to be honest. People, who frequently use currency hedging, do it out of faith that the cost of hedging will pay off over time. The fund's objective is to decrease the currency risk and get used to the additional cost of purchasing a forward contract. 4. Hedging Acts as a Shield A currency hedging strategy will act as a shield for the investor in case the value of a currency was to see a sharp drop. Suppose that there are two mutual funds which are made up entirely of Malaysian-based companies. One of the funds fund do not hedge currency risk. But the other fund, while it contains the exact same portfolio of stocks, but buys off forward contracts on the Malaysian currency, the Ringgit. All the above are reasons why hedging is necessary. Political and economic factors would be able to find huge fluctuations in the rates of exchange. In a few cases, currency rates are normally quite volatile.
  2. Forex brokers serve as an intermediary between two parties involved in a forex market transaction, buyer and seller. Forex brokers help the traders conduct trading activities in decentralised forex market connecting them to the market. There are different types of foreign exchange brokers out there, who have been employed by forex traders to carry out manual or automated forex trading. This information has been shared by easy market. Market Maker Brokers: Dealing Desk brokers are the one who act as counter-parties to clients in the foreign exchange trade. They are in possession of a dealing desk, and normally act as counter-party for their clients. This means they must buy when the client sells or vice versa, therefore, taking a trading position which is completely opposite in position. There exists a conflict of interest between the broker and his client trader. Market makers set the exchange rates that may differ from another market maker or ECN. Although the prices are set as per their own interest, spreads are kept fair due to stiff competition among numerous market makers. There can be times when market makers trade against the client. They can hold an order by passing it on to someone else. In case, they don’t find it there, then they can pass the order to a liquidity provider. Market makers normally have quotes that are marginally different from the liquidity providers in the inter-bank market. They have fixed rates and let out negative slippages more often than positive slippages. No Dealing Desk Brokers: “No-Dealing-Desk” brokers are the ones which do not work as ‘counter-parties’ to their clients. These are the ones that are ECN, STP or ECN+STP. And their characteristic feature is a lack of the ‘dealing desk’ which the market makers possess. Their clients’ orders are passed on directly to liquidity providers for execution without any sort of intervention from a dealer. The No-Dealing-Desk broker offers spreads that are variable and low; and the execution speed is also extremely fast. These kinds of platforms earn money from a fixed commission. Electronic Communication Network: ECN brokers are also sometimes referred to as STP or ‘straight-through-processing’ mode of execution. They, like market makers pass on the orders of the client to the inter-bank market for the purpose of execution. However, they would not allow their clients to be the counterparty to a transaction. A majority of ECN brokers normally possess a trade module, whereby all the orders from banks and financial institutions are displayed on the chart, and this helps the traders to compete against one another. Therefore, they have perfect transparency when it comes to price quotes. The spreads are normally very variable, and are usually quite low. ECN brokers make money from the spread and by charging a fixed percentage of commission on trades. Also, for most of the time, they require a substantial initial deposit in order to open an ECN account with a broker.
  3. The forex or the foreign exchange market has the highest liquidity in the whole world. In order to trade in this market, you have to know certain things. This way you will be able to gain much more profits. Here are some things discussed by fibogroup that you may consider, if you want to trade in the forex market. Keep your charts clean It is quite tempting to take advantage of all the analysis tools that are offered by the trading platform, once you open an account in the forex. There are many indicators that work well for the forex market. You should always try to keep analysis techniques to a minimum, so that they can be effective. If you use same types of indicators, for example, two oscillators or two volatility indicators, you may get opposing signals. You should try to avoid this. You should remove the analysis technique that you do not use on a daily basis in order to enhance the trading performance. Protect your trading account While trading in the forex, you should pay attention to how you can avoid losing money in this huge market. If you want to be a successful trader, it is important that you know money management techniques properly. There are many experienced traders who agree to the fact that anyone can enter a position at any price. What is important that how you get out of that trade. This means, you should know when to accept your losses and move on. In order to ensure that your losses remain reasonable, always use a protective stop loss. You should not only have plans to limit losses, but also to protect your profits. If you have proper money management techniques, it can help you to gain large amount of profits. Start with small investment Once you have done your homework, made plans and practiced in the demo account for a considerable amount of time, it may be time that you start trading in a real account. While trading in a real account for the first time, make small investment at first. Then when you get accustomed with trading, you can invest more money. Keep records In order to learn form your losses and get success in the forex market, use a trading journal. Keep a record of everything such as instruments, dates, losses, profits, and also your own performance as a trader. A trading journal is extremely important for you to grow as a successful trader. If you review a trading journal periodically, it will give you important feedback in order to make learning possible.