Forex for us?
09/28/2005
As I get ready for another trip to India (well it is the centre of the Universe presently - even the Prime Minister in his Party Conference mentioned it) I am thinking about currencies of course.
Trading currencies online can be more interesting and lucrative than trading stocks.
After all where else but currency trading does politics meet economics allowing you to take positions on something more fascinating than future semiconductor sales and Intel's stock price?
And where else but currency trading can $1000 control $200,000 of currency? That's leverage. Such margin trading, requiring only a portion of the overall trade size, means a 0.5% move in yen-dollar (which can happen daily) could result in a $1000 profit, doubling your initial stake.
The best way to trade currencies is to combine analysis of the macroeconomy with analysis of price charts. Take Sterling/US Dollar (GBP/USD) trades. Translate all economic data into why people would want to hold one currency over the other.
That means analyzing market expectations about the relative strength of the US and UK economies. To do that view the economic data, commentary and reaction of currency markets following data releases on sites such as www.forexnews.com and advfn.com.
The most important UK economic data, for instance, are: claimant unemployment; average earnings; RPI-X; retail sales; PPI; industrial production; GDP growth; purchasing managers; surveys (manufacturing and services); money supply; balance of payments and housing prices.
Of course GBP/USD rates are affected by other factors including the difference in yields between the 10-year UK gilt and that on the 10-year US Treasury note.
Don't let these put you off trading currencies, because commentary sites such as forexonline.com, thatresearch.com and www.fxall.com will interpret these.
I find it far easier to take a view on a currency trade. That's because often currencies move in a very smooth trend.
Former Global Head of Foreign Exchange at the then Salomon Brothers, Bill Lipshutz, has very specific invaluable advice on trading currencies.
"Always ensure your upside reward is at least double your downside risk, and never stand to lose more than 3 percent of your trading capital."
For instance, if you have £50,000 risk capital, then you should not lose more than £1500 on a trade. So, if you are trading GBP/USD which is say at 1.4400 (and a long time ago it was!), and you 'go long' (ie make money if sterling appreciates in value) then if you are wrong you should only lose £1500 maximum on the trade.
Now, let's say you make a trade where for every 0.01 change in the currency you make or lose £1500.
That means exiting at 1.4300 and taking a loss. But if that is your downside risk, then Lipshutz says your upside target should be 1.4600 with at least the same liklihood of being hit; so you have at least 2:1 reward to risk ratio.
Sometimes after making these calculations you find the trade is simply not worth making. Fine, move to another currency, or wait. Trading is as much about the trades you don't make as the ones you do.
Value-Growth
On my value growth criteria which are based on stocks meeting revenue and profit growth and good value based on criteria such as price earnings growth, the following names come up. Remember they are for a 6 month outlook: Comino, British Polythene, Spectris, Printing.com, Touchstone, Chieftain.
Remember I am targeting about 20-20% with the value growth criteria. Last year it produced 33% return. On my momentum value indicator I have some new names: Slimma, IFG, Chesnara, Belgravium.
Crazy Small Stock
These are high risk volatile stocks which could move sharply higher or move sharply lower in my view, but will almost certainly not stand still. Names on the radar include: Wolfson, Waterman, Fletcher King, Brandon Hire.
Also, if you would like a free multi-media CDROM on 'Investing Better', which covers spreadbetting, CFD trading and momentum indicators like the MACD, posted to you then drop me an email with your postal address to alpesh@tradermind.com.
Spreadbetters
Spreadbetters and futures traders often look at hard and soft commodities. Here's my quick take on the action for the week ahead:
- Oil: Sideways
- Copper: Higher to sideways
- Gold: Sideways to lower
- £/$: Sideways to down
- Dow: Sideways
- FTSE 100: Up
- Soyabean Oil: Sideways to down
Jargon
I have been asked by a couple of readers to explain the jargon I use. 'Going long' means buying a stock in the expectation of it rising in price. 'Going short' is selling something you do not own in the expectation that a price fall means you can buy it back cheaper to make a profit from the falling price.
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