Trade systems on Forex

Trading with brokers. Foreign exchange brokers, unlike equity brokers, do not take positions for themselves; they only service banks. Their roles are to bring together buyers and sellers in the market, to optimize the price they show to their customers and quickly, accurately, and faithfully executing the traders' orders. The majority of the foreign exchange brokers execute business via phone using an open box system — a microphone in front of the broker that continuously transmits everything he or she says on the direct phone lines to the speaker boxes in the banks. This way, all banks can hear all the deals being executed. Because of the open box system used by brokers, a trader is able to hear all prices quoted; whether the bid was hit or the offer taken; and the following price. What the trader will not be able to hear is the amounts of particular bids and offers and the names of the banks showing the prices. Prices are anonymous. The anonymity of the banks that are trading in the market ensures the market's efficiency, as all banks have a fair chance to trade.

Direct dealing. Direct dealing is based on trading reciprocity. A market maker—the bank making or quoting a price — expects the bank that is calling to reciprocate with respect to making a price when called upon. Direct dealing provides more trading discretion, as compared to dealing in the brokers' market. Sometimes traders take advantage of this characteristic. Direct dealing used to be conducted mostly on the phone. Phone dealing was error-prone and slow. Dealing errors were difficult to prove and even more difficult to settle. Direct dealing was forever changed in the mid-1980s, by the introduction of dealing systems. Dealing systems are on-line computers that link the contributing banks around the world on a one-on-one basis. The performance of dealing systems is characterized by speed, reliability, and safety. Dealing systems are continuously being improved in order to offer maximum support to the dealer's main function: trading.

Matching systems. Unlike dealing systems, on which trading is not anonymous and is conducted on a one-on-one basis, matching systems are anonymous and individual traders deal against the rest of the market, similar to dealing in the brokers' market. However, unlike the brokers' market, there are no individuals to bring the prices to the market, and liquidity may be limited at times. Matching systems are well-suited for trading smaller amounts as well. The dealing systems' characteristics of speed, reliability, and safety are replicated in the matching systems. In addition, credit lines are automatically managed by the systems. Traders input the total credit line for each counterparty. When the credit line has been reached, the system automatically disallows dealing with the particular party by displaying credit restrictions, or shows the trader only the price made by banks that have open lines of credit. As soon as the credit line is restored, the system allows the bank to deal again. In the inter-bank market, traders deal directly with dealing systems, matching systems, and brokers in a complementary fashion.

Risks by the foreign exchange on Forex

As it was mentioned above trading on the Forex is essentially risk-bearing. By the evaluation of the grade of a possible risk accounted should be the following kinds of it: exchange rate risk, interest rate risk, and credit risk, country risk. 

Exchange rate risk is the effect of the continuous shift in the worldwide market supply and demand balance on an outstanding foreign exchange position. For the period it is outstanding, the position will be subject to all the price changes. The most popular measures to cut losses short and ride profitable positions that losses should be kept within manageable limits are the position limit and the loss limit. By the position limitation a maximum amount of a certain currency a trader is allowed to carry at any single time during the regular trading hours is to be established. The loss limit is a measure designed to avoid unsustainable losses made by traders by means of stop-loss levels setting.

Interest rate risk refers to the profit and loss generated by fluctuations in the forward spreads, along with forward amount mismatches and maturity gaps among transactions in the foreign exchange book. This risk is pertinent to currency swaps; forward outright, futures, and options (See below). To minimize interest rate risk, one sets limits on the total size of mismatches. A common approach is to separate the mismatches, based on their maturity dates, into up to six months and past six months. All the transactions are entered in computerized systems in order to calculate the positions for all the dates of the delivery, gains and losses. Continuous analysis of the interest rate environment is necessary to forecast any changes that may impact on the outstanding gaps.

Credit risk refers to the possibility that an outstanding currency position may not be repaid as agreed, due to a voluntary or involuntary action by a counter party. In these cases, trading occurs on regulated exchanges, such as the clearinghouse of Chicago.

Forex - The most liquid market in the world

Since the advent of the freely floating exchange rate system, after the decision by Nixon to remove the Dollar from the Gold Standard, currency valuations became much more volatile. This volatility makes it possible to speculate one currency against another. Speculators quickly seized the advantage and the largest most liquid markets were born. Not only did the international banks provide the service of exchanging foreign currencies to facilitate tourism and international trade, but they soon discovered that speculating in the values of currencies was a profitable venture for themselves. Banks set up trading desks and were soon the dominant speculators in the forex markets. They traded for their clients and for their own account. Thus the interbank system of trading foreign exchange grew from $500 billion per day to the current level of $3 trillion per day.

Automated Forex Trading

If you use a 100% mechanical system you can literally put your computer doing all the work for you. An automated Forex system searches for trades, and places trades on your broker. So, if you feel comfortable with this kind of system, you just need to leave your computer turned on 24 hours a day, and he’ll be trading for you. If you intend to use a 100% mechanical trading system to trade for you, you can develop one in a platform like MT4 (http://www.metaquotes.net/). MT4 is a great platform and allows you to build virtually any kind of trading system. If you’re not a programmer, you can look for automated Forex systems. These systems can be back-tested, and trade for you. Usually, you can define the maximum amount you’re comfortable to risk, and the system trades accordingly with your instructions. When you have everything in place, you just need to leave your computer on, and he’ll do all the work.  

Some of the most reputable mechanical systems on the market are Forex Autopilot System, Forex Autopilot and TrendFinder Forex System. 

How Can I Start Making Money on Forex? (part 3)

Improve Risk Management and Discipline: 

Risk Management is extremely important for a trader. If you want to achieve success, you need to adopt a disciplined mind about trading and improve your risk management rules as much as you can. You shouldn’t risk more than 2% of your account on a trade. This way you’ll be more relaxed because you know that if you lose money on a trade that’s not the end of the world. Besides this, if you have a good system or strategy, you need to have the discipline to stick to your rules.  

Be Patient and Realistic: 

You need to be patient and have realistic expectations about the Forex market.  

The truth is that Forex is a difficult market, and unless you work hard on it, you won’t achieve consistent results. You need to treat Forex trading as a business and you need to be patient. In order to become a professional trader, you’ll need some time. 

Don’t set unrealistic goals. If you do so, you’ll be frustrated when you realize that you weren’t able to achieve them.  

When you define your goals in Forex trading, define ambitious goals but, at the same time, goals that you can accomplish. If you’re just starting in the Forex market, define as a goal achieving a profit at the end of the month. It doesn’t matter if it’s a big profit or not, but if you can start with a profit, you’re on the right track.

If you’re just starting and define goals like “I’ll make $20K by the end of the month”, you’re just dreaming. This is the kind of unrealistic expectations that destroy most beginners in Forex. Since they define unrealistic goals, they start taking huge risks in order to believe that they will achieve their goal. The worst part is when the huge risks destroy their account, and they find out that Forex trading is not a get rich quick opportunity. 

Patience and realistic goals are really important for a Forex trader. If you define good goals and you have the patience to work and improve your strategy, you’re on the right track.