Forex Useful Tips

1. Be willing to take money off the table as a position moves in your favor;
"2-for-1 money management1" is a good start. Essentially, once your profits exceed your initial risk, exit half of your position and move your stop to breakeven on the remainder of your position. This way, barring overnight gaps, you are ensured, at worst, a breakeven trade, and you still have the potential for gains on the remainder of the position.

2. Understand the market you are trading. This is especially true in derivative trading (i.e. options, futures). I know a trader who was making quite a bit of money by selling put options until someone exercised their options and "put" the shares to him. He lost thousands of dollars a day and wasn't even aware this was happening until he received a margin call from his broker.

3. Strive to keep maximum drawdowns between 20 and 25%. Once drawdowns exceed this amount it becomes increasingly difficult, if not impossible, to completely recover. The importance of keeping drawdowns within reason was illustrated in the first installment of this series.

4. Be willing to stop trading and re-evaluate the markets and your methodology when you encounter a string of losses. The markets will always be there. Gann said it best in his book, How to Make Profits in Commodities, published over 50 years ago: "When you make one to three trades that show losses, whether they be large or small, something is wrong with you and not the market. Your trend may have changed. My rule is to get out and wait. Study the reason for your losses. Remember, you will never lose any money by being out of the market."

5. Consider the psychological impact of losing money. Unlike most of the other techniques discussed here, this one can't be quantified. Obviously, no one likes to lose money. However, each individual reacts differently. You must honestly ask yourself, What would happen if I lose X%? Would it have a material effect on my lifestyle, my family or my mental well being? You should be willing to accept the consequences of being stopped out on any or all of your trades. Emotionally, you should be completely comfortable with the risks you are taking.

6. The main point is that money management doesn't have to be rocket science. It all boils down to understanding the risk of the investment, risking only a small percentage on any one trade (or trading approach) and keeping total exposure within reason. While the list above is not exhaustive, I believe it will help keep you out of the majority of trouble spots. Those who survive to become successful traders not only study methodologies for trading, but they also study the risks associated with them. I strongly urge you to do the same.

Ihis is my own suggestions. Please treat as this a guidance. Don't apply direct.

Forex Method in European Union

The European Union (EU) is a sterling example of successful economic integration among the countries of a region. Formerly known as the European Economic Community (EEC) the union was born our of the “Treaty of Rome entered into among six European countries-Belgium, Netherlands, Luxembourg France, Germany and Italy-who are also its founder .member its came into operation on January 1, 1958.

Under the Treaty of Rome the member countries agreed to;(i) gradual liberalization of trade among the members with a view of achieving Zero tariff level as early as possible; (ii)evolving a common external tariff among the member countries for inter regional trade(iii) evolving a common agricultural and transport policy;(iv)removal of obstacles to the free movement of persons services and capital: (v) establishing the European Common Market(ECM) with a view to reducing intra-regional income disparities and promote trade among the members and(vi) evolving common fiscal and economic policies to the extent possible for the functioning of the ECM and to remedy disequilibria in their balance of payments.

The member countries agreed to abolish in a phased manner all the tariffs among themselves and adopt a uniform tariff and fiscal barriers. This was achieved by 1968. The next step was to integrate the European Community into a single market with single set of laws, tariffs and fiscal barriers, This was to be achieved by 1992,In June 1985, the European Commission issued the white paper listing various legislative proposals on completing the internal market’, The proposals essentially center an abolishing existing physical, technical and fiscal barriers. These include border controls. Technical standard and regulation and disparities in tax regulations The Single European Act, which became effective in July 1987. Provided the legal basis necessary to implement the integration of European markets .

The European Union is operating as a single market with effect from 1st January 1993 with the elimination of Barriers to the Movements of Goods, services, capital manpower and skills within the boles. At present the membership includes 15 countries with the addition of England, Ireland, Denmark, Greece, Spain, Portugal Austral, Finland and Sweden. Art now constitutes the world’s largest and prosperous market with a share of 40% in the world trade.

One of India’s major trade partners is the EU which accounts for 25% of its exports while the scope for exports has been enlarge by the mere size of the market and flexibility of the quote for different items, the Indian industry has to survive the severe competition arising form throwing open the market to ask. India has signed a trade and economic cooperation agreement with the EU,. This provides for perennial trade between E and India and mantel cooperation in economic and agricultural and industrial development. It is expected that in course of time India my be assigned an associate member status.

Forex Prevention of Speculation

Stable exchange rates avoid the dangerous possibilities of speculation and thus help in orderly growth of international markets. The claim that stable exchange rates prevent speculation is not correct. By keeping the value of the currency at an artificial level. It encourages speculation of devaluation of the currency. The suspicion of devolution will ultimately make devaluation inevitable and result in the destruction of the stability of the currency.

Small Open Economies

It is destruction of the stability of the currency small open economies i.e., a country which trades extensively with others. Such economies may be depending upon imports to a large extent for many of its to deprecation of the currency of the country. This is opposed to stimulate exports due to reeducation in the price of domestic products and thus adjust the deficit in the balance of payments. But depreciation of the currency will raise the price of imports. If the import is inelastic, it will raise the cost of living leading to rise in wages. The prices of domestic products increase offsetting of the benefit of depreciation. Thus the increase in exports may not realize. It would be better for such economics to fix the value of their currencies to the currency of the country which supplies most of their imports.

Inflation under the fixed rate, system where rates are strictly on gold or dollar standard, there was need for the central bank to keep a close watch on the money supply and keep the inflation under control. Poor performance on this front was immediately reflected in the dwindling of foreign exchange reserves. This provided a good reason for taking strong remedial measures by the central bank. Under flexible exchange rates, the foreign exchange reserves are not affected and therefore no evidence of the deterioration in the situation is available. This may allow inflation to creep in. however, it should be noted that under flexible rates, the change in exchange rate itself provides the needed evidence. Therefore, it may not be say that flexible rates are more inflationary than fixed rates.

Terms of trade many countries maintain their currencies pegged through trade and exchange controls at a level higher than that would prevail in a free market. The introduction of flexible rate system would far exceed gain, if any, that accrues from introduction of flexible exchange rates.

Competitive exchange depreciation under the flexible exchange rate system there is a possibility of countries engaging in competitive depreciation of their currencies in order to capture would markets. Such unhealthy practices are eliminated in the case of stable exchange rates.

Forex Development of Currency Areas

Proper functioning of regional arrangements like sterling area of dollar area would be facilitated with the stable exchange rates. IN such arrangements. If flexible rates prevail, especially for the major currency like pound sterling or dollar with which the other currencies.

The argument that stable rates of exchange are required for development of regional arrangements does not stand the test of proof. The case of sterling area is a good illustration in this regard. The sterling area was promoted in 1930s at which time the pound sterling was free to fluctuate under market conditions. Therefore, it is clear that the strength was free to fluctuate freely would not weaken the area if the decision is taken after consultation with member countries.

Forex Case for fixed rates

(1) Promotions of international trade stable exchange rates encourage international trade by providing certainty and confidence. Exports and importers know in advance how much they will receive or they will have to pay in terms of home currency.

Advocates of floating rates point out that the post-war experiences do not support the view that stable exchange rates are required for smooth flow of international trade. Even under flexible rates of exchange international trade will flourish. So long as the balance of payments is at equilibrium , no change in the trade of exchange is expected. When the balance is in disequililbrium , the rate of exchange will change but the change expected can be assessed. Further, the importers and exports can guard themselves against the changes by entering into forward contracts. The facility of forward contracts imparts the necessary as far as the traders are concerned.

(2) Promotions of international investment stable exchange rates promote international investments which are essential for economic development and progress of the underdeveloped countries. Lenders on long-term would be prompted to invest in other countries only when the return of home currency is ensured by stable exchange rates.

The claim that stable exchange rates promote international investment is not borne out by facts. Even under fixed exchange rates it cannot be ensured that the rates will not change over a long period running into decades. The impending fear of the possibility of devaluation of the currency may act as a deterrent factor in international investment. On the other hand, flexible exchange rates adjust the external value of the currency and prevent recurrence of balance of payments crises more effectively. As a result, their effect on the international lending is likely to be beneficial.

(3) Facility of long – range planning firms and the government can draw out. Long-range plans and work towards economic stability and prosperity easily under conditions of stable exchange rates. the stable exchange rates provide the necessary frame work for drafting out such plans under flexible exchange rates, the frequent changes in exchange rates would render determination of the outlay of the plans difficult because every change in exchange rates the outlay would vary.

Proponents of flexible rates argue that under flexible exchange rates the
Adjustment of balance of payments is done painlessly through changes in the rate of exchange with out affecting the domestic prices and income . this helps planning by firms. Further , flexible rates allow freedom to the country in its monetary arrangements. Under fixed rates the monetary policy adopted should be such as to facilitate maintenance of the fixed rates.

Forex Floating / Flexible Exchange Rates

Free or floating rates refer to the system where the exchange rates are determined by the conditions of demand for and supply of foreign exchange in the market. The rates are free to fluctuate according to the changes in demand and supply forces with Flexible rates of exchange refer to the system where the exchange rate is fixed but is subject to frequent adjustments upon the market conditions. Thus it is not a free or floating rate with cent per cent flexibility, but is any system providing for adjustments as and when required.

However, in practice, often the above difference ignored and both the terms are used interchangeably. The term ‘managed float’ or ‘dirty float’ is used to refer to the system where the central bank intervenes only where the market forces cause violent fluctuations, to bring some order in the market.

Under floating rates no par value is declared and the central bank does not intervene in the market. Any disparity in the balance of payments is adjustment through the changes in exchange rate that take place automatically in the market there is no change in the exchange reserves of the country.

A lively debate on the advisability of adopting fixed or floating rates of exchange has always been engaging the attention of economists. Forceful agreements have been put forward in favor of both systems.

FIXED AND FLOATING EXCHANGE RATES

Fixed Exchange Rates

Fixed exchange rates refer to the system under the gold standard where the rate of exchange tends to stabilise around the mint par value. Any large variation of the rate of exchange from the mint par value would entail flow of gold into or from the country. This world has the effect of bringing the exchange rate back to the mint par value.

In present-day situation where gold standard no longer exists, fixed rates of exchange refer to maintenance of external value of the country at a predetermined level. Whenever the exchange rate differs from this level it is corrected through official intervention. For example, when IMF was instituted , every member-country was required to declare the value of the currency in terms of gold and US dollars (known as the par value). The actual market rates were allowed to fluctuate only within a narrow band of margin from this level.

The par value system was abolished with the second amendment to the articles of IMF in 1978. Still the system of fixed rates continues in many countries in the form of pegging their currencies to a major currency. For instance, countries like Chile, Egypt, Iraq and Pakistan have pegged the value of their currencies to US dollar,. That is , the values of these national currencies are fixed in terms of US dollar and are allowed to vary in the exchange markets only within a narrow band.

If the exports of the country exceed imports, the demand for the local currency in the exchange market will rise. This will raise value of the currency in the market. Where the increase in value is beyond the support point, the central bank of the country intervenes in the market to sell local currency and thus the foreign exchange reserves of the country increase. The sale of local currency in the market leads to increase in money supply in the country causing inflation. Revaluation may be resorted to allow supply for more imports and contain inflation.

If the country is facing balance deficits due to higher imports, it would have the effect of increase in supply of local currency in the foreign exchange markets. The police of local currency may go below the support point and the central bank may have to intervene by buying local currency at a higher price. In the process, the foreign reserves of the country are depleted because the foreign currencies are exchanged in the market for buying local, currency. To make up for the deficit, the country may be compelled to devalue the currency. The large scale buying of local currency will reduce the domestic money supply and may help fight inflation.

Under fixed rates, the compulsion to devalue the currency may be postponed or avoided by mopping up additional reserves. One such way is exchange of currency reserves between the central banks of countries. For instance, if India is in deficit, reserve bank may sell rupees to bank of England against purchase of pound sterling. The sale will be reserved after a number of years when India has corrected its balance of payments.

International Exchange Systems

I we saw that the exchange rate between currencies in a foreign exchange market is affected by a number of factors. The extent to which these fluctuations are allowed is vastly dependent on the monetary systems adopted by the countries concerned.

When countries were under gold standard the value of currency of a country was fixed as the value of gold of definite weight and fineness. The exchange rate between the currencies was determined on the relative value of gold content of currencies concerned. For example, if the gold content of Indian rupee was 5 grains of standard purity, the rate of exchange between Indian rupee and US dollar could be determined as under:

1Rupee = 5\60 = USD 0.0833

1 USD= 60\5 = Rs12.

Or,

This rate of exchange was known as the mint par of exchange because, at the Indian mint one rupee would get 5 grains of gold and in the USA USD 0.0833 would get the same quantity of 5 grains of gold. Exchange rates were stable under gold standard

Because any deviation in the exchange rate would be set right automatically by the movement of gold between the countries that such deviation caused.

When the paper currency system replaced the gold standard, the exchange rate was determined by relative purchasing power of the currencies. The stability in exchange rates gave way to fluctuations with dynamic situation prevailing all rounds.

Forex Current Scenario

The performance during the first 8 months of the current year (2009-10) has been promising. Between April and October 2002, exports registered a growth of 13.8% as compared to decline of 1.1 % during the same period last year. The contribution to the higher growth in exports has come mainly from exports of ores and minerals, engineering goods, gems and jewellery, readymade garments, handicrafts, chemicals, rubber manufacturing products, glass and non-basmati rice.

On the import front, the growth rate was 3.3% as against a decline of 1.4% during the same period the previous year. The first four of the fiscal had a negative growth rate in imports. A healthy growth in imports was seen during August-September . the petroleum bill showed an increase of 18.5% due to rice in international prices. Increase was also seen in the import of capital goods, especially transport equipment.

The trade deficit was USD 5 billion marginally down from USD 5.2 billion during the previous year. Sustained effect is needed to maintain the progress and achieve the avowed goal of achieving trade surplus.

In the post despite continuous balance of trade deficits, India could manage its balance of payments due to net receipt from invisible trade. But the balance of payments position remained under pressure throughout the seventh Five-year plan mainly due to large-trade deficits and fall in the surpluses on invisible account. Between 1995-96 and 1997-98 invisible showed an increase the positive balance from USD 5,449 million to USD 10,007 million.

The balance of payments of India continued to face strain in 1990-91. In fact the position challenged the clean record of India in payment of external borrowings; doubts about possible default in repayments were triggered by down grading of credit rating by international agencies. The foreign exchange reserves declined sharply from RS. 5,480

Crores at the end of august 1990 to RS.2, 152 crores in December 1990.the GULF crisis beginning in august 1990 with consequent increase in import bill of oil and reduction in inward remittances was a major factor contributing to the situation.

In January 1991, India Obtained two loans from IMF amounting to SDR 1,269 million. As a result of the borrowing, reserves increased to RS.4, 719 crores by the end of January 1991. Simultaneously the reserve bank also imposed severe curbs on imports through a steep hike in cash margins for import. However between April and June 1991, the reserve declined again with complete stoppage of commercial funds from abroad. Besides, there was also a large outflow of funds from the NRI deposits. In July 1991 a second drawal of SDR 166.18 million was made from IMF. In the same month reserve bank borrowed USD 400 million by pledging 46.9 tonnes of gold. As a result of these efforts, the reserves increased to RS.3, 313 crores by the end of July 1991.

Between September 1991 and January 1992,indai received large inflow of capital in the form of IMF loans , India development bonds floated for NRIS and amnesty scheme for NRIs. Total inflow of foreign capital during this period amounted to Rs.5,900 crores, India development bonds and Amnesty schemes accounting for Rs.4,000 crores. Resurgent India bonds issued in 1998 could get Rs.4,000 crores. By January 2000,the foreign exchange reserves showed a comfortable figure of USD 34 billion.

The year ending march 2002 saw after a lapse of long years a positive balance of payments position, though on a modest scale. Since there has been a surge in foreign exchange reserves contributed by lower trade deficit, foreign direct investment and other inward remittance. The foreign exchange reserves of the country stood at all time high of USD 68.4 billion by December 2002. in fact the size of the reserves has given rise to the question whether the country could afford such a huge balance in foreign exchange. The inward remittance, not matched by an increase in domestic production, are expected to have an inflationary effect on the domestic economy through increased money supply. The reserve bank has been sterilizing the inflows through open market operations. It is issuing government securities to absorb the liquidity and at the same time reduce the interst cost on government borrowings.

Forex Devaluation

Devaluation

To revive the exports growth the reserve bank devalued rupee in July 1991 against major international currencies by about 20%.

Devaluation of a currency is expected to boost exports and curb imports. By devaluation the exports. At the same time imports into the country world become costly in terms of domestic currency. This world act as a disincentive to imports leading to a reduction in imports.

The expected results from devaluation will realize only when the exports of the country are price elastic. It is possible that exports from country may not increase in quantity terms because the demand for the products from the country depends also open many other factors like quality , etc. therefore , in there is no quantity increase in exports the result would be lesser realization in foreign exchange. On the import front, if the items imported are essential goods, there may not be any reduction in the quantity imported and the amount paid may increase instead of declining.

An analysis of the foreign statistics trade of India reveals that the expected benefits did not accrue in the immediate post-devaluation period. In dollar terms exports during April - November 1991 were lower by five per cent at USD 10,951

Million as against USD 11,531 millions during the corresponding period, the previous year. Imports too were lower showing a decline by 20.7% to USD 12,381 millions from USD 15,610 millions, but this was the combined effect of devaluation and curbs on imports. The deficit came down to USD 1,430 millions from USD 4,079 millions mainly due to lower level of imports.

The effect of devaluation was seen inflated figures of foreign trade in rupee terms. In rupee terms exports increased by 28.1% from Rs. 20,303 crores to Rs. 26,012 crores. The trade deficit too showed a drop to Rs. 3,398 crores from Rs. 7,181 crores. It may be noted that a surplus in foreign exchange terms is more important as it is the true indicator of accretion to foreign exchange assets of the country.

Along with devaluation, the other methods introduced were :( i) introduction of Exim scrips to replace replenishment licences. Theses licences are intended ultimately to replace the import licences entirely barring few exceptions ;( ii) abolition of cash compensatory support. Their impact on foreign trade balance has been only marginal.

The structural reform of the trade policy is continuing and the government

Has brought out a new export import policy on I st April 1992 valid for five years ending march 1997.along with this the rupee was made fully convertible on current account. the measures taken by the government were expected to yield results in the form of smaller deficit in balance of trade but as could be seen from the data given in the beginning, the trade deficit continues to cause concern. With stagnating exports the balance of trade increased from USD 11,359 million in 1995 -96 to USD 15.507 million by 1997-98. The general recession world over and the Asian currency crisis were the immediate excuses available to justify the poor performance on export front. The situation improved somewhat to a deficit of USD 13,246 in 1998-99. The improvement was not due to increase in exports , which in fact registered a negative growth. The fall in the world price of oil was the relieving factor. Though the trade deficit is on the declining trend since 1999-2000, the magnitude is still large.

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