Month: November 2010

By Owen Trimball –

Ratio spreads were identified by David L. Caplan in “The New Options Advantage” as one of the safest and potentially profitable option trading strategies for traders who want a trading edge over the markets. In this article we wish to discuss a variation of the concept to demonstrate how these trade setups can not only be safe, but given the right conditions, provide a huge return on investment.

Let’s take the following as an example:

Assume we have a bearish outlook for the next couple of months on a popular stock index and wish to take advantage of that using put options. The index is currently trading around 4400 and we decide to do the following. The following options positions all have an expiry date at least 60 days out.

Buy 5 “out of the money” put option contracts – index strike price 4200 – cost $135 each Sell 15 “further out of the money” put option contracts – index strike price 4000 – income $88 each Buy 10 “even further out of the money” put option contracts – index strike price 3900 – cost $70.50 each

You can see from the above example, that we have bought and sold the same amount of contracts in total, but since they are at different strike prices and each for a different number of contracts, they qualify to be defined as a “ratio spread”. The beauty of the above example is that your overall debit would only be around $600 plus brokerage, but with a potential profit of $9,400 if the market closes at 4000 on expiry date. That is over 1500 percent return on investment!

If we were to graph the trade, we would noticed that the position will make at least some profit if the index closes anywhere between 3900 and 4200 at expiry date, while the maximum profit of $9,400 is achieved at the 4000 level.

A trade with this level of potential profit level at such minimum outlay, being bearish in outlook, can also be used as a hedge against other open trades that may have a bullish outlook. If the current market is uncertain and bad news is floating about such as a ‘global financial crisis’ or ‘recession’ or any international unrest which may affect the confidence of the markets, then a ratio spread of this kind could also be an excellent way to protect yourself against the risk of falling stocks. You could even view it as a form of ‘insurance’.

For any hedge to be effective, it requires minimal outlay to protect yourself against other positions involving much higher investment of overall capital. This kind of ratio spread serves exactly that purpose. It’s all about money management – how you have allocated your overall capital and how much you risk on any one trade.

In summary, ratio spreads can take different forms in terms of how many of each position you buy and sell – i.e. the ratio of ‘buy’ vs ‘sell’ positions and their respective strike prices. As such, they can be used for varying outcomes according to your own personal trading risk profile. If you have a good piece of software that will quickly analyze the risk vs reward ratios as a graph, you can easily assess the value of various combinations to determine the optimal choice for whatever overall option trading strategy you have in mind.

About the Author

Owen has traded options for many years. Visit his popular site to discover the advantages of Option Trading and how strategies like ratio spreads can provide a trading edge over the markets.

EURUSD’s downward move from 1.4281 extended to as low as 1.3574 level. As long as 1.3825 key resistance holds, the bounce from 1.3574 is treated as consolidation of downtrend and another fall to 1.3450-1.3500 area is still possible. However, a break above 1.3825 resistance will indicate that the fall from 1.4281 has completed at 1.3574 already, then the following upward move could bring price back to 1.4000-1.4100 area.

Written by ForexCycle.com

By James Woolley

Many people within the forex trading industry will avoid using forex robots altogether, whilst others will be more than willing to invest in any expert advisor that appears to be profitable. So are forex robots worth using or are they a waste of time and money, and should you have some experience of forex trading before you start using them?

Well these are difficult questions to answer because my opinion of them changes all the time, but I would say that you should only start using them if you have some experience of forex trading already. This is because you need to know all about forex trading and how the markets move in order to weigh up how well a robot actually works in reality.

Plus if you see how the robot actually trades and what kind of trading conditions need to be met in order to enter and exit a trade, you can then tweak these rules yourself and maybe come up with a manual system that you can use. That way you can increase your overall profits.

Problems start arising when inexperienced traders start using these robots because they are often very naive about the kind of drawdowns that they may experience. For instance an expert advisor can go along very steadily for a few months, slowly building your account, and then all of a sudden you can experience huge drawdowns when the market suddenly moves dramatically against you. In some cases you may even be wiped out completely if the running losses become too great.

Of course we would all like to put these robots to work straight away because the sales pages of these products explain just how profitable they have been in the past using backtested data. They will also give you live trading accounts as proof of their profitability. However it is often a completely different story when you start trading them yourself using real money. Plus you have to remember that market conditions can change very easily, so just because one of these expert advisors has made money in the past, does not mean that it will continue doing so in the future.

So overall I would say that you shouldn’t disregard these forex robots completely as there are a few good ones out there that will increase your trading capital slowly and steadily. However most of them will not be as profitable as they claim to be, and they are certainly not recommended for people new to forex trading. A little bit of knowledge will help you evaluate these robots and tweak them if necessary. Plus this will also help you to set your own stop losses in order to keep you out of trouble.

About the Author

Click here to learn all about Forex Crescendo, the new forex trading robot, and to read a full Zulutrade review.

By James Woolley

A common approach to forex trading is to play with small stakes and target large price moves in the region of 50-200 pips. Indeed I trade this way myself using my main 4 hour trading system. However an alternative approach is to increase your stakes and look for much smaller price moves. That way you only need to find one decent trade per day if it generates around 10 pips, for instance.

It’s not that easy to do, but you can achieve this target if you employ a sound trading strategy. The best approach is to concentrate only on the major currency pairs (such as the GBP/USD, EUR/USD, USD/JPY, EUR/GBP and GBP/JPY, etc) and look for pairs that are trending strongly upwards or downwards during a given trading session.

You simply look at say the 1 hour chart of all of the major pairs and see which ones are moving strongly upwards or downwards. Then once you’ve done that you can use the shorter time frames to get a good entry point.

The best strategy is to find out which currency pairs are moving upwards on both the 1 hour and 15 minute charts, and then hone in on the 5 minute chart. You want to wait for the price to start moving sideways or downwards on this shorter time frame before turning upwards again, because this is an excellent sign that the established trend is set to continue, and therefore likely to net you at least 10 points or so if this is your target.

Many intraday traders use this type of strategy and for good reason. If you know there is a strong trend in place, then the short-term chart will present you with some decent trading opportunities, particularly near the beginning of a particular trend.

Therefore it’s fairly easy to generate a safe 10 pips every day, particularly if you use a few technical indicators to help you. For example you could use moving average crossovers, or you could wait for the RSI and/or stochastics to become oversold and then go long if there is a long term upward trend in place.

There are lots of methods you can use but the point is that if you always trade in the direction of the overall trend, then it is fairly easy to generate consistent profits. You should find that you can easily find one outstanding trading opportunity every single day across the various different currency pairs. After all you only need to generate around 10 pips per day to make a decent living from forex trading.

About the Author

Click here to find out about a forex course that will not only teach you all the basics of forex trading, but will also show you a profitable day trading strategy that you can use to trade the markets.

By Paolo Palazzi-Xirinachs

What is Forex trading? The foreign exchange (also known as currency, forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade volume in the global forex and related markets currently is estimated at over US$3 trillion. The Foreign Exchange Market is a 24/7 market place.

But why does this market exist? For example, it permits a UK business to import European goods and pay in euros, even though the business’s income is in British pounds. It also supports speculation, and facilitates investors borrowing low-yielding currencies and investing high-yielding currencies.

Currencies exist on free-floating exchange rates, and are traded as pairs in relation to each other. The most traded pairs in the world are called the Majors. They are EUR/USD (Euro/Dollar), GBP/USD (Pound/Dollar), USD/JPY (Dollar/Yen) and EUR/GBP (Euro/Pound). Additionally, there are three minor pairs known as Commodity Pairs, because their economies and currency are heavily influenced by their natural resources. They are USD/CAD (Dollar/Loonie), AUD/USD (Dollar/Aussie) and NZD/USD (Kiwi/Dollar). About 85 percent of all regular FX transactions involve the exchanging of the world’s key currencies: US Dollar (USD), British Pound (GBP), Euro (EUR), Japanese Yen (JPY), Canadian Dollar (CAD), Australian Dollar (AUD), and Swiss Franc (CHF)-but currency exchanges occur amongst all the currencies of the world.

Four key currency exchange pairs are generally utilized for investment purposes. They are: Euro in opposition to US dollar, US dollar in opposition to Japanese yen, British pound in opposition to US dollar, and US dollar in opposition to Swiss franc.

Transactions within the foreign exchange marketplace are performed by dealers at key banks or at currency trading brokerage firms. Currency trading occurs 24/7 and is a vital cog of the worldwide marketplace, so while you are sleeping in the comfort of your bed, the dealers in Europe may be exchanging currencies with their Japanese or Australian counterparts.

With the advent of Internet technology and availability, FOREX trading has dramatically grown in popularity and is now available to investors of all types. As with any other financial product exchange, the successful trader must not only be knowledgeable and savvy with regard to the currencies being traded but also the venue in which he or she is operating.

About the Author

For more information visit www.igmarkets.com/fx/.

By James Woolley

If you trade forex on a regular basis, it can be very tempting to set yourself profit targets that you want to achieve each week. This is particularly true if you rely on this income to live. However it is not something you should actively do because it can be quite dangerous.

To demonstrate this point, let’s say you start the week with $10,000 in your trading account and set yourself the target of making $300 for the coming week. Now you may get lucky and hit this target in the first two or three days, but the trouble often begins when you are well below this target going into Thursday and Friday.

That’s because you can then starting taking greater risks in order to hit this weekly target. So for instance you may stick to your existing trading system but increase the stakes, or you may open an impulsive trade that is based on gut instinct more than anything else. Either way it is very likely that you will end up losing money and finishing well below your target. You may even end the week having lost money in the worst case scenario.

Another problem you may face when setting targets is that you can sometimes end up going for the big win rather than banking lots of small profits. Similarly if you are a long way away from hitting your target, it can be tempting to hold on to a losing position for far too long in the desperate hope that it will turn around and end up generating a decent profit.

You are often much better off trying to come up with a forex trading system that builds profits slowly and steadily, giving you a nice upward sloping equity curve. You don’t need to set yourself targets as this will lead to you deviating from your profitable trading strategy, and possibly making some nasty losses along the way.

If you stick to your trading strategy and only risk a certain percentage of your bank on each trade (no more than around 2 or 3%), then your account will grow very nicely in the long run. You don’t need to take risks in order to hit self-imposed targets. Just take what the markets give you and accept that some weeks will be more profitable than others. That’s the nature of the markets because some weeks the markets will be very volatile, whilst other weeks they will be dull and boring.

About the Author

Click here for all the very latest forex tips and to read a full review of Forex Morning Trade, which is a new but highly effective day trading system.

By Owen Trimball – Both novice and seasoned traders often have many questions in their quest to understand options trading. In this article, we will discuss some of the more frequently asked questions.

How Are Options Better Than Other Derivatives?

Options, like other derivatives, are highly leveraged financial instruments. This means that for a much smaller outlay, you can receive the same rewards that would normally accrue for a much larger sum invested. You can receive more than ten times the profit from an option trade as you would if you had invested the same amount of money on buying the shares themselves.

But options are not the only derivative that allows this kind of leverage. You can do the same thing with futures or ‘contracts for difference’ (CFDs). Both these arrangements involve a small deposit to take on the potential risks and rewards for price movements that would normally accrue if you had purchased or sold the entire amount specified in the contract. In the case of CFDs, the remaining amount above the deposit (often as low as 5 percent) is financed by the market maker in exchange for interest debited to your account. You can realize a princely sum if the share or commodity price moves in the anticipated direction.

But if it goes the opposite way to your expectations, you learn what the ugly side of leverage looks like. The same profits you could’ve made become the exact amount of losses you now suffer. If it is more than your entire trading capital, your broker will call you and ask for more funds, which you are legally obliged to pay.

Leverage working against you without limits can quickly bring financial ruin.

Options on the other hand, involve limited risk. As long as your positions are only bought ones, the most you can ever lose is the amount you have invested on any one trade. It can never be more than that. Selling options ‘naked’ is never recommended. But you don’t need to short sell options to profit from either a rising of falling market. You simply buy either call or put options depending on anticipated direction.

So in summary, options are preferable to other leveraged instruments in that the level of risk is limited to your investment.

So What is the Downside?

Unlike CFDs, but not unlike futures, options have a limited life. All option contracts have an expiry date – and as that date draws closer, the value of ‘out-of-the-money’ options declines at an exponential rate, particularly during the final 30 days.

This means that you can’t hold your positions forever in the hope that one day, you will make some leveraged profits from the deal. You can of course, extend the time needed to be right by purchasing long dated options with many months, even years, to expiry date. But you pay more for the privilege of time. You can however, reduce the effect of this by entering debit spread positions instead of simply buying a single option. It is usually recommended that vertical debit spreads have at least 90 days until expiry date – it gives you enough time to be right.

What Else Can Options Be Used For?

Options can also be used to hedge existing positions or to make more profit from existing investments. If you already own shares, or wish to purchase them, you can also write (sell) call options at exercise (strike) prices above your share purchase price and make extra income selling covered calls – or in effect, reduce the original purchase price of your shares.

Hedging is a process whereby you spend a small amount of money to create a position that will make sufficient profit or loss, to offset the effect of price movements in your asset portfolio, which cost you a much larger sum. The leverage available in options is what gives you this power.

What Else Can You Do With Options?

Once you understand the concept of leverage and combine that with a knowledge of how option pricing works, you can actually place ‘non-directional’ trades. You can take a position both ways. You don’t care which way the future price movement goes, as long as it goes somewhere. With setups such as straddles and strangles, you can realize such a profit on the winning trade that it pays for the losing one and them some. There are certain setups you need to look for, but when you find them, straddle trades can be a very safe and highly profitable strategy.

On the other hand, you may not want the underlying stock to go anywhere in the near future. There are other option trading strategies that are tailored for this expectation.

In summary, the beauty of options trading is that, unlike most other derivatives, they are so flexible in what you can do with them.

Understanding option trading means becoming acquainted with the all the option trading basics and advanced option trading strategies. So begin your exciting journey of discovery and self education. Empower yourself to become financially self sufficient.

About the Author

Owen has traded options for many years and is writes for “Options Trading Mastery”. Discover the advantages of Option Trading and empower yourself by understanding option trading.

By James McKee

All eyes are on the G20 summit right now in the hopes that financial policy changes will be instituted that will help speed up global economic recovery. Within the walls of the building where the G20 was being held tempers flares as deep lines of division separated the economic goals of many different nations. The first word of the day was “conflict” and most of it was centered around decisions by the United States to attempt to buy their way out of its problems. Not only has the USD plunged on the Forex currency exchange it has also caused entire countries to lose fortunes because their holdings are in US dollars.

After the dust settled from initial conflicts at the summit many leaders present claimed that everyone had embraced the basic framework set forth by popular agreement. However beyond this basic “framework” many participants are unable to arrive at any cohesive agreements. Many had hoped that the G20 summit in Seoul would bring about a lasting agreement that would help nations participating to continue to cooperate with one another after the financial crisis is over. Much of the conference was also aimed at encouraging China to begin spending some its immense cash reserve to relieve the economic strain on many importers.

Many Forex traders are watching the G20 summit and eager to grab up any tidbits that might indicate what type of strategies will be used in an effort to stabilize the global economy. To date austerity measures and attempting to create money out of thin air has impacted the value of various currencies on the Forex exchange. In the end it is still anyone’s guess what action will be taken by politicians and those in charge of central banks in order to stabilize the world’s economy. Plug in your RSS feeds and read often!

About the Author

Author is a Forex trader and financial analyst residing in Denver, Colorado. To stay up to date on all the latest developments in the financial world and beyond be sure to check out the forex exchange rates regularly.

By Nicholas Dockerty

Financial spread betting is fast becoming an essential extra tool for investors and traders to use to take advantage of shifting short-and long-term trends on the financial markets. One of the reasons it’s attractive to seasoned market participants is the sheer amount of markets you can take a position on.

For instance, if you were interested in the mining industry you could spread bet commodity prices, industry sectors, forex, indices, shares, binaries and options.

Since the start of the global recession we’ve seen commodity prices steadily rise. While the headlines tend to be taken each week by gold breaking another price record we’ve seen the prices of aluminium, coal, copper and silver go up too.

As a result of this trend we’ve seen the profits of the major mining and metal based companies’ rise and rise and begin to dominate the direction of FTSE 100. There are now thirteen such companies in the FTSE 100 and they are:

Rio Tinto; BHP Billiton; Fresnillo; Kazakhmys; Eurasian Natural Resources; Vedanta; Lonmin; African Barrick Gold; Antofagasta; Xstrata; Randgold Resources; Johnson Matthey; Anglo American.

While it’s a heavyweight industry – accounting for well over a third of the total market capitalisation of all the companies within the FTSE 100 – it’s also a fragile one too.

Substantial profits make for healthy share prices. However, with mining companies being so dependent on commodity prices and commodity prices being so dependent on a range of factors not always in the direct control of the mining companies, the day-to-day share prices of mining companies are prone to fluctuate.

Each commodity has its own unique combination of factors that will influence it.

If the Central Bank of China announces it’s trying to slow down its economy by raising interest rates it will affect the price of copper as demand is likely to fall for commodities used in manufacturing. If the US dollar rises after a boom in domestic GDP then the price of gold will be affected as demand for the precious metal will fall as it won’t be such a successful hedge against a weak dollar.

There is no doubt then that mining companies are increasingly exerting a powerful influence on the overall direction of the UK’s leading index. And more so than ever before it’s better to look at the broader FTSE 250 to get a more truer picture of how well UK plc is doing.

Indeed, consider what affect a major fall in commodity prices might have on the direction of the UK’s leading index?

About the Author

IG Index is the leading spread betting company in the UK with one-in-two UK financial spread bettors having an account with them – according to a survey by research organisation Investment Trends. You can find out more at www.igindex.co.uk.

By James McKee

As economic conditions grow worse throughout the world many officials are left with wondering if it is time to “pull out all the stops” and begin resorting to currency wars. The primary focus of the recent G20 summit seems to have been trade deficits between China and the United States in which the United States appears to be seeking out solutions. This has upset many smaller nations who feel that the G20 should have been more “well rounded” and addressed problems aside from those being suffered by the United States. The recent rise and fall of the US dollar certainly seems to be on everyone’s mind when it comes to the Forex market and the United States government seems to be making efforts to release its trading deficit.

When one country’s currency is devalued by another this can result in the rapid buying and selling of the opposing country’s currency, depending on the situation this cause either a rise or a fall in their currency value. Such efforts may in fact prove to be necessary if events such as the G20 leave many countries feeling “out in the cold” with regard to global economic policy change. This can certainly be a good thing for Forex traders though because currency wars will be very public affairs with predictable results that a clever trader can bet on accordingly.

One of the other major issues on the chopping block at the G20 summit was an initiative to limit a country’s surplus to 4% of their own GDP. This is a move that many believe will motivate China to raise the value of their currency. This is a move that would force China to spend considerable amounts of their enormous financial surplus that severely dwarfs any other in the world. If this did come about it would help the US economy immensely and of course every other economy in the world.

About the Author

Author is a Forex trader and financial analyst residing in Denver, Colorado. To stay up to date on all the latest developments in the financial world and beyond be sure to check out the forex exchange rates regularly.