WHAT IS SPREADS ?

The Spread in the Forex markets is the difference between the various buying and selling prices on offer for any particular currency pair. Before any trade becomes profitable, traders must first make up the spread. Lower spreads means trades move into the positive column earlier. Many traditional Market Maker forex brokers proudly advertise their low fixed spreads as being an advantage to traders.

The truth is fixed spreads do not offer any significant advantage and are subject to broker tactics such as widening - a tactic whereby forex brokers with dealing desks manipulate the spreads on offer to their clients when client trades move against the broker.

Capital One Forex's ECN/STP trading model does not have a fixed spread. This means the spread on offer will accurately reflect the true buying and selling rates for a particular currency pair and ensures investors are trading under real market conditions of supply and demand.

A fixed spread may seem like a good thing when market conditions are optimal and there is heavy supply and demand. The fact is, a fixed spread remains in place even when market conditions are not the best and regardless of what the true buying and selling rates for any given currency pair are.

Our ECN/STP model provides our clients with direct access to the other Forex market participants (retail and institutional). We do not compete with our clients or even trade against them. This grants our clients more advantages over dealing desk market makers:

• Very tight spreads
• Better rates
• No conflict of interest between Capital One Forex and its clients
• No limits on Scalping
• No “stop-loss hunting”

Capital One Forex strives to offer its clients the most competitive rates and spreads in the market. This is the reason we have invested heavily in establishing strong relationships with the most reputable and reliable liquidity providers. The Capital One Forex advantage means our clients enter the forex arena on the same terms as the majors. Prices are streamed from various liquidity providers to Capital One Forex’s Aggregation Engine which then selects the best BID and ASK prices from the streamed prices and posts the selected best BID/ASK prices to our clients, as illustrated in the flow diagram below.

Prices are collected from our liquidity providers and the best BID/ASK prices are sorted by our aggregation engine and presented to our clients. No intervention or manipulation.

Forex trading the way you asked for.

What Is Forex ?

What is Forex? Forex, or FX, is a shortening of the words foreign exchange, and the Forex market is where different countries trade one type of currency for another. For instance, the Chinese can trade their renminbi or yuan for American Dollar. The value of currencies on the Forex market is affected by supply and demand.

The Gold Standard

The Forex market actually began with the first international gold standard in 1875. At that time, every major economic power priced an ounce of gold at a certain number of their currency's units. This made it far easier for countries to trade among themselves without having endless bartering sessions, or even wars, to settle the trades.

Countries tended to go on and off the gold standard through the early 20th century and into the world wars until, after World War II, the final attempt at a gold standard appeared: the Bretton Woods System. This system used gold to trade between nations with currencies basing themselves off of an ounce of gold.

It Couldn't Last

Unfortunately, even the Bretton Woods system of the gold standard proved impossible to support. Some countries are more efficient producers than others, and the resulting imbalances in trade made the gold standard unfavorable to less productive countries. A nation needs a lot of gold to support such a standard, and a trade deficit could drain the national coffers dry in a short time. Most of the world's economies had left the various types of gold standard behind shortly after the second World War ended, and the United States finally overturned the Bretton Woods Act in 1971.

A new Way

Because of the decision to move beyond gold, the world's central banks had to decide how they would trade with other countries. The method ultimately decided upon proved to be the Forex market we use today.

In this market, banks from various countries bring different kinds of money to the proverbial table and trade a certain amount of one currency for a certain amount of another currency. Some currencies will float, which means their value can change based on momentary supply and demand. Other currencies are merely pegged to the value of another currency, which means they will always have exactly the same value compared to the currency they're pegged with.

The Forex market is split up into several different levels of access. At the very top are the central banks of the world, and below them are different companies such as hedge funds. At the very bottom of the hierarchy are individual retail investors, who have to pay the largest amounts of spread for each transaction they make.

Trading Tips

1. Know yourself. Check and define your risk tolerance carefully. Realize your needs.

In order to profit in trading, you must recognize the markets. To recognize the markets, you must first know and recognize yourself. The first step of gaining self-awareness is to make sure your risk tolerance and capital allocation to forex and trading are not excessive or lacking. This means that you must carefully study and analyze your own financial goals when you enter forex trading.

2. State your targets. Make a plan.

Once you know what you want from trading, you must systematically define a timeframe and a working plan for your trading career. What would be determined as a failure, what would be defined as success? What is the timeframe for the trial and error process? How much time can you devote to trading? What is your ultimate goal? These and similar questions must be answered before you can gain the clear vision necessary for a persistent and patient approach to trading. Also, having clear goals will make it easier to abandon the endeavor entirely in case that the risks/return analysis precludes a profitable outcome.

3. Choose your broker carefully.

While this point is often neglected by beginners, it is impossible to overemphasize the importance of the choice of broker. That a fake or unreliable broker invalidates all the gains acquired through hard work and study is obvious. But it is equally important that your expertise level, and trading goals match the details of the offer made by the broker. What kind of client profile does the forex broker aim at reaching? Does the trading software suit your expectations? How efficient is customer service? All these must be carefully scrutinized before even beginning to consider the intricacies of trading itself. Capital One Forex through its various account levels cater to all types of traders and can give you a custom made trading deal to suite your trading needs.

4. Pick your account type, and leverage ratio in accordance with your needs and expectations.

It is necessary that you choose the account package that is most suited to your expectations and knowledge level. The various types of accounts offered by Capital One Forex are made with the thought that different traders have different needs. If you have a good understanding of leverage and trading in general, you can be satisfied with a standard account. If you’re a complete beginner, it is a must that you undergo a period of study and practice by the use of a mini account. In general, the lower your risk, the higher your chances, so make your choices in the most conservative way possible at the beginning of your career.

5. Focus on a single currency pair, expand as you better your skills.

The world of currency trading is deep and complicated, due to the chaotic nature of the markets, and the diverse characters and purposes of market participants. It is hard to master all the different kinds of financial activity that goes on in this world, so it is a great idea to restrict our trading activity to a currency pair which we understand, and with which we are familiar. Beginning with the trading of the currency of your nation can be a great idea. If that’s not your choice, sticking to the most liquid and widely traded pairs can also be an excellent practice for both the beginner and the advanced traders.

6. Do what you understand.

Simple as it is, failure to abide by this principle has been the doom of countless traders. In general, if you’re unsure that you know what you’re doing, and that you can defend your opinion with strength and vigor against critics that you value and trust, do not trade. Do not trade on the basis of hearsay or rumors. And do not act unless you’re confident that you understand both the positive consequences, and the adverse results that may result from opening a position.

7. Restrain your emotions.

Greed, excitement, euphoria, panic or fear should have no place in traders’ calculations. Yet traders are human beings, so it is obvious that we have to find a way of living with these emotions, while at the same time controlling them and minimizing their effect on our lives. That is why traders are always advised to begin with small amounts. By reducing our risk, we can be calm enough to realize our long term goals, reducing the impact of emotions on our trading choices. A logical approach and less emotional intensity are the best forex trading tips necessary for a successful career.

8. Take notes. Study your success and failure.

Take an analytical approach to trading. it does not begin at the fundamental and technical analysis of price trends, or the formulation of trading strategies. It begins at the first step taken into the career, with the first dollar placed in an open position, and the first mistakes in calculation and trading methods. The successful trader will keep a diary, a journal of his trading activity where he carefully scrutinizes his mistakes and successes to find out what works and what does not. This is one of the most importance forex trading tips that you will get from a good mentor.

9. Automate your trading as much as possible.

We already noted the importance of emotional control in ensuring a successful and profitable career. In order to minimize the role of emotions, one of the best of courses of action would be the automatization of trading choices and trader behavior. This is not about using forex robots, or buying expensive technical strategies. All that you need to do is to make sure that your responses to similar situations and trading scenarios are themselves similar in nature. In other words, don’t improvise. Let your reactions to market events follow a studied and tested pattern.

10. Do not rely on forex robots, wonder methods, and other snake oil products.

Surprisingly, these unproven and untested products are extremely popular these days, generating great profits for their sellers, but little in the way of gains for their excited and hopeful buyers. The logical defense against such magical items is in fact easy. If the genius creators of these tools are so smart, let them become millionaires with the benefit of their inventions. If they have no interest in doing as much, you should have no interest in their creations either.

11. Don’t go against the markets, unless you have enough patience and financial resilience to stick to a long term plan.

In general, a beginner is never advised to trade against trends, or to pick tops and bottoms by betting against the main forces of market momentum. Join the trends so that your mind can relax. Fight the trends, and constant stress and fear will wreck your career.

12. Understand that forex is about probabilities.

Forex is all about risk analysis and probability. There is no single method or style that will generate profits all the time. The key to success is positioning ourselves in such a way that the losses are harmless, while the profits are multiplied. Such a positioning is only possible by managing our risk allocations in accordance with an understanding of probability and risk management.

13. Study money management.

Once we make profits, it is time to protect them. Money management is about the minimization of losses, and maximization of profits. To ensure that you don’t gamble away your hard-earned profits, to “cut your losses short, and let profits ride”, you should keep the bible of money management as the centerpiece of your trading library at all times.

14. Study the markets, fundamentals, and technical factors leading the price action.

That we have placed this so low in the list should not surprise the experienced trader. Faulty analysis is rarely the cause of a wiped-out account. A career that fails to begin is never killed by the consequences of erronerous application or understanding of fundamental or technical studies. Other issues that are related to money management, and emotional control are far more important than analysis for the beginner, but as those issues are overcome, and steady gains are realized, the edge gained by successful analysis of the markets will be invaluable. Analysis is important, but only after a proper attitude to trading and risk taking is attained.

15. Don’t give up.

Finally, provided that you risk only what you can afford to lose, persistence, and a determination to succeed are great advantages. It is highly unlikely that you will become a trading genius overnight, so it is only sensible to await the ripening of your skills, and the development of your talents before giving up. As long as the learning process is painless, as long as the amounts that you risk do not derail your plans about the future and your life in general, the pains of the learning process will be harmless.

FUNDAMENTAL ANALYSIS

Fundamental analysis is a method that attempts to predict the intrinsic value of an investment. It is based on the theory that the market price of an asset tends to move towards its 'real value' or 'intrinsic value'.

Fundamental analysis in Forex entails predicting the price valuation of a currency and its market trends by analyzing current economic conditions, government policy and societal factors within a business cycle framework. Forex Traders gauge a country's economic state by examining macroeconomic indicators covering:

• Interest Rates Announcement
• Gross Domestic Product (GDP)
• Consumer Price Index (Inflation) and Spending Indicators
• Employment Indicators
• Retail Trade and Consumer Confidence
• Balance of Trade Surplus or Deficit
• Government Fiscal and Monetary Policy

 Fundamental Analysis Benefits

Determining the intrinsic value of an investment

Identifying long-term investment opportunities

Fundamental Analysis Drawbacks

Too many macroeconomic indicators and indicator can confuse novice investors

Macroeconomic indicators are statistics that indicate the current status of the economy of a state depending on a particular area of the economy (industry, labor market, trade, etc.). They are published regularly at a certain time by governmental agencies and the private sector. Capital One Forex provides an Economic Calendar for the dates of critical fundamental announcements and events. When properly used, these indicators can be an invaluable resource for any Forex trader.

In truth, these statistics help Forex traders monitor the economy's pulse; thus it is not surprising that these are religiously followed by almost everyone in the financial markets. After publication of these indicators we can observe volatility of the market. The degree of volatility is determined depending on the importance of an indicator. That is why it is important to understand which indicator is important and what it represents.

Interest Rates Announcement

Interest rates play the most important role in moving the prices of currencies in the foreign exchange market. As the institutions that set interest rates, central banks are therefore the most influential actors. Interest rates dictate flows of investment. Since currencies are the representations of a country’s economy, differences in interest rates affect the relative worth of currencies in relation to one another. When central banks change interest rates they cause the forex market to experience movement and volatility. In the realm of Forex trading, accurate speculation of central banks’ actions can enhance the trader's chances for a successful trade.

Gross Domestic Product (GDP)

The GDP is the broadest measure of a country's economy, and it represents the total market value of all goods and services produced in a country during a given year. Since the GDP figure itself is often considered a lagging indicator, most traders focus on the two reports that are issued in the months before the final GDP figures: the advance report and the preliminary report. Significant revisions between these reports can cause considerable volatility.

Consumer Price Index

The Consumer Price Index (CPI) is probably the most crucial indicator of inflation. It represents changes in the level of retail prices for the basic consumer basket. Inflation is tied directly to the purchasing power of a currency within its borders and affects its standing on the international markets. If the economy develops in normal conditions, the increase in CPI can lead to an increase in basic interest rates. This, in turn, leads to an increase in the attractiveness of a currency.

Employment Indicators

Employment indicators reflect the overall health of an economy or business cycle. In order to understand how an economy is functioning, it is important to know how many jobs are being created or destructed, what percentage of the work force is actively working, and how many new people are claiming unemployment. For inflation measurement, it is also important to monitor the speed at which wages are growing.

Retail Sales

The retail sales indicator is released on a monthly basis and is important to the foreign exchange trader because it shows the overall strength of consumer spending and the success of retail stores. The report is particularly useful because it is a timely indicator of broad consumer spending patterns that is adjusted for seasonal variables. It can be used to predict the performance of more important lagging indicators, and to assess the immediate direction of an economy.

Balance of Payments

The Balance of Payments represents the ratio between the amount of payments received from abroad and the amount of payments going abroad. In other words, it shows the total foreign trade operations, trade balance, and balance between export and import, transfer payments. If coming payment exceeds payments to other countries and international organizations the balance of payments is positive. The surplus is a favorable factor for growth of the national currency.

Government Fiscal and Monetary policy

Stabilization of the economy (e.g., full employment, control of inflation, and an equitable balance of payments) is one of the goals that governments attempt to achieve through manipulation of fiscal and monetary policies. Fiscal policy relates to taxes and expenditures, monetary policy to financial markets and the supply of credit, money, and other financial assets.

Conclusion: 

There are many economic indicators, and even more private reports that can be used to evaluate the fundamentals of forex. It's important to take the time to not only look at the numbers, but also understand what they mean and how they affect a nation's economy.