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There are two types of traders... Which one are you?

There are different ways in which we can classify traders:

By the time frame they use to trade: there are long term traders who use the weekly or daily charts to open their trades, swing traders who use the 1H and 4H (some even use the daily chart) to look for trade opportunities, there are also day traders who use from the 5M to the 1H charts, and very short term traders or scalpers, who use the 1M and 5M (some even use tick data).

By the way they trade: Some traders like to trade based on fundamentals, other based on technical indicators, some others use forecasting tools such as Fibonacci or Elliot waves, others base their trades on price action, chart patterns, planetary cycles, some even use their pets :) to determine which currency pairs to trade.

But the one I like to use its much simpler: Disciplined and undisciplined traders.

Which one are you? Here are a few characteristics of each type of trader:

Undisciplined Traders

1. They don’t have a system, if they have one, they don’t follow it
2. They don’t understand that each trader is different
3. They take trades following advices from other traders, internet, forums, etc (when not using the same methodology)
4. They don’t use money, risk or trade management
5. They are looking for quick gains here and there...
6. Because they don’t have a system, the trade based on their emotions
7. They think trading is easy, and will become millionaires after a few months

Disciplined Traders

1. They do have and follow a system, every single rule, they understand it’s the only way to achieve consistent results.
2. They know that it is important to trade a system that fits their trading style, this way they’ll be able to follow it
3. They never take someone else ’s, they only take trades when their system gives them a signal
4. They understand that using money, risk and trade management it’s even more important than the signal itself. It’s what will keep them alive when things go wrong, and increase their profitability then the market behaves well
5. They no longer look for quick gains, again, they just follow their system
6. They understand that emotions play an important role on their trading, they try to use them on their favor
7. They know trading successfully come with experience, and they rather have steady results than trying to hit home runs

So which one are you?

Really, try to think about this, read each one of the points discussed above and see what type of trader you are.

To be a discipline trader is no guarantee of achieving consistent results, but let me tell you something, in order to become a successful trader, you first need to become a discipline trader, it’s like: to go from point A to point C, you need to get through point B, there is just no other way.

How much time would it take a discipline trader to become a consistent trader?

There is no right answer here... but I assure you, not much time...

Is it possible for an undisciplined trader to become a consistent trader?

No.

What can I get from this article?

It’s not important the type of trader you were yesterday, or last week or on the last X years. The past has passed, and the past does not dictate the future. So I want you to think now, Today, what type of trader do I want to be? You know the characteristics of them, you know which one is more likely to succeed. So again, what type of trader do you want to be from now on?

Feel free to comment, even if you don’t agree with me – the discussion might get interesting :). And don’t forget to “like it” or +1 it to share it!

Do you think a winning trade is always good?Think twice...

What is the first idea that pops up in your mind when you lose a trade? “There must be something wrong with my system”, or “I knew it, “I shouldn’t have taken this trade” (even when your system signaled it). But sometimes I think that we need to dig a little deeper in order to see the nature of our mistake, and then work on it accordingly.

What Mistakes really are

Most of us relate a trading mistake to the outcome (in terms of money) of any given trade. The truth is, mistakes have nothing to do with it, we make a mistake when we don’t follow our system, when the rules you trade by are violated. To have a better understanding of this, take in consideration the following two scenarios:
First scenario: The system signals a trade.

Action: Signal taken and trade turns out to be a profitable trade.

Outcome of the trade: Positive, made money.

Experience gained: It’s good to follow the system, if I do this consistently the odds will turn in my favor.

Confidence is gained in both the trader and the system.

Mistake made: None.

Action: Signal taken and trade turns out to be a losing trade.

Outcome of the trade: Negative, lost money.

Experience gained: It is impossible to get them all right, a losing trade is just part of the game; our raw material. Even with this negative trade, the trader is proud about himself for following the system. Confidence in the trader is gained.

Mistake made: None.

Action: Signal not taken and trade turns out to be a profitable trade.

Outcome of the trade: Neutral.

Experience gained: Frustration, the trader always seems to get in trades that turned out to be losing trades and let the profitable ones go away. Confidence is lost in the trader self.

Mistake made: Not taking a trade when the system signaled it.

Action: Signal not taken and trade turns out to be a losing trade.

Outcome of the trade: Neutral.

Experience gained: The trader will start to think “hey, I’m better than my system”. Even if the trader doesn't think on it consciously, the trader will rationalize on every signal given by the system because deep in his or her mind, his or her “feeling” is more important than the system itself. From this point on, the trader will try to outguess the system. This mistake has catastrophic effects on our confidence to the system. The confidence on the trader turns into overconfidence.

Mistake made: Not taking a trade when system signaled it

Second Scenario: System does not signal a trade.

Action: No trade is taken

Outcome of the trade: Neutral

Experience gained: Good discipline, we only need to take trades when the odds are in our favor, just when the system signals it. Confidence gained in both the trader self and the system.

Mistake made: None

Action: A trade is taken, turns out to be a profitable trade.

Outcome of the trade: Positive, made money.

Experience gained: This mistake has the most catastrophic effects in the trader self, the system and most importantly in the trader’s trading career. You will start to think you need no system, you know better from them all. From this point on, you will start to trade based on what you think. Confidence in the system is totally lost. Confidence in the trader self turns into overconfidence.

Mistake made: Take a trade when there was no signal from the system.

Action: A trade is taken, turned out to be a losing trade.

Outcome of the trade: negative, lost money.

Experience gained: Next time, the trader will think it twice before getting in a trade when the system does not signal it. The trader will go “Ok, it is better to get in the market when my system signals it, only those trade have a higher probability of success”. Confidence is gained in the system.

Mistake made: Take a trade when there was no signal from the system

As you can see, there is absolutely no correlation between the outcome of the trade and a mistake. The most catastrophic mistake even has a positive trade outcome, made money, but this could be the beginning of the end your trading career. As I have already stated, mistakes must only be related to the violation of rules a trader trades by.

These mistakes were directly related to the signals given by a system, but the same could be applied when getting out of a trade. There are also mistakes related to following a trading plan. For example, risking more money on a given trade than the amount the trader should have risked and many more.

How to Avoid Trading Mistakes


Most mistakes can be avoided by:

1. Having a trading plan. A trading plan includes the system: the criteria we use to get in and out the market, the money management plan: how much we will risk on any given trade, and many other points.
2. Secondly, and most important, we need to have the discipline to strictly follow our plan.

We created our plan when no trade was placed on (I hope so), therefore no psychological barriers were up front. By following our trading plan, we are making sure that all trading decisions will be taken on our best interests, and in the long run, these decisions will help us have better results. We don’t have to worry about isolated events, or trades that could had give us better results at first (monetary), but then they could have catastrophic results in our trading career.

Understanding the fact that the outcome of any trade has nothing to do with a mistake will open your mind to other possibilities, where you will be able to understand the nature of every mistake made. This at the same time will open the doors for your trading career as you work and take proper action on every mistake made.

Now, we are all human, and human make mistakes, we all do, but we can grow from them, mistakes; mistakes are a learning experience, we can learn invaluable lessons on every single mistake made. Every mistake is just one more chance to try harder and do it better the next time, because we don’t know if we are going to get another chance next time.

What do you think?

Feel free to comment, you don’t have to agree with me in order to leave a comment. And don’t forget to like it if you found this article useful.

Forex Market vs. Futures & Stock Markets

* Remember leverage could work in your favor as well as against you.

Things You Should Know About Forex Trading

How difficult is it to make money trading the Forex market? How much time does it take to actually be able to make a living trading the Forex market? These and other important aspects of trading are to be discussed in this article.

Trading the Forex market has many benefits over other financial markets, among the most important are: superior liquidity, 24hrs market, better execution, and others. Traders and investor see the Forex market as a new speculation or diversifying opportunity because of these benefits. Does this mean that it is easy to make money trading the Forex Market? Not at all.


Forex brokers agree that 90% of traders end up losing money, 5% of traders end up at break even and only 5% of them achieve consistent profitable results. With these statistics shown, I don’t consider trading to be an easy task. But, is it harder to master any other endeavor? I don’t think so, consider musicians, writers, or even other businesses, the success rates are about the same, there are a whole bunch of them who never got to the top.

Now that we know it is not easy to achieve consistent profitable results, a must question would be, Why is it that some traders succeed while others fail to trade successfully in the Forex market? There is no hard answer to this question, or a recipe to follow to achieve consistent profitable results. What we do know is that traders that reach the top think different. That’s right, they don’t follow the crowd, they are an independent part of the crowd.

A few things that separate the top traders from the rest are:

Forex Education: They are very well educated in the matter; they have chosen to learn every single and important aspect of trading. The best traders know that every trade is a learning experience. They approach the Forex market with humility, otherwise the market will prove them wrong.

Forex trading system: Top traders have a Forex trading system. They have the discipline to follow it rigorously, because they know that only the trades that are signaled by their system have a greater rate of success.

Price Action: They have incorporated price behavior into their trading systems. They know price action has the last word.

Money management: Avoiding the risk of ruin is a primary subject to the best traders. After all, you cannot succeed without funds in your trading account.

Trading psychology: They are aware of every psychological issue that affects the decisions made by traders. They have accepted the fact that every individual trade has two probable outcomes, not just the winning side.

These are, among others, the most important factors that influence the success rate of Forex traders.

We know now that it is not easy to make money trading the Forex market, but it is possible. We also discussed the most important factors that influence the rate of success of Forex traders. But, how much time does it take to have consistent profitable results? It is different from trader to trader. For some, it could take a life time, and still don’t get the desired results, for some others, a few years are enough to get consistent profitable results. The answer to this question may vary, but what I want to make clear here is that trading successfully is a process, it’s not something you can do in a short period of time.

Trading successfully is no easy task; it is a process and could take years to achieve the desired results. There are a few things though every trader should take in consideration that could accelerate the process: having a trading system, using money management, education, being aware of psychological issues, discipline to follow your trading system and your trading plan, and others.

Currency Futures Price Sensitivity

Currency futures prices are sensitive to changes in each of the components in the pricing model. In other words, currency future prices are sensitive to changes in the underlying exchange rate and the interest rate differential between the two countries in question.

The Basis

The difference in price between the currency futures and the underlying exchange rate is called the ‘Basis’. The Basis reflects a number of factors, collectively called ‘Carrying Costs’ (e.g. interest differential). The Basis difference narrows as the currency future contract nears expiry this is known as basis convergence.

Minimum Contract Size

Currency futures have a minimum contract size of 1000 foreign underlying currency (e.g. $ 1000).

Expiry Months and Date

The expiry months specified for foreign currency futures contracts are March, June, September and December. All currency futures contracts expire two business days prior to the third Wednesday of the expiry month or, if that day is not a business day, then the previous business day.

Expiry Prices

The price at which the foreign currency futures contracts expire is calculated from an arithmetic average of the underlying spot taken every 60 seconds for 100 iterations between 12h01 and 13h40. If less than one hundred iterations have been accumulated by the expiry time for the computation of the expiry price, then the computation and publication of the expiry price shall be postponed until one hundred iterations have been accumulated.

Settlement

The foreign currency futures contracts are cash settled in Rand. In other words, no physical delivery of the underlying currency will ever take place.

Margining

Each trade is matched daily by Yield-X, i.e. the exchange ensures that there is a buyer and a seller to each contract traded. The JSE’s clearinghouse Safcom becomes the counterparty to each trade once each transaction has been matched and confirmed. The clearinghouse therefore ensures settlement takes place on each trade. To protect itself from non-performance, Safcom employs a process known as margining. This mechanism is two-fold.

Initial Margin

Firstly, when a position is opened (either long or short), the investor is required to pay an initial margin in cash with the broker who subsequently deposits it with the clearinghouse. This amount remains on deposit as long as the investor has an open position. The initial margin attracts a market related interest rate which is refunded to the investor once the position is closed out, or if the contract expires. The initial margin requirement varies between the different currency futures offered.

The Bid/Ask Price

Like equities, foreign exchange has a Bid price and an Ask price. The bid is where the market maker will buy. The ask is where the market maker will sell. For investors, the reverse is true.

The bid price is where an investor can sell, while the ask is where an investor can buy.
The bid price is always less than the ask price. This makes logical sense as a market maker, like any investor, wants to buy low and sell high.

The spread between the bid and the ask is called the Bid/Ask Spread or Dealing Spread. The bid/ask spread is the premium that market makers charge to provide constant liquidity to a retail client base.

For example, the bid and ask might be 1.2050/1.2055. The spread is 5 pips.
Paralleling foreign exchange trading to equities, a market maker, like FXDD, is the equivalent of a specialist on the floor of the exchange.

A specialist is always willing and able to make a market (i.e. provide liquidity) to the market/investor. For this service, he will have a bid where he buys the stock and an offer or ask, where he will sell the stock.

The bid/ask spread the specialist charges will fluctuate with the general liquidity of the underlying stock.

That same principle applies to FXDD's Bid/Ask Spreads.

Dealing Spreads for the major currencies pairs on FXDD are 2-3 pips wide. Some less liquid currencies will be a bit wider.

This reflects the relative liquidity/risk in the professional market for that particular currency pair.

The dealing spreads that we quote reflect a normal market making spread given the risks we take and the costs we incur for servicing our clients' business.

Obviously, if the volatility and risk of making a market increase because the markets become less liquid, it stands to reason that our spreads will increase as well.

These are universal realities of market makers and should not come as a surprise to knowing investors/traders.

Buying and Selling Foreign Exchange

What exactly do you buy or sell when you make a foreign currency transaction?

In reality, you are doing both actions - buying and selling. A transaction of Buying the EUR/USD at 1.2000 is actually buying the Euro and selling the Dollars at 1.2000 cents. If the Euro increases in value in relation to the dollar, the price would increase and the investor will make money.

If for whatever reason, a trader could not execute an order using FXDD, a verbal order to a broker could be the following:

"I buy 100,000 Euros and sell the dollar at the Market"

or

"I buy 500,000 EUR/USD on a 1.2100 stop"

or

"I buy 100,000 Euros vs. the Dollar at the market"

What is required on all verbal orders is the amount, the Currency Pair, the rate and/or the type of order. Simply saying "I buy the Dollar at the Market" is not good enough as it does not say what currency the trader wants to sell.

Foreign Currency Symbols

Currencies, like equities, have their own symbols that distinguish one from another. Since currencies are quoted in terms of the value of one against the value of another, a currency pair includes the "name" for both currencies, separated by a "/". The "name" is a three letter acronym. The first two letters are in most cases reserved for identification of the country. The last letter is the first letter of the unit of currency for that country.

For example,

USD = United States Dollar
GBP = Great Britain Pound
JPY = Japanese Yen
CAD = Canadian Dollar
CHF = Confederatio Helvetica (Latin for Swiss Confederation) Franc
NZD = New Zealand Dollar
AUD = Australian Dollar
NOK = Norwegian Krona
SEK = Swedish Krona

Since the European Euro has no specific country attached to it, it goes simply by the acronym EUR.

By combining one currency, EUR, with another USD, you create a currency pair EUR/USD.

The Liquid Currency Pairs

Currencies, like equities and bonds, have pairs that are very liquid and those that are not so liquid. The liquid currencies can be characterized as those that are the most stable economically and politically. They include the countries that form the G7 - the United States, Japan, Great Britain, France, Germany, Italy, and Canada.

Since the unification of the European currencies into the EURO, the currencies that are most liquid now include the US Dollar, the Japanese Yen, the British Pound, the Euro, and the Canadian Dollar. It is estimated that activities in these currencies comprise more than 80% of the daily foreign exchange volume.

What is Foreign Exchange?

For active traders and investors, foreign exchange should be no different than other investment products such as equities, commodities or fixed-income. Because of globalization in the economic world and consolidation of whole economic regions (i.e., the European Union), including currencies in a portfolio helps to diversify assets and can reduce risk.

Just like other investment alternatives, foreign exchange offers traders/investors a market where they can buy or sell an investment product. In this case it is a specific Currency Pair. The currency pair may be the Euro versus the US Dollar, the US Dollar versus the Japanese Yen, the British Pound versus the US Dollar, the Euro versus British Pound, or a number of other currency combinations.

The different currency combinations represent nothing more than the value of one currency versus the value of another. That relationship is represented by a single price. In foreign exchange, the price of a currency pair is the market’s expectations (at that time) of the value of that currency measured against another currency given the current and expected economic and political situation in the two economies. In equity terms, it is the price of the stock.
If, for example, an economy’s inflation/interest rates are low and stable, if its output is growing strongly, or if its politics are stable and expectations are for more of the same, then one can expect (in general) for that country's currency to remain strong versus a less fundamentally favorable currency.

Contrasting that with an equity, if the domestic and global economy is strong, if inflation is not rampant, if competition is not taking away market share or eating into margins, if product demand and growth are strong, of if the companies internal "politics" are such that the workers are happy and productive, and expectations are for more of the same, then you can expect that company’s stock to remain strong versus a company with less favorable fundamentals.

Similar to equities there are other factors that determine the short term value of a product including technical analysis, short term supply and demand, seasonal capital flow patterns, the current price of the instrument, etc. It is these universal dynamics that will move a currency’s value up or down.

Forward Contracts versus Futures Contracts

Forward and futures contracts share characteristics.
Both allow investors to hedge against currency risk..
Forward contracts differ to futures contracts in that they are over-the-counter (OTC) contracts traded directly between banks and financial institutions. OTC contracts are often tailored to meet the needs of each individual customer. The disadvantage, however, is that forward contracts are often reserved for larger institutions. Institutions that trade forwards are also required to have all the necessary transactional documentation and may be required to motivate why the forward contract was entered into. The buyers and sellers of OTC derivatives are also subject to the risk that the counterparty to the trade may default.

Futures contracts are exchange traded contracts and thus standardised with respect to quantity and value of the underlying, quotation method and date of expiry. Prices for each contract are negotiated between buyers and sellers via the Yield-X electronic order matching platform or automatic trading system (ATS). Currency future brokers input orders which are automatically matched on the basis of time and price priority. Currency futures therefore allow for transparent pricing. Currency futures also equalize the playing field for all investors. The product allows for individuals to access the currency market generally reserved for institutions and allows smaller corporate entities to access favourable rates generally reserved for larger corporates. Currency futures unlike forwards allow investors to take a view on the movement of the underlying exchange rates.

Performance by the counterparties to a futures contract is guaranteed on Yield-X via Safcom (the JSE’s clearing house) for all derivative contracts. Standardised contracts traded on a regulated exchange enable the risk of both parties to be reduced and also increase the liquidity in the secondary trading market. Liquidity refers to the ability of trading participants to get in and out of their positions when they choose to.

Metatrader 4 (MT4) Trading Platform

The highly accredited Metatrader 4 or MT4 trading platform as it is commonly referred to, is one of the most renowned and widely used forex trading platforms around today. It is the first choice of trading platform amongst retail investors and traders alike and the benchmark platform amongst brokers. It is one of the most versatile, user friendly trading platforms, packed with all the necessary features today’s active trader requires to succeed with their forex trading.

Benefits of MT4:

• User friendly interface with no real complexities, which makes this platform especially suitable for novice traders.

• No language barriers. MT4 enables users across the world to convert the data in the MT4 platform to their language of choice.

• MT4 possesses both charting and trading capabilities all packed in one user friendly package thus enabling today’s active trader’ s to carry out technical analysis and place trades at the same time.

• A very important and popular feature that MT4 offers its users is to automate their trading through the use of expert advisors or EA’s as it is commonly known as. Expert advisors or EA’s can either be developed by the user themselves or they can purchase EA’s developed and tested by well known vendors.

• MT4 is a equipped with advanced communication tools where TDFX post messages, publishes in house analysis, market news in real time thus eliminating the need to communicate with clients through the traditional methods of e-mail and telephone.

• MT4 is a highly reliable trading platform and is not a demanding application to run on a PC.

• MT4 provides its users with easy access to view personal information such as account balances, account history, access details, change of password etc.

• MT4 is a very secure and highly safe trading platform to carry out trading activities as the data transfer between trader and server is scripted through 129-bit key and it also conceals the server’s IP address.

• MT4 works with all kinds of currency crosses so long as they are offered by the broker and has also been designed to work with futures and equities.

• Last but not least in this comprehensive list of benefits is the fact that MT4 is fully customizable and its users can tailor MT4 to satisfy every need. Users can develop their own indicators and expert advisors through MT4’s proprietary MQL programming language.

Introducing Foreign Exchange (Forex)

Foreign Exchange Trading is the buying and selling of different currencies. Better known as FOREX, it is a fast paced but highly lucrative process. To make a decent head start in the industry, it is best to remember a few important factors.

In Foreign Exchange Trading or FX Trading, clients are able to hedge against, or speculate upon, changes in the exchange rate of two currencies. For example, a speculator can be long EUR/USD in foreign exchange market in order to profit from capturing the appreciation of Euro against the U.S. Dollar. Foreign exchange services provide an opportunity for clients to trade FX. Foreign Exchange Trading is done on the foreign exchange market.

Each currency in the FOREX trading industry is assigned a three-letter code. Because many countries use currencies with the same name (e.g. the dollar or peso), it is extremely important that traders are familiar with these codes.

Where an exact same currency is used in various countries, then the code remains the same. For example, the Euro is used across much of the European Union, so the same code (EUR) would be used for France, Germany, etc.

Other examples of three-letter codes include the US dollar, which is assigned (USD), the Australian dollar (AUD), the Chinese Yuan Renminbi (CNY), the Chilean peso (CLP), and so forth.
Just as with any trade industry, the main purpose is to make a profit, by buying low and selling high. Thus, in FOREX trading, one must always find the opportunity to buy one currency low, and sell the other high.

Traders must also be aware of trading hours and which markets across the globe are open or closed. For example, due to time differences, the market in London would be open or closed at different times to that in Tokyo. While Frankfurt, London and New York open at 2:00am, 3:00am and 4:00am respectively, Sydney and Tokyo do not open until 4:00pm and 7:00pm, on Eastern Standard Time.

10 GREAT FOREX TRADING TIPS

Below are some expert trading tips for forex traders

1. An old cliché but on which holds great truth – ALWAYS trade in the direction of the trend. In the Forex markets we see great trends in currency pairs that last for a long time (cycles). Therefore, it pays to identify the dominant trend of currency pairs. Going against the trend will only cost you a lot of money and destabilise you emotionally.

2. Plan your trade, trade your plan. Trade plans can be made well in advance in the Forex market and help eliminate emotional trading. The more mechanical you become in entering and exiting trades, the more profitable and consistent you will become in the long run.

3. Before initiating any trade, always know your risk and truly accept this risk. The risk is defined as the number of pips from your entry to your stop loss.

4. Always, use a stop loss after initiating a trade. Placing a stop loss does not essentially mean that you are expecting to experience a losing trade but will help minimize losses against unforeseen market circumstances caused by unforeseen events such as terrorist attacks, geopolitical events etc.

5. After initiating a trade, a trader must have clear trade management guidelines for that trade. Trade management means that the trader knows in advance when and where he or she will move the stop loss and when to scale out of part of the trade and eventually where to take profits.

6. Whilst trading Forex, it is imperative for a trader to know the characteristics of the currency pairs he or she likes to trade. A way of achieving this is by looking at the past behaviour of the currency pairs in order to ascertain key characteristics such as:

a) how well does the pair trend?

b) which economic events influence the pair?

c) what is the Average Daily Range of the pair?etc.

7. Always keep in mind that the Forex market presents the trader with a constant stream of opportunities, therefore, if the trader experiences more than 2-3 consecutive losses, stopping to trade for a period of time is advisable. This will give the trader time to refocus and examine mistakes and prepare psychologically to re-enter the market again.

8. Trade to profit and not just to trade. Many traders think that because they might sit in front of a trade station for a period of time it is logical that they should be trading constantly. A trader should only initiate trades once all the odds are stacked in his favour and he has an edge. Then and only then can trade be initiated. Patience and discipline is an integral part of successful and consistent trading and are traits that a trader must endeavour to possess.

9. All successful traders have a trading diary that contains all the trades good or bad they have ever initiated. This gives traders the opportunity to constantly evaluate their performance and rectify any identified mistakes.

10. All successful traders are constantly learning and evolving. Just when you think you know it all about trading, a new curveball gets thrown your way. Furthermore, as time passes by, new methods of making money are developed and need to be learned about.

Market Participants

There are four categories of participants in the currency derivatives market. Hedgers use currency futures to protect an existing portfolio (or an anticipated investment) against possible adverse currency movements. Hedgers therefore seek to reduce risk.
Hedgers have a real interest in the underlying currency and use futures as a way of preserving their performance.
Arbitrageurs profit from price differentials of similar products in different markets, e.g. price differentials between the spot exchange rate and futures price.
Investors use currency futures to enhance the long-term performance of a portfolio of assets. Speculators use currency futures in hopes of making a profit on short-term movements in prices.
Speculators therefore seek to enhance risk with the aim of making a profit.
Speculators have no interest in the underlying currency other than taking a view on the future direction of the currency’s price.

A successful and efficient market is made up of a healthy balance of the abovementioned participants.

Currency Futures Qualifying Clients

The following categories of clients are permitted to tradeand hold positions in currency futures and are referred toas “qualifying clients.”

1. A South African individual with no limits applicable

2. A South African corporate entity with no limits applicable

3. A non resident individual or corporate entity with no limits applicable

4. An Investment Manager and Collective investment Scheme subject to their foreign portfolio allowance

5. A resident pension fund organisation subject to their foreign portfolio allowance.

6. A resident long-term or short-term insurer subject to their foreign portfolio allowance

Currency Futures Dispensations

Currency futures were launched predominatelyas a retail product.
The initial dispensation granted by the Minister of Finance in 2007
allows individuals to trade over and above their two millionRand foreign allocation allowance stipulated by the SouthAfrican Reserve Bank.
Individuals, in other words, have nolimits to the value traded in the currency futures market.

The Minister of Finance in his 2008 budget speech extended the currency futures qualifying audience to include all South African corporate entities.
Corporate entities, including companies, close corporations, (Pty) Ltds, partnerships and trusts are authorized to trade currency futures with no restrictions on the value traded.
Corporate entities do not need to apply to Reserve Bank to trade nor do they have to report their trades.

Factors that Influence Exchange Rates

An exchange-rate between to countries is determined by demand and supply of the relevant two currencies, which is influenced by economic factors including, among many others, the flow of imports and exports, the flow of capital and relative inflation rates. One factor affecting an exchange-rate is the merchandise trade balance. By definition, the merchandise trade balance is the net difference between the value of merchandise being exported and imported into a particular country. For example, consider the exchange-rate for USD/ZAR. South Africa (SA) imports products from the U.S. To pay for them, South Africans need US Dollars; therefore, the SA companies trade SA Rand for US Dollars. On the other hand, because Americans desire SA goods, they purchase SA Rands.

The net effect is an increase in the supply of US Dollars and SA Rands. The SA demand for American goods and services contributes to the demand for US Dollars while American purchases of SA goods and services contribute to the demand of SA Rands. In this case, the net difference between SA purchases of American goods, and American purchases of SA goods, is the merchandise trade balance between the two countries. If the SA demand for American goods is higher than the American demand for SA goods, the demand for US Dollars is higher than the demand of SA Rands.

As a result the US Dollar would appreciate against the SA Rand. The flow of funds between countries to pay for stocks and bonds purchases also contributes to the exchange-rate movements. In the near term, these capital flows are greatly influenced by yield or interest differentials. This is known as interest rate parity, which holds that the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. Over the long run, the spot exchange adjusts to reflect the difference in interest rates between the two countries.

All else being equal, the higher the yield on SA securities compared to American securities, the more attractive SA securities are relative to American securities. An increase in SA yields would tend to raise the flow of U.S. dollars into SA securities as well as decrease the outflow of Rands to American securities. Combined, this increased flow of funds into SA would lower the value of the U.S. dollar and increase the value of the Rand, therefore, the SA to U.S. dollar ("ZARUSD") ratio, as it is represented in the forex market, would increase, hence you would need more Dollars to buy one SA Rand. The rate of inflation is another factor influencing currency exchange-rates. Inflation occurs when the rate of money growth in an economy is higher than the rate of growth in real GDP, hence more money is chasing fewer goods, and this in turn drives up the prices of these goods.

Since exchange rates are an expression of one unit of a currency in terms of another, inflation essentially changes the relative value of this relation. For example, if SA is experiencing higher inflation than US then the USD/ZAR ratio increases to represent the increased value of Dollars relative to SA Rand. Or seen in another way, one Rand will now buy less Dollars. This fact is rooted in the concept of a purchasing power parity, which holds that, over the long run, the exchange-rate adjusts to reflect the difference in price levels between countries, a given item will thus in theory have the same price in two countries adjusted by the prevailing exchange rate.

Introduction to the Foreign Exchange Markets

Although the foreign exchange market is the largest traded market in the world, its reach to the retail sector pales in comparison to the Equity and Fixed Income markets. This is in large part due to a general lack of awareness of FX in the investor community, along with a lack of understanding of how and why currencies move. Adding to the mystique of this market is the lack of a physical central exchange akin to the NYSE or the CME. It is this very lack of structure that enables the FX markets to operate on a 24-hour basis, beginning the trading day in New Zealand and continuing through the time zones.
Traditionally, access to the FX market was limited to the bank community that traded large blocks of currencies for commercial, hedging, or speculative purposes. The creation of firms like FXDD has opened the door of Forex trading to such institutions as funds and money managers, as well as to the individual retail trader. This sector of the market has grown exponentially over the past several years.