Understanding the Margin System
Trading currencies on margin lets you increase your buying power. Here’s a simplified example: If you have $2,000 cash in a margin account that allows 1:100 leverage, you could purchase up to $200,000 worth of currency-because you only have to post 1% of the purchase price as collateral. Another way of saying this is that you have $200,000 in buying power.

You are probably wondering how a small investor can trade such large amounts of money. Think of your broker as a bank who basically fronts you $100,000 to buy currencies and all he asks from you is that you give him $1,000 as a good faith deposit, which he will hold you for but not necessarily keep. Sounds too good to be true? Well this is how forex trading using leverage works.

For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have $5,000 you can trade up to $500,000 of Forex.

In the example above, it is used a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a depost on the position.

What is a Margin Call?
In the event that money in your account falls below margin requirements (usable margin), your account will close some or all open positions. This prevents your account from falling into a negative balance, even in a highly volatile, fast moving market.

Example #1
Let’s say you open a regular Forex account with $2,000. You open 1 lot of the USD/JPY, with a margin requirement of $1000. Usable Margin is the money available to open new positions or sustain trading losses. Since you started with $2,000, your usable margin is $2,000. But when you opened 1 lot, which requires a margin requirement of $1,000, your usable margin is now $1,000.

If your losses exceed your usable margin of $1,000 you will get a margin call.

Example #2
Let’s say you open a regular Forex account with $10,000. You open 1 lot of the USD/JPY, with a margin requirement is $1000. Remember, usable margin is the money you have available to open new positions or sustain trading losses. So prior to opening 1 lot, you have a usable margin of $10,000. After you open the trade, you now have $9,000 usable margain and $1,000 of used margin.

If your losses exceed your usable margin of $9,000, you will get a margin call.

Make sure you know the difference between usable margin and used margin.

If the equity (the value of your account) falls below your usable margin due to trading losses, you will either have to deposit more money or the system will close your position to limit your risk. As a result, you can never lose more than you deposit.

Leverage Ratio and Margin Percentage
The simple relationship between the two terms are:

Leverage = 100 / Margin Percent
Margin Percent = 100 / Leverage

Leverage is conventionally displayed as a ratio, such 1:100

Margin Trading: Stocks vs Forex

The word “margin” means something very different in forex than it does in stocks.

With stocks, trading on margin means that a trader can borrow up to 50% of a stock’s value to buy that stock. This can be a costly move because the investor must pay interest to the brokerage firm on the amount borrowed. This is not the case in forex trading.

For example: at $400/share, 100 shares of Google are valued at $40,000 ($400 x 100 shares). To trade this stock on margin, the money required for the trade is 50%, or $20,000. The remaining $20,000 is borrowed and interest must be paid on that amount. Margin interest is different from broker to broker, but a good rule of thumb is typically Prime plus 1-3% or more.

In forex, margin is the minimum required balance to place a trade. When you open a forex trading account, the money you deposit acts as collateral for your trades. This deposit, called margin, is typically 1% of the value of the position.

For example: if you want to purchase $100,000 of USD/JPY at 1:100 leverage, the money required is 1%, or $1000. The other $99,000 is collateralized with your remaining account balance. You pay no interest.

It is very important to remember that leverage magnifies your profits AND your losses. You should monitor your account balance on a regular basis and utilize stop-loss orders on every open position to limit downside risk.

However, leverage is an exceptionally good tool that can be utilized to increase your buying power and return on capital, as long as you have a solid risk management plan in place.

Technical analysis is not an exact science, it is more of an art and takes a considerable amount of experience. Not all studies work the same for every instrument traded. One study may give excellent buy and sell signals while another may not work for you at all. It’s up to each individual trader to find those that will fit his or her specific needs. Technical analysis attempts to use past stock or forex market price and volume information to predict future price movements.

A Trading System based on real-time charts is one of the best ways to control risk. It’s not the only way, but it’s one strategy that’s followed by a lot of investors.

General Rules for Trading Systems

Understand why you are trading in the markets.
Establish your trading plan before the markets open.
Detail your plan for each trade.
Establish entry and exit points and understand risk reward ratios.
Accept small losses as part of the game if you want to win.
Don’t blame the market for your losses. You are the reason for your losses.
Develop a trading plan for each potential situation you may face.
Sustain your patience. Big movements take time to develop.
Remind yourself there is nothing new in the markets.
Don’t predetermine your profits.
Avoid techniques you don’t understand.
What is Market Timing?

Market timing is any attempt to use past prices and other market-generated data to accurately forecast or prophesy future prices of securities or indexes, whether long-term or intra-day, consistently and persistently. It is based on various economic or stock market indicators, for deciding when to buy or sell securities. Other words Market timing recommendations are based on a Technical analysis of market data.

Timing Includes asset allocation, technical analysis, charting, momentum investing, and quantitative analysis using neural networks, genetic algorithms, artificial intelligence (AI), fuzzy logic, chaos theory or other non-linear techniques. Precisely because market prices are efficient integrators and anticipators of information relevant to security valuation, they also serve as high-quality inputs for reliable market timing models.

“Market timing has shown itself to be futile in every study ever conducted. The idea of market timing and the reality are night and day. The idea is very compelling. It presupposes you can be on the sidelines when the market goes down and in when it goes up. If you could do that you’d be richer than Warren Buffett. The reality is it leaves most people in the market when it’s going down and not in when it’s going up.”

Forecasting asset prices is a problem that has fascinated investors since the very advent of financial markets. Accurate predictions of the market movements imply fast and substantial capital gains. Attempts to forecast stock prices are numerous.

Timing strategy provides investors with the opportunity to avoid major market price declines at the same time many argue that using any market-timing tool is a waste of time.

Every investor has his own market timing theory when it comes to making money in the stock market. Many technicians attempt to improve their performance by timing the market and adjusting their portfolio according to predictions about the market or specific sectors. Obviously, if investors can avoid weak periods in the market and participate in the strong, they can also experience superior returns over a buy-and-hold strategy. What is surprising is that studies show that investors can still outperform a buy-and-hold strategy, even if they don’t participate in the strongest times – as long as they escape major market declines.

Market Timing Tips:

Timing is everything in today’s volatile markets. However, misleading signals and ambiguous chart patterns often leave traders in a quandary over the real market direction.
Market Timing is a top down view of the market and its prospects. The elements of market strategy includes investor sentiment, trends in interest rates and fed action, overall market valuation, technical underpinning, and flow of funds.
Without timing system, then, it’s clear that over the short term the market is an inefficient vehicle for making money.
During bull markets, timing usually underperforms. When the market is going up, the only thing timing can do is tell you to be invested; that doesn’t give you any advantage over buy-and-hold. But of course no bull market goes up in a straight line for very long. And often when there’s a downward blip, it causes a sell signal, and you’re out of the market.
Why Technical Analysis is important for a Trader?

Technical analysis is not an exact science, it is more of an art and takes a considerable amount of experience. Not all studies work the same for every instrument traded. One study may give excellent buy and sell signals while another may not work for you at all. It’s up to each individual trader to find those that will fit his or her specific needs.

The professional investor that looks at the same stocks and only buys when there is a SALE going on doesn’t have to care about analysts or market hype. So when everyone has given up and sold, he is buying. After a month or two the stock generally rebounds and Wall Street loves the stock again, then analysts hop on board and upgrade the stock to a strong buy, raising estimates and new fools come in and buy the stock at the all time high. The professional investor then dumps his stock and looks to find the next stock that is still at a bargain price.

Every technical analyst knows the importance of charts and indicators. But if these were all it took to make profitable trading decisions, everyone would be a winner. With most indicators it is possible to detect buy and sell levels, but the sport is to detect them before everybody else.

“The trend is your friend” is the motto of technical analysis

Technical Stock Analysis doesn’t look at income statements, balance sheets, company policies, or anything fundamental about the company. Instead it looks at the actual history of trading and price in a security or index.
Every technical analyst knows the importance of charts and indicators. But if these were all it took to make profitable trading decisions, everyone would be a winner.
With most indicators it is possible to detect buy and sell levels. The sport is to detect them before everybody else.
Analyze market data in real time. Plan your own Market Timing strategy to make money, regardless of upward or downward trending markets.
Every technical analyst knows the importance of charts and indicators.
Study charts often (daily if possible).
Minute-by-minute trading volume shows the reversal points of the market, and therefore when to buy and sell!
“The trend is your friend” is the motto of technical analysis
Technical Analysis Tips

Volume analytics’ basic premise is that volume and index behaviors are closely interrelated and that the trading patterns of an index can be predicted, or at least anticipated, from a proper understanding of the unfolding volume patterns.

Volume analytics is not an exclusive discipline. It can stand fully on its own, yet may also be used in conjunction with other technical analysis methods. In fact, this approach could well be the missing piece of the market analysis puzzle that so many traders have been seeking.

Without a doubt, a detailed study of volume patterns has much to reveal, much more than is commonly believed. One of the reasons volume analytics has not always received the attention it deserves is that intraday real-time volume data and charts for entire indexes were not available until recently. Now that they are, you have the opportunity to closely monitor and analyze the volume behavior of a particular index, as it unfolds in real-time. This allows you to heed one of the golden rules of trading, “Do not play against the market”, which brings us to our next topic.

Why apply volume analytics to indexes and exchanges, rather than to individual stocks? Indexes best describe the mood of the market as a whole. Regardless of what you trade, a particular index or sub-index, stocks, options, futures, most of these trading vehicles tend to move in concert with the broad market. As a rule, the market dictates the direction of a particular security, never the other way around. It therefore makes sense to get a good grasp on what is happening at the index or stock exchange level, and we have found volume analytics to be an excellent vehicle to make that determination.

With the myriad of technical indicators, market timing systems and trading approaches available today, the question arises: why bother with volume analysis at all? The answer is that volume is the best and truest sentiment indicator for what is really going on in the markets. Volume is the underlying cause of all price movements. Without a change of volume, the price of a security cannot move. To make this point, imagine that a (thinly traded) stock does not trade at all on a particular day. Consequently, that stock’s price might not even be listed in the newspaper the following day – because if there is no volume (i.e., no one is buying and no one selling), it logically follows that there can be no price change (price movement). On the other extreme, if there is unusually high interest in a stock, everyone will hear about it, because volume levels will spike far above normal, signaling “something big and significant” went on (or is expected).

Some offshore jurisidictions have developed as centres for particular types of offshore financial service: thus, there are hundreds of banks in the Caymans, and several thousand investment funds in Luxembourg, and British Virgin Islands (BVI).

In recent years, growing financial awareness has created strong demand for offshore financial services among a wider community of customers; this is especially true of offshore investment funds. Even so, offshore financial services have tended to remain the preserve of larger companies or of relatively wealthy and sophisticated individuals – transaction costs are high and information not always easy to come by.

The Internet has opened the way to a far broader market for the providers of offshore financial services, by reducing transaction costs and by making information about offshore available instantly to anyone who is interested, although national authorities have sought to constrain this to an extent, especially in the case of US investors. It is therefore highly unusual now not to see a warning of some kind on the websites of offshore online service providers to the effect that their material should not be viewed by residents of X, Y or Z countries. Whether said residents choose to heed those warnings, however, is beyond the control of the provider!

Offshore providers of financial services theoretically have strong competitive advantages, for example:

Profits are less highly-taxed, or untaxed, allowing cheaper products
Offshore jurisdictions are usually less highly regulated than high-tax countries, so that an offshore financial institution has more flexibility in planning, marketing and delivering products
Financial products themselves can take advantage of a low-tax environment in order to deliver greater returns to customers
The cost base of an offshore location is often more favourable than that of a high-tax location

The whole range of retail financial services can be provided from offshore using the Internet. Services and products can include:

Electronic banking including current and deposit account maintenance, paying bills, direct debits etc
Offer and sale of stocks and shares, investment and mutual fund units, equity derivatives etc
Foreign exchange services
Offer, sale and maintenance of savings products including pension schemes
Offer and sale of insurance products

Since fundamental analysis is about looking at the intrinsic value of an investment, its application in forex entails looking at the economic conditions that affect the valuation of a nation’s currency. Here we look at some of the major fundamental factors that play a role in the movement of a currency.

Economic Indicators
Economic indicators are reports released by the government or a private organization that detail a country’s economic performance. Economic reports are the means by which a country’s economic health is directly measured, but do remember that a great deal of factors and policies will affect a nation’s economic performance.

These reports are released at scheduled times, providing the market with an indication of whether a nation’s economy has improved or declined. The effects of these reports are comparable to how earnings reports, SEC filings and other releases may affect securities. In forex, as in the stock market, any deviation from the norm can cause large price and volume movements.

You may recognize some of these economic reports, such as the unemployment numbers, which are well publicized. Others, like housing stats, receive little coverage. However, each indicator serves a particular purpose, and can be useful. Here we outline four major reports, some of which are comparable to particular fundamental indicators used by equity investors:

The Gross Domestic Product (GDP)
The GDP is considered 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. The GDP is somewhat analogous to the gross profit margin of a publicly traded company in that they are both measures of internal growth.

Retail Sales
The retail-sales report measures the total receipts of all retail stores in a given country. This measurement is derived from a diverse sample of retail stores throughout a nation. 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. Revisions to advanced reports of retail sales can cause significant volatility. The retail sales report can be compared to the sales activity of a publicly traded company.

Industrial Production
This report shows the change in the production of factories, mines and utilities within a nation. It also reports their ‘capacity utilizations’, the degree to which the capacity of each of these factories is being used. It is ideal for a nation to see an increase of production while being at its maximum or near maximum capacity utilization.

Traders using this indicator are usually concerned with utility production, which can be extremely volatile since the utilities industry, and in turn the trading of and demand for energy, is heavily affected by changes in weather. Significant revisions between reports can be caused by weather changes, which in turn, can cause volatility in the nation’s currency.

Consumer Price Index (CPI)
The CPI is a measure of the change in the prices of consumer goods across over 200 different categories. This report, when compared to a nation’s exports, can be used to see if a country is making or losing money on its products and services. Be careful, however, to monitor the exports – it is a focus that is popular with many traders because the prices of exports often change relative to a currency’s strength or weakness.

Some of the other major indicators include the purchasing managers index (PMI), producer price index (PPI), durable goods report, employment cost index (ECI), and housing starts. And don’t forget the many privately issued reports, the most famous of which is the Michigan Consumer Confidence Survey. All of these provide a valuable resource to traders, if used properly.

So, How Are These Used?
Since economic indicators gauge a country’s economic state, changes in the conditions reported will therefore directly affect the price and volume of a country’s currency. It is important to keep in mind, however, that the indicators discussed above are not the only things that affect a currency’s price. There are third-party reports, technical factors, and many other things that also can drastically affect a currency’s valuation. Here are a few useful tips that may help you when conducting fundamental analysis in the foreign exchange market:

* Keep an economic calendar on hand that lists the indicators and when they are due to be released. Also, keep an eye on the future; often markets will move in anticipation of a certain indicator or report due to be released at a later time.
* Be informed about the economic indicators that are capturing most of the market’s attention at any given time. Such indicators are catalysts for the largest price and volume movements. For example, when the U.S. dollar is weak, inflation is often one of the most watched indicators.
* Know the market expectations for the data, and then pay attention to whether or not the expectations are met. That is far more important than the data itself. Occasionally, there is a drastic difference between the expectations and actual results and, if there is, be aware of the possible justifications for this difference.
* Don’t react too quickly to the news. Oftentimes, numbers are released and then revised, and things can change quickly. Pay attention to these revisions, as they may be a useful tool for seeing the trends and reacting more accurately to future reports.

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. When properly used, these indicators can be an invaluable resource for any currency trader.

Other Interesting Reading:

How do forex brokers make their money?
Fundamental Factors That Affect Currency Values
Will recession become something worse?

It is really amazing how the brokers offer their services without charging a fee for it. The services rendered by a forex dealer are very similar to that of a middleman. Let us take for example as bread middleman. This person purchases bread from the wholesale market at a wholesale price, he then sells it to the retailer. The difference he makes is his profit. In case the bakery store needs to replenish further stock of break, they would contact the middleman. The difference which the middleman charges is his brokerage and his profit as well.
The forex market is very similar to this. The price at which the currency is purchased is called the ask price and the price at which it is sold is the bid price. The essence of the forex market is to buy low and sell high. An experienced forex broker would accordingly advise the trader when to effect buying and selling. Stock and futures market brokers do charge commission on the trades and transactions effected. The forex broker does not charge anything from the investor.

The forex broker purchases the currency from the trader at 1.1967 and the trader purchases the currency at 1.1971. The difference in the amount is the forex broker’s commission. The price gap which is there in each and every transaction is his profit. There are many trades effected by the forex broker day in and day out and the forex broker literally mints money. 0.0001 is called as the pip. In the above referred example, the forex trader makes 4 pips. When calculated in dollars, if the forex contract amount is 100,000$, the total transaction amount works out to 40$ or 4 pips. The mantra in forex trading is that tighter the spread, it is better.

Many forex brokers also offer demo trading accounts which make trading easier and hassle free. The trader is able to practice on these demo trading accounts using virtual money. This makes it easier for the trader to do real time trading. A trader only needs to have a computer and internet connectivity and connectivity to the broker’s website to enter into trading business. The software programs enable the trader to be successful in forex trading. It is important that you select a trustworthy and experienced broker who would be able to guide you properly.

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Interesting article written by an Indian Economist:

Rank, Country, Current Account Balance (million US$)

1 People’s Republic of China (PRC) 179,100
2 Japan 174,400
3 Germany 134,800
4 Russia 105,300

………who is at number 163.  Find out here.

Japanese save a lot. They do not spend much. Also Japan exports far more than it imports. Has an annual trade surplus of over 100 billions. Yet Japanese economy is considered weak, even collapsing.

Americans spend, save little. Also US imports more than it exports. Has an annual trade deficit of over $400 billion. Yet, the American economy is considered strong and trusted to get stronger.

But where from do Americans get money to spend?

They borrow from Japan, China and even India. Virtually others save for the US to spend. Global savings are mostly invested in US, in dollars.

Rank, Country, Current Account Balance (million US$)

1 People’s Republic of China (PRC) 179,100
2 Japan 174,400
3 Germany 134,800
4 Russia 105,300
5 Saudi Arabia 103,800
6 Norway 63,330
7 Switzerland 50,440
8 Netherlands 50,170
9 Kuwait 40,750
10 Singapore 35,580
11 Venezuela 31,820
12 Sweden 28,610
13 United Arab Emirates 26,890
14 Algeria 25,800
15 Hong Kong 20,900
16 Canada 20,560
17 Malaysia 17,860
18 Libya 14,500
19 Brazil 13,500
20 Iran 13,130
21 Nigeria 12,590
22 Qatar 12,510
23 Taiwan 9,700
24 Finland 8,749
25 Iraq 8,134
26 Angola 7,700
27 Oman 7,097
28 Belgium 6,925
29 Austria 5,913
30 Argentina 5,810
31 Chile 5,063
32 Denmark 4,941
33 Philippines 4,900
34 Luxembourg 4,630
35 Trinidad and Tobago 3,259
36 Azerbaijan 2,737
37 Egypt 2,697
38 Korea, South 2,000
39 Bahrain 1,999
40 Gabon 1,807
41 Botswana 1,698
42 Yemen 1,690
43 Indonesia 1,636
44 Peru 1,515
45 Israel 1,643
46 Uzbekistan 1,410
47 Burma 1,247
48 Republic of the Congo 1,215
49 Vietnam 1,029
50 Ecuador 727
51 Bolivia 688
52 Papua New Guinea 661
53 Namibia 572
54 Ivory Coast 460
55 Cameroon 419
56 Morocco 389
57 Bangladesh 339
58 Turkmenistan 321.2
59 Equatorial Guinea 175
60 British Virgin Islands 134.3 (1999)
61 Kazakhstan 113
62 Cook Islands 26.67 (2005)
63 Palau 15.09 (2004)
64 Tuvalu 2.323 (1998)
65 Samoa -2.428 (2004)
66 Tonga -4.321 (2005)
67 Comoros -17 (2005)
68 Kiribati -19.87 (2004)
69 Swaziland -23.13
70 São Tomé and Pr íncipe -24.4
71 Vanuatu -28.35 (2003)
72 Federated States of Micronesia-34.3 (2005)
73 Anguilla -42.87 (2003)
74 Cape Verde -44.43
75 The Gambia – 54.61
76 Burundi -57.84
77 Haiti -58.72
78 Tajikistan -73.95
79 Lesotho -75.44
80 Seychelles -78.59
81 Antigua and Barbuda -83.4 (2004)
82 Guyana – 84.3
83 Rwanda -104.1
84 Honduras -160
85 Zambia -165.4
86 Republic of Macedonia -167
87 Belize -173.4
88 Malawi -186
89 Ghana -219
90 Armenia -247.3
91 Togo -261.9
92 Zimbabwe – 264.6
93 Kyrgyzstan -287.3
94 Paraguay -300
95 Chad -324.1
96 Benin -342.7
97 Guinea -344
98 Cambodia -369
99 Mexico -400.1
100 Uganda -423
101 Eritrea -440.5
102 Mozambique -444.4
103 Fiji -465.8
104 Panama -467
105 Madagascar -504
106 Laos -404.2
107 Belarus -511.8
108 Syria -529
109 Moldova -561
110 Uruguay -600
111 Burkina Faso -604.6
112 Mauritius -651
113 Albania -679.9
114 Georgia -735
115 Tunisia -760
116 Slovenia -789.2
117 Nicaragua -883
118 Senegal -895.2
119 Thailand – 899.4
120 Tanzania -906
121 Malta -966.2
122 Jamaica -970
123 Cyprus -1,051
124 El Salvador -1,059
125 Sri Lanka -1,118
126 Kenya -1,119
127 Dominican Republic -1,124
128 Costa Rica -1,176
129 Cuba -1,218
130 Guatemala -1,533
131 Bosnia and Herzegovina -1,730
132 Estonia -1,919
133 Ukraine -1,933
134 Colombia -2,219
135 Serbia -2,451 (2005)
136 Latvia -2,538
137 Lithuania -2,572
138 Jordan -2,834
139 Croatia -2,892
140 Iceland -2,932
141 Ethiopia -3,384
142 Slovakia -3,781
143 Czech Republic -4,352
144 Sudan -4,510
145 Poland -4,548
146 Bulgaria -5,100
147 Lebanon -5,339
148 Pakistan -5,486
149 New Zealand -7,944
150 Hungary -8,392
151 Ireland -9,450
152 Romania -12,450
153 South Africa -12,690
154 Portugal -16,750
155 Greece -21,370
156 Italy -23,730
157 Turkey -25,990
158 India -26,400
159 France -38,000
160 Australia -41,620
161 United Kingdom -57,680
162 Spain -98,600
163 United States -862,300

India itself keeps its foreign currency assets of over $50 billions in US
securities. China has sunk over $160 billion in US securities. Japan’s
stakes in US securities is in trillions.

Result:

The US has taken over $5 trillion from the world. So, as the world saves for the US, Americans spend freely. Today, to keep the US consumption going, that is for the US economy to work, other countries have to remit $180 billion every quarter, which is $2 billion a day, to the US!

A Chinese economist asked a neat question. Who has invested more, US in China, or China in US? The US has invested in China less than half of what China has invested in US.

The same is the case with India. We have invested in US over $50 billion. But the US has invested less than $20 billion in India..

Why the world is after US?

The secret lies in the American spending, that they hardly save. In fact
they use their credit cards to spend their future income. That the US
spends is what makes it attractive to export to the US. So US imports more than what it exports year after year.

The result:

The world is dependent on US consumption for its growth. By its deepening culture of consumption, the US has habituated the world to feed on US consumption. But as the US needs money to finance its consumption, the world provides the money.

It’s like a shopkeeper providing the money to a customer so that the
customer keeps buying from the shop. If the customer will not buy, the shop won’t have business, unless the shopkeeper funds him. The US is like the lucky customer. And the world is like the helpless shopkeeper financier.

Who is America’s biggest shopkeeper financier? Japan of course. Yet it’s
Japan which is regarded as weak. Modern economists complain that Japanese do not spend, so they do not grow. To force the Japanese to spend, the Japanese government exerted itself, reduced the savings rates, even charged the savers.

Even then the Japanese did not spend (habits don’t change, even with taxes, do they?). Their traditional postal savings alone is over $1.2 trillions, about three times the Indian GDP. Thus, savings, far from being the strength of Japan, has become its pain.

Hence, what is the lesson?

That is, a nation cannot grow unless the people spend, not save. Not just spend, but borrow and spend.

Dr. Jagdish Bhagwati, the famous Indian-born economist in the US, told
Manmohan Singh that Indians wastefully save. Ask them to spend, on imported cars and, seriously, even on cosmetics! This will put India on a growth curve. This is one of the reason for MNC’s coming down to India, seeing the consumer spending.

‘Saving is sin, and spending is virtue.’

But before you follow this neo economics, get some fools to save so that you can borrow from them and spend!!!
God Bless You

Warmest Regards

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On Friday, the dollar again fell against major currencies.

Since March, the dollar index, which weighs the U.S. currency against a basket of foreign currencies like the euro, the Japanese yen, the pound and the Swiss franc, has fallen nearly 12 percent. In that same period, crude has jumped 81 percent.

The widening gap between the value of a dollar and that of a barrel of oil shows just how much oil-based index funds have come to affect the prices that consumers pay for energy.

Benchmark crude for October delivery rose 81 cents to $73.30 on the New York Mercantile Exchange. Oil prices earlier this week hit $75, a high for the year.

Oil prices are threatening to hit new highs in a week when the government reported that more unused crude is being placed into storage. The U.S. is also nearing the end of the driving season, when demand generally falls.

Demand for gasoline is already weaker than it was last year, even though right now it costs a dollar less to buy every gallon.

Overnight, retail gasoline fell nearly a penny to $2.613. That’s a dime more than gas cost a month ago, largely because of refineries have cut production to match falling demand.

It is difficult to predict how long oil prices can remain at current levels when so little of it is being used. Yet value of a barrel of oil will likely remain elevated as long as investors are skittish about the health of banks and other businesses.

Money under the control of the Federal Deposit Insurance Corp. has been severely depleted by the wave of collapsing financial institutions. Some analysts warn that the FDIC, which guarantees bank deposits, could be losing money by the end of the year.

To a lot of big investors, oil looks like a pretty safe place to park money right now.

“Oil became a safe haven as traders lost confidence in the U.S. banking system (and) ran to oil to protect themselves from the deteriorating economic world around us,” said PFGBest analyst Phil Flynn. “Now some critics now call that excessive speculation but what I call it is reflection of the reality. You have to remember the value of any commodity when expressed in a currency will ultimately be determined by the confidence and faith in that underlying instrument.”

It seems nothing can prop up prices for natural gas, which hit seven-year lows this week. There is so much gas being pumped into the ground that the U.S. is running out of places to store it. That is largely because big energy users, like manufacturers, have cut back severely on operations as they ride out the recession.

Natural gas prices fell 11 cents to $3.095 per 1,000 cubic feet.

In other Nymex trading, gasoline for September delivery rose 2.2 cents to $2.0535 a gallon and heating oil rose 2 cents to $1.8787 a gallon.

In London, Brent crude rose 54 cents to $73.05.

By Associate Press

Yet here’s the problem: While we know that we made investment mistakes, and vow not to repeat them, most people have only the vaguest sense of what those mistakes were, or, more important, why they made them. Why did we think and feel and behave as we did? Why did we act in a way that today, in hindsight, seems so obviously stupid? Only by understanding the answer to these questions can we begin to improve our financial future.

This is where behavioral finance comes in. Most investors are intelligent people, neither irrational nor insane. But behavioral finance tells us we are also normal, with brains that are often full and emotions that are often overflowing. And that means we are normal smart at times, and normal stupid at others.

The trick, therefore, is to learn to increase our ratio of smart behavior to stupid. And since we cannot (thank goodness) turn ourselves into computer-like people, we need to find tools to help us act smart even when our thinking and feelings tempt us to be stupid.
Let me give you one example. Investors tend to think about each stock we purchase in a vacuum, distinct from other stocks in our portfolio. We are happy to realize “paper” gains in each stock quickly, but procrastinate when it comes to realizing losses. Why? Because while regret over a paper loss stings, we can console ourselves in the hope that, in time, the stock will roar back into a gain. By contrast, all hope would be extinguished if we sold the stock and realized our loss. We would feel the searing pain of regret. So we do pretty much anything to avoid that pain—including holding on to the stock long after we should have sold it. Indeed, I’ve recently encountered an investor who procrastinated in realizing his losses on WorldCom stock until a letter from his broker informed him that the stock was worthless.

Successful professional traders are subject to the same emotions as the rest of us. But they counter it in two ways. First, they know their weakness, placing them on guard against it. Second, they establish “sell disciplines” that force them to realize losses even when they know that the pain of regret is sure to follow.

So in what other ways do our misguided thoughts and feelings get in the way of successful investing—not to mention increasing our stress levels? And what are the lessons we should learn, once we recognize those cognitive and emotional errors? Here are eight of them.

No. 1

Goldman Sachs is faster than you.

There is an old story about two hikers who encounter a tiger. One says: There is no point in running because the tiger is faster than either of us. The other says: It is not about whether the tiger is faster than either of us. It is about whether I’m faster than you. And with that he runs away. The speed of the Goldman Sachses of the world has been boosted most recently by computerized high-frequency trading. Can you really outrun them?

It is normal for us, the individual investors, to frame the market race as a race against the market. We hope to win by buying and selling investments at the right time. That doesn’t seem so hard. But we are much too slow in our race with the Goldman Sachses.

So what does this mean in practical terms? The most obvious lesson is that individual investors should never enter a race against faster runners by trading frequently on every little bit of news (or rumors).

Instead, simply buy and hold a diversified portfolio. Banal? Yes. Obvious? Yes. Typically followed? Sadly, no. Too often cognitive errors and emotions get in our way.

No. 2

The future is not the past, and hindsight is not foresight.

Wasn’t it obvious in 2007 that financial institutions and financial markets were about to collapse? Well, it was not obvious to me, and it was probably not obvious to you, either. Hindsight error leads us to think that we could have seen in foresight what we see only in hindsight. And it makes us overconfident in our certainty about what’s going to happen.

Want to check the quality of your foresight? Write down in permanent ink your forecast of tomorrow’s stock prices. Do that each day for a year and check the accuracy of your predictions. You are likely to find that your foresight is not nearly as good as your hindsight.

Some prognosticators say that we are now in a new bull market and others say that this is only a bull bounce in a bear market. We will know in hindsight which prognostication was right, but we don’t know it in foresight.

When I hear in my mind’s ear a voice that says that the stock market is sure to zoom or plunge, I activate my “noise-canceling” device rather than go online and trade. You might wish to install this device in your mind as well.

No. 3

Take the pain of regret today and feel the joy of pride tomorrow.

Emotions are useful, even when they sting. The pain of regret over stupid comments teaches presidents and the rest of us to calibrate our words more carefully. But sometimes emotions mislead us into stupid behavior. We feel the pain of regret when we find, in hindsight, that our portfolios would have been overflowing if only we had sold all the stocks in 2007. The pain of regret is especially searing when we bear responsibility for the decision not to sell our stocks in 2007. We are tempted to alleviate our pain by shifting responsibility to our financial advisers. “I am not stupid,” we say. “My financial adviser is stupid.” Financial advisers are sorely tempted to reciprocate, as the adviser in the cartoon who says: “If we’re being honest, it was your decision to follow my recommendation that cost you money.”

No. 4

Investment success stories are as misleading as lottery success stories.

Have you ever seen a lottery commercial showing a man muttering “lost again” as he tears his ticket in disgust? Of course not. What you see instead are smiling winners holding giant checks.

Lottery promoters tilt the scales by making the handful of winners available to our memory while obscuring the many millions of losers. Then, once we have settled on a belief, such as “I’m going to win the lottery,” we tend to look for evidence that confirms our belief rather than evidence that might refute it. So we figure our favorite lottery number is due for a win because it has not won in years. Or we try to divine—through dreams, horoscopes, fortune cookies—the next winning numbers. But we neglect to note evidence that hardly anybody ever wins the lottery, and that lottery numbers can go for decades without winning. This is the work of the “confirmation” error.

What is true for lottery tickets is true for investments as well. Investment companies tilt the scales by touting how well they have done over a pre-selected period. Then, confirmation error misleads us into focusing on investments that have done well in 2008.

Lottery players who overcome the confirmation error conclude that winning lottery numbers are random. Investors who overcome the confirmation error conclude that winning investments are almost as random. Don’t chase last year’s investment winners. Your ability to predict next year’s investment winner is no better than your ability to predict next week’s lottery winner. A diversified portfolio of many investments might make you a loser during a year or even a decade, but a concentrated portfolio of few investments might ruin you forever.

No. 5

Neither fear nor exuberance are good investment guides.

A Gallup Poll asked: “Do you think that now is a good time to invest in the financial markets?” February 2000 was a time of exuberance, and 78% of investors agreed that “now is a good time to invest.” It turned out to be a bad time to invest. March 2003 was a time of fear, and only 41% agreed that “now is a good time to invest.” It turned out to be a good time to invest. I would guess that few investors thought that March 2009, another time of great fear, was a good time to invest. So far, so wrong. It is good to learn the lesson of fear and exuberance, and use reason to resist their pull.

No. 6

Wealth makes us happy, but wealth increases make us even happier.

John found out today that his wealth fell from $5 million to $3 million. Jane found out that her wealth increased from $1 million to $2 million. John has more wealth than Jane, but Jane is likely to be happier. This simple insight underlies Prospect Theory, developed by Daniel Kahneman and Amos Tversky. Happiness from wealth comes from gains of wealth more than it comes from levels of wealth. While gains of wealth bring happiness, losses of wealth bring misery. This is misery we feel today, whether our wealth declined from $5 million to $3 million or from $50,000 to $30,000.

We’ll have to wait a while before we recoup our recent investment losses, but we can recoup our loss of happiness much faster, simply by framing things differently. John thinks he’s a loser now that he has only $3 million of his original $5 million. But John is likely a winner if he compares his $3 million to the mountain of debt he had when he left college. And he is a winner if he compares himself to his poor neighbor, the one with only $2 million.

In other words, it’s all relative, and it doesn’t hurt to keep that in mind, for the sake of your mental well-being. Standing next to people who have lost more than you and counting your blessings would not add a penny to your portfolio, but it would remind you that you are not a loser.

No. 7

I’ve only lost my children’s inheritance.

Another lesson here in happiness. Mental accounting—the adding and subtracting you do in your head about your gains and losses—is a cognitive operation that regularly misleads us. But you can also use your mental accounting in a way that steers you right.

Say your portfolio is down 30% from its 2007 high, even after the recent stock-market bounce. You feel like a loser. But money is worth nothing when it is not attached to a goal, whether buying a new TV, funding retirement, or leaving an inheritance to your children or favorite charity.

A stock-market crash is akin to an automobile crash. We check ourselves. Is anyone bleeding? Can we drive the car to a garage, or do we need a tow truck? We must check ourselves after a market crash as well. Suppose that you divide your portfolio into mental accounts: one for your retirement income, one for college education of your grandchildren, and one for bequests to your children. Now you can see that the terrible market has wrecked your bequest mental account and dented your education mental account, but left your retirement mental account without a scratch. You still have all the money you need for food and shelter, and you even have the money for a trip around the country in a new RV. You might want to affix to it a new version of the old bumper sticker: “I’ve only lost my children’s inheritance.”

So here’s my advice: Ask yourself whether the market damaged your retirement prospects or only deflated your ego. If the market has damaged your retirement prospects, then you’ll have to save more, spend less or retire later. But don’t worry about your ego. In time it will inflate to its former size.

No. 8

Dollar-cost averaging is not rational, but it is pretty smart.

Suppose that you were wise or lucky enough to sell all your stocks at the top of the market in October 2007. Now what? Today it seems so clear that you should not have missed the opportunity to get back into the market in mid-March, but you missed that opportunity. Hindsight messes with your mind and regret adds its sting. Perhaps you should get back in. But what if the market falls below its March lows as soon as you get back in? Won’t the sting of regret be even more painful?

Dollar-cost averaging is a good way to reduce regret—and make your head clearer for smart investing. Say you have $100,000 that you want to put back into stocks. Divide it into 10 pieces of $10,000 each and invest each on the first Monday of each of the next 10 months. You’ll minimize regret. If the stock market declined as soon as you have invested the first $10,000 you’ll take comfort in the $90,000 you have not invested yet. If the market increases you’ll take comfort in the $10,000 you have invested. Moreover, the strict “first Monday” rule removes responsibility, mitigating further the pain of regret. You did not make the decision to invest $10,000 in the sixth month, just before the big crash. You only followed a rule. The money is lost, but your mind is almost intact.

Things could be a lot worse.

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Commission Structures
There are three forms of commission used by brokers in forex. Some firms offer a fixed spread, others offer a variable spread and still others charge a commission based on a percentage of the spread. So which is the best choice? At first glance, it seems that the fixed spread may be the right choice, because then you would know exactly what to expect. However, before you jump in and choose one, there are a few things you need to consider.

The spread is the difference between the price the market maker is prepared to pay you for buying the currency (the bid price), versus the price at which he is prepared to sell you the currency (the ask price). Suppose you see the following quotes on your screen: “EURUSD – 1.4952 – 1.4955.” This represents a spread of three pips, the difference between the bid price of 1.4952 and the ask price of 1.4955. If you are dealing with a market maker who is offering a fixed spread of three pips instead of a variable spread, the difference will always be three pips, regardless of market volatility. (For more, see Common Questions About Currency Trading.)

In the case of a broker who offers a variable spread, you can expect a spread that will, at times, be as low as 1.5 pips or as high as five pips, depending on the currency pair being traded and the level of market volatility.

Some brokers may also charge a very small commission, perhaps two-tenths of one pip, and then will pass the order flow received from you on to a large market maker with whom he or she has a relationship. In such an arrangement, you can receive a very tight spread that only larger traders could otherwise access.

Different Brokers, Different Levels of Service
So what is the bottom line effect of each type of commission on your trading? Given that all brokers are not created equal, this is a difficult question to answer. The reason is that there are other factors to take into account when weighing what is most advantageous for your trading account.

For example, not all brokers are able to make a market equally. The forex market is an over-the-counter market, which means that banks, the primary market makers, have relationships with other banks and price aggregators (retail online brokers), based on the capitalization and creditworthiness of each organization. There are no guarantors or exchanges involved, just the credit agreement between each player. So, when it comes to an online market maker, for example, your broker’s effectiveness will depend on his or her relationship with banks, and how much volume the broker does with them. Usually, the higher-volume forex players are quoted tighter spreads. (For more, see Getting Started In Forex.)

If your market maker has a strong relationship with a line of banks and can aggregate, say, twelve banks’ price quotes, then the brokerage firm will be able to pass the average bid and ask on to its retail customers. Even after slightly widening the spread to account for profit, the dealer will be able to pass a more competitive spread on to you than competitors that are not well capitalized.

If you are dealing with a broker that can offer guaranteed liquidity at attractive spreads, this may be what you should look for. On the other hand, you might want to pay a fixed pip spread if you know you are getting at-the-money executions every time you trade. Slippage, which occurs when your trade is executed away from the price you were offered, is a cost that you do not want to bear.

In the case of a commission broker, whether you should pay a small commission depends on what else the broker is offering. For example, suppose your broker charges you a small commission, usually in the order of two-tenths of one pip, or about $2.50 – $3 per 100,000 unit trade, but in exchange offers you access to a proprietary software platform that is superior to most online brokers’ platforms, or some other benefit. In this case, it may be worth paying the small commission for this additional service.

Choosing a Forex Broker
As a trader, you should always consider the total package when deciding on a broker, in addition to the type of spreads the broker offers. For example, some brokers may offer excellent spreads but their platforms may not have all the bells and whistles that are offered by competitors. When choosing a brokerage firm, you should check out the following:

* How well capitalized is the firm?
* How long has it been in business?
* Who manages the firm and how much experience does this person have?
* Which and how many banks does the firm have relationships with?
* How much volume does it transact each month?
* What are its liquidity guarantees in terms of order size?
* What is its margin policy?
* What is its rollover policy in case you want to hold your positions overnight?
* Does the firm pass through the positive carry, if there is one?
* Does the firm add a spread to the rollover interest rates?
* What kind of platform does it offer?
* Does it have multiple order types, such as “order cancels order” or “order sends order”?
* Does it guarantee to execute your stop losses at the order price?
* Does the firm have a dealing desk?
* What do you do if your internet connection is lost and you have an open position?
* Does the firm provide all the back-end office functions, such as P&L, in real time?

Conclusion
Even though you might think you are getting a deal when paying a variable spread, you may be sacrificing other benefits. But one thing is certain: As a trader you always pay the spread and your broker always earns the spread. To get the best deal possible, choose a reputable broker who is well capitalized and has strong relationships with the large foreign exchange banks. Examine the spreads on the most popular currencies. Very often, they will be as little as 1.5 pips. If this is the case, a variable spread may work out to be cheaper than a fixed spread. Some brokers even offer you the choice of either a fixed spread or a variable one. In the end, the cheapest way to trade is with a very reputable market maker who can provide the liquidity you need to trade well.

by Selwyn Gishen

Other Related Reading:

Basic Concepts For the Currencies / Forex Market

Common Questions About Currency Trading

Foreign Exchange Trading

Forex Traders

Before moving on to better times, however, let’s think a bit about how we’ve responded to the big problems that began emerging in 2006 and 2007. What are some of the clear money lessons we’ve learned? Almost by definition, these lessons seem very obvious today. But our children and grandchildren will forget many of them, just as we forgot the hard-knocks lessons of our parents and grandparents. Here’s some starter advice:

The experts are often wrong. Don’t forget that our current problems were predicted by very few people and that the “smart money” spent a lot more time protecting itself than helping anyone else. All of the kind words from banks, brokerages and real estate companies didn’t amount to much when crunch time arrived. Many years will pass before our trust in financial institutions and leaders is restored. Never accept what you hear at face value–ask questions, do your homework, and make sure that your interests are protected.

Budgeting is cool. I spend a lot less money each month than I did two years ago, and most days I feel that the quality of my life has improved. I owe much of the credit to the hour or so I spend each month with our household budget. I don’t spend much cash or write many checks. I charge as much as I can on a credit card that provides rebates, and I pay off the entire balance every month. I pay nearly all of my bills through online banking and download them into a spreadsheet. As I inch closer to my own retirement, my downsized spending profile is turning out to be a great adjustment. Even if the economy and stock market soar for years, I’m never giving up that spreadsheet.

Everything’s negotiable. Tough times make for tough shoppers, and bargaining for a better deal is becoming part of our DNA. Retail pricing is disappearing in a world of online discount stores and aggressive bloggers eager to share details of their latest bargain finds. A few vendors such as Apple can still get away with premium prices linked to consumer value perceptions. But for most products, it’s a cost-plus world. Even the opaque pricing of electricians, plumbers and other home-repair providers is under assault from the online information explosion. The recession may have forced us to become more price conscious. Technology will make sure we never go back.

Actively manage your investment accounts. See what happens when you put your money into an investment account and forget about it. Repeat after me: Never be a passive investor, never be a passive investor, never be a passive investor, never–well, you get the idea. Look at your retirement accounts monthly, and consider rebalancing them quarterly. If transaction fees make rebalancing unduly expensive, consider shifting your accounts into holdings that don’t penalize you for doing the right thing.

Don’t bank on housing wealth. We’re all convinced we’ll never make this mistake again, but just wait. Even a few years of solid increases in home values could bring on mass amnesia. So, while the memories and lessons are still vivid, make sure your retirement plans aren’t dependent on an appreciating piece of real estate. Housing gains should be viewed as a cushion, not a fundamental requirement for sufficient retirement income.

Stay healthy, stay solvent. People who get regular exercise are healthier–mentally as well as physically–than people who don’t. They live longer. They’re happier. Their brains even work better. Exercise need not cost you a penny, whereas poor health is very expensive. If a serious recession has any silver lining, it’s the realization it brings that your quality of life is largely up to you.

By Philip Moeller

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