International finance terms

Hi,

Just want to explain the term of Forex.

Upward pressure means peningkatan.

Downward pressure means penurunan.

Example:



When to weaken currency?
 

Remember everything in adjustment of currency either to weaken or to strengthen, one thing to remember is that demand of currency increase, inflation rate will goes up. Same goes to employment, when currency supply increase, US currency will be strengthen, so lower unemployment unable to achieve.

Currency sterilized intervention & non sterilized intervention

During MBA international finance class, we have been discussing sterilized intervention & non sterilized intervention. We can take it easy by relate the word sterilize as a small sterilization pill used by rapist to rape and sterilize their victims. Sterilize means that to stop the productivity, without increasing in supply of something, it can be pregnancy, bacteria, in this term it mean money supply in the market.

There are basically two types of intervention: sterilized and unsterilized. Sterilized intervention requires offsetting intervention with the buying or selling of government bonds, while unsterilized intervention involves no changes to the monetary base to offset intervention. When intervention is not sterilized, the money supply is increased because the funds used to sell yen may be raised by printing money.

We can understand more deeply currency sterilized intervention by read this paragraph.>>> [The central bank “remains prepared to buy foreign currency in unlimited quantities” to hold down the franc, Thomas Jordan, the Swiss National Bank president, said at a news conference in Bern, according to a text of his remarks. “Even at the current rate, the Swiss franc is still high. Another appreciation would have a serious impact on both prices and the economy in Switzerland. The S.N.B. will not tolerate this.”,(Source: http://www.nytimes.com/)]

History of Currency Interventions in Japan (Source: Deja vu – Another Currency Intervention in the offing?)

From 1989 to 2003, the Japanese economy was suffering from a long deflationary period. On June 2003, over a 15 month period, the Japanese central bank intervened in the YEN/USD currency markets by injecting over 35 trillion Yen of currency. This currency was then used to buy 320 billion U.S. dollars, which were in turn invested into U.S. treasuries. The jury is still out on whether this increased yen supply did actually weaken the yen against the dollar or not.

Tokyo also intervened on September 15, 2010 shortly after the dollar hit a 15-year low of 82.87 yen, a move that pushed the U.S. currency up by more than 3 percent during the day. While the dollar rises soon petered out, finance ministry officials judge the intervention as a success as it halted excessive, short-term falls and prevented the U.S. currency from breaching the psychologically important 80 yen level. It took another six months for the dollar to eventually cross that line.

The next round of FX intervention came in March 2011. After the tragic earthquakes and nuclear crisis that crippled the Japanese economy, Yen appreciated to a new high of 76.25 (I will discuss the reasons for this appreciation in the next section). Not only was that a damagingly high level for Japan’s export-led economy, it also risked triggering the “volatility” in currency markets that central bankers hate to see. So, for the first time in more than a decade, central banks around the world stepped into the foreign exchange market and jointly intervened to sell the Japanese yen.

The last time all the G7 central banks had acted together was in September 2000 then the euro fell to a record low.  At the time, the Federal Reserve, Bank of England (BOE), Bank of Japan (BOJ) and other central banks joined the European Central Bank (ECB) in buying Euros.

Let us now analyze the various external factors which lead to an appreciation in Yen.

Factors influencing the value of Yen –

Japanese Yen has a few unique characteristics which make it vulnerable to such extreme moves every now and then.

Safe Haven –

Traditionally, the Yen has been considered as a safe haven for investors. So whenever there is some kind of an economic crisis, there is a flight to Yen from other currencies. At the moment, the European crisis and the US debt drama have shaken investor confidence in Euro and Dollar, leading to a surge in demand for the “safe” Yen.

Unwinding of “Carry-Trade” –

Carry-Trade is a popular investment strategy in which traders take advantage of ultra-low interest rates in Japan, by borrowing in yen and reinvesting the proceeds in some other, faster-growing stock market overseas – exchanging the yen for Brazilian real, New Zealand dollars, and so on.

Nervous investors may have started to reverse this bet in recent days, bringing their overseas investments back home, and strengthening the Japanese yen in the process.

Repatriation of Cash –

An important reason for the unprecedented yen appreciation post the March earthquake was that Japanese insurance firms and other corporations were “repatriating” cash – exchanging their foreign-denominated holdings for yen – to pay for the cost of handling the crisis.

“Good” old market speculation –

A very depressing reason for the yen’s move could also be pure speculation — investors betting, George Soros-style – though these days through complex financial instruments – on how the yen would move as a result of the crisis. Japanese deputy finance minister Fumihiko Igarashi said that these speculators are ‘like sneaky thieves as the scene of a fire’, who are capable of ruining the Japanese economy.

Impact of a Stronger Yen on Japan and the rest of the world –

A stronger Yen is bad news for the Japanese economy since it is heavily dependent on exports for generating even the meagre economic growth of the past few years.

The wrenching aftermath of the collapse of Lehman Brothers collapse in autumn of 2008 showed that rapid movements in financial markets can very quickly transmit panic throughout the global economy. If the US defaults or the European crisis gets uglier or the carry trade is abruptly unwound, it could cause what economists call a “sudden stop,” draining capital from riskier markets around the world, with real consequences for business and consumers on the ground.

How Much Capital Should I Trade Forex With?

By Jeremy Wagner, Lead Trading Instructor  and  Timothy Shea,

Summary:Research shows that the amount of capital in your trading account can affect your profitability. Traders with at least $5,000 of capital tend to utilize more conservative amounts of leverage. Traders should look to use an effective leverage of 10-to1 or less.

In looking at the trading records of tens of thousands of FXCM clients, as well as talking with even more traders daily via live webinars, Twitter, and email, it appears that traders enter the Forex market with a desire to cap their potential for losses on their risk based capital. Therefore, many newer traders choose to start trading forex with a small capital base.

What we have found out through the analysis of thousands of trading accounts is that traders with larger account balances tend to be profitable on a higher percentage of trades. We feel this is a result of the EFFECTIVE LEVERAGEused in the trading account.

Figure 1

Since many smaller traders are inexperienced in trading forex, they tend to expose their account to significantly higher levels of effective leverage. As a result, this increase in leverage can magnify losses in their trading account. Emotionally spent, traders then either give up on forex or choose to compound the issue by continuing to trade in relatively high amounts of effective leverage. This becomes a vicious cycle that damages the enthusiasm which attracted the trader to forex.

No matter how good or bad your strategy is, your decision (or non-decision, as the case may be) about effective leverage has direct and powerful effects on the outcomes of your trading. Last year, we published some tests showing the results over time of the same strategy with different leverage. You can read it in the article Forex Trading: Controlling Leverage and Margin.

Figure 2

In figure 2, we have modified 2 elements of the chart in figure 1. First, we renamed each column to represent the highest dollar value that qualified for the given column. For example, the $0-$999 equity range is now being represented as the $999 group. The $1,000 - $4,999 equity range is now being represented as the $4,999 group. And likewise, the $5,000 - $9,999 range is now being represented as the $9,999 group.

The second change made was that we calculated the average trade size of each group and divided it into the maximum possible account balance for that group. In essence, this provided us a conservative and understated effective leverage amount. (A larger balance reduces the effective leverage so the red line on the chart is the lowest and most conservative calculation of the chart.) For example, the average trade size for the $999 group was 26k. If we take the average trade size and divide it by the account equity, the result is the effective leverage used by that group on average.

As the effective leverage dropped significantly from the $999 group to the $4,999 group (red line), the resulting proportion of profitable accounts increased dramatically by 12 basis points (blue bars). Then, as further capital is added to the accounts such that they moved into the $9,999 category, the effective leverage continued to incrementally drop pushing the profitability ratio even higher to 37%.

Game Plan: How much effective leverage should I use?

We recommend trading with effective leverage of 10 to 1 or less. We don’t know when the market conditions will change causing our strategy to take on losses. Therefore, keep the effective leverage at conservative levels while using a stop loss on all trades. Here is a simple calculation to help you determine a target trade size based on your account equity.

Account Equity X Effective Leverage Target = Maximum Trade Size of All Combined Positions

10 : 1 Leverage Calculations
Account Equity Trade Size $5,000 50,000 $10,000 100,000 $25,000 250,000 $100,000 1,000,000 $1,000,000 10,000,000
Figure 3

The above illustration shows a trader’s account size and the maximum trade size based on 10 to 1 leverage. That means if you have $10,000 in your account, then never have more than 100,000 of open trades at any one time.

The precise amount of leverage used is decided entirely by each individual trader. You may decide that you are more comfortable using an even lower effective leverage such as 5 to 1 or 3 to 1.

Most professional traders enter into trading opportunities focused on how much capital they stand to lose rather than how much capital they are looking to gain. Nobody knows the future movement of prices so professional traders are confident in their trading approach but conservative in their use of effective leverage.

Adjusting the effective leverage to suit your risk tolerance

Our research indicates that accounts with the smallest capital base (the group labeled $999) have an average trade size of 26k for each trade. Their effective leverage is at least 26 times which is significantly higher than the 10 times leverage discussed earlier. If these traders want to trade at no more than a 10 to 1 effective leverage, they would need to make at least one of the adjustments noted below:

Increase their trading account equity by depositing more funds to an amount that reduces their effective leverage to less than 10 to 1. So our average trader, who is averaging 26k trade sizes, would need at least $2,600 in their account to trade 26k on a 10 to 1 effective leverage.

Decrease their trade size to a level that reduces their effective leverage to less than 10 to 1. Use the figure 3 calculations and chart above.

Figure 4

In the chart above, notice how the trade size remains relatively stable as the account equity increases from the $999 group to the $4,999 group. In essence, this indicates that traders are looking for, on average, at least $2.60 per pip (if they average 26k trade size, that is approximately $2.60 p/l per pip in most currency pairs).

There could be many reasons why traders average at least 26k for each trade, or $2.60 per pip. Perhaps they want a large enough trade size to make their time invested trading worthwhile. In other words, traders may be seeking a price per pip value and $2.60 is the minimum threshold on average. If these traders were to use no more than 10 to 1 effective leverage, they would need at least $2,600 in their account to support $2.60 per pip.

Another possibility is that many newer traders simply don’t understand the power of leverage and how one large losing trade can wipe out several winning trades in a row. Using a conservative amount of leverage will help slow down the rate of capital losses when a trader goes through a losing streak.

Regardless of the reasons, our goal is to use conservative amounts of leverage. If you know how much risk capital you have available, then use the chart and calculations used in Figure 3 to determine an trade size appropriate to your account size.

If you have a target “per pip” value, then use the calculations in figure 5 to determine the minimum amount of account capital needed to support your trade size. Increasing your capital base does not mean you will become more profitable. It means that you can stay in a trade longer if it goes against you. On average, traders that use a combination of sufficient capital (at least $5,000) and conservative use of effective leverage (10 to 1 or less) tend to be more profitable.

DailyFX Resources for Successful Money Management

The DailyFX Course Instructors have years of experience trading the markets and helping thousands of new traders learn forex.

Introduction to Money Management Video

Controlling Leverage and Usable Margin - presentation from 2011 FXCM Expo

Arriving at a Risk/Reward Ratio

Would You Like to Increase Your Chances of Becoming a Successful Trader?

FXCM Clients can take free interactive classes via the DailyFX PLUS Trading Course.

The Traits of Successful Traders

This article is a part four of our four-part Traits of Successful Traders series.

Part One: What is the Number One Mistake Forex Traders Make?

Part Two: When is the Best Time of Day to Trade Forex?

Part Three: Here is How to Trade Forex Majors Like the Euro during Active Market Hours

Over the past several months, The DailyFX Research team has been closely studying the trading trends of FXCM clients, utilizing the enormous amount of trade data at FXCM. We have gone through an enormous number of statistics and anonymized trading records in order to answer one question: “What separates successful traders from unsuccessful traders?”. We have been using this unique resource to distill some of the “best practices” that successful traders follow, such as the best time of day, appropriate use of leverage, the best currency pairs, and more. You can learn more about the project and see further research at DailyFX.com.