With the forex markets there’s a variety of opportunities for investors big and small. Moreover, it has opened up avenues of self-employment. Online trading platforms are easy to use. However, developing a few strategies that work is important for any investor venturing into the market. Forex trading requires a great deal of discipline to begin with, and is an art that takes time to nurture. The idea is make use of demo platforms and develop a feel for the market, prior to trading with real money.

One of the most important strategies is to manage your time and money efficiently. Once you are able to master this you will be in a better position to adopt an appropriate trading strategy. Geographical locations of forex markets permit trading 24 hours a day. Being alert and trading during peak hours will help you to develop a trading strategy.

As far as money is concerned, you need to look at reducing your leverage, which permits better risk management. Large investments do not necessarily indicate bigger profits. If you want to earn a certain profit percentage per day based on your account balance, you may not need to use the maximum leverage available.

There are other reasons to have knowledge of foreign exchange markets, maybe you send money exchange worldwide for your business. It pays to have a good understanding of the many factors that can move rates during the time your looking to send money overseas.

For the long and short of it

The forex market typically follows two patterns, tiny fluctuations, and strong oscillations. As an new entrant into the market, your strategy needs to be based on either of the two. If you base your strategy on day trades then you need to ignore strong oscillations that may occur due to strong economic factors. The opposite works for those traders that focus on strong oscillations. Once you are well experienced you can experiment with mixing long and short term strategies. Modifying a strategy will help reduce your win/loss ratio.
Mixing strategies

Trading strategies are useful for traders to develop a better approach for trading on the FX markets. Developing a strategy with the help of tools such as charts and signals, and trading software will help you to minimize losses. However, tools and tactics aren’t the only means to develop a strategy. You need to maintain your composure at all times, and take each trade your stride. Using long-term as well as short-term trading strategies can only result in bigger losses. However, two trading systems can be mixed in order to reduce possible losses, but not as a method of increasing profits.

The idea is to take advantage of all the tools available. However, with time you need to build up a firm foundation and understanding of the fundamental principles of forex trading. Attending an online course and reading up on all the material available will go a long way in helping you perfect trading strategies and develop a firm understanding of how the forex markets operate. Forex trading should be treated as an investment just like a business venture, which comes along with its set of successes and failures, and you will soon become a seasoned trader in the near future.

In my last post I covered the investing strategy of Benjamin Graham, a renowned investor who managed huge success with growth shares. Further to his ideas, let me run through a strategy based on defensive investing.

Graham insisted upon certain criteria for the stock section of the defensive investors portfolio. I have listed them below, adding my own reasoning to why they remain good practice.

(1) Adequate though not excessive diversification- 10-30 companies. Diversification is very important- simply not putting all of your eggs into one basket. No matter how stable the company selected is, there is always an inherent risk of a highly negative unforeseeable future development, hence buying 10-30 of these companies means that you can afford for one or two to drop. BP is a fantastic case in point- the company looked in great shape, yet had you invested exclusively in it, your portfolio would have lost around half of its value. Yet had you owned a portfolio of 20 large companies, one of which was BP the half drop in share price would mean a loss of 2.5%- far more manageable.

(2) Companies should be of sufficient size. Graham suggests $1 billion – £1billion would probably be a reasonable marker for UK stocks.

(3) Earnings Stability. Graham suggests all suitable companies should have delivered some profit for each of the last ten years. Of Grahams criteria, arguably this one of the most important- if a company is not consistently profitable it is likely a very poor investment, and certainly one that is not suitable for the defensive investor.

(4) Record of continuous dividend payments. Record should extend for at least ten years. It is very important for the defensive investor that they can reasonably expect dividend payments to continue- large companies that claim it is in the shareholders interests for the profits to stay entirely within the business are often in serious trouble.

(5) Some growth in earnings. Graham insists upon a minimum increase of 1/3 in earnings per share over the last ten years, calculate using 3 yer averages at the beginning an end of the ten year period.Such growth earnings is actually very modest- an annual return of just under 3%. We should probably insist upon a 50% increase over the last decade- still only 4.1% average annual growth.

(6) Moderate Price to Earnings ratio. Graham recommended that the defensive investor should not pay more than 25 x average earnings over the last seven years for growth shares- the “last seven years” bit is very important as it would exclude most highly speculative growth shares, as it insists on at least a moderate track record.

(7) Moderate ratio of price to assets.

(a) Current price not more than 1.5 x Net tangible assets per share

The first of Grahams “price to assets” criteria ensures a defensive investor does not purchase shares that do not hold significant underlying value. This criteria was designed for traditional investing activities, and it may be hard to find growth shares priced so moderately in comparison to their assets. However, I will include it, as it still certainly a good sign if a share meets this criteria, as it offers something of Graham’s margin of safety.

These criteria are in no way guaranteed to be the most successful- do not simply go out an buy all of the stocks meeting this criteria. Graham designed it to protect defensive investors from severely overvalued shares, and to provide a list of stocks from which investors could select.

Benjamin Graham defined a growth share as a share in a company “that has done better than average in the past, and is expected to do so in the future.”

The basic attraction of growth shares is as such: if you invest in a rapidly growing company, its earnings will increase, thereby increasing the values of your shares and the amount you receive in dividends.

The Problems With Trying To Predict The Growth Shares Of The Future.

We all know about the incredible growth stories behind some of the worlds biggest companies- if only we had bought a few shares in google or dell and we would be millionaires. The success of past growth stocks is still a significant pull to investors, luring them into hopelessly trying to predict the stocks and areas of the future.

Of course the principle of trying to invest in companies with good futures sounds very logical, yet it is actually very difficult- and if you get it wrong you might lose big time.

To illustrate the difficulties of picking the growth areas of the future, let us take the current energy debate. A “smart” guy might think there’s money to be made- now lets look at his options:

This simplistic diagram does at least indicate how difficult it would be to even pick a growth sector of the future. More bad news for the speculator- picking the right company is even harder. In terms of our energy example, there might be hundreds of companies in each sector- very tough to pick the eventual winner. Remember that Microsoft was essentially a garage based operation up against the mighty IBM and hundreds of other competitors. Unless you are prepared to lose all of your money, guessing which stocks will make it is not advisable. It is not investment, it is speculation.

Another problem of buying stocks with a good track record of growth is that they are very often expensive- after all if they are growing quickly, there are a lot of people willing to buy them. This presents another risk for the investor- He may pick shares in a fantastic company that grows its business at a fantastic over the next five years, but still not make much money.

Example

Company XYZ has a fantastic growth rate, priced at $3 per share, but has an EPS (Earnings per Share) of only 11p, giving it a P/E ratio of 27. This high P/E ratio is largely due to this companies past growth record, and its positive outlook for the future. Lets imagine XYZ’s earnings grow at 12% per year for the next five years- a fantastic growth rate. Now EPS would be about 19.4 pence per share. If the market still valued the share at 27 times earnings then your shares might be worth $5.23- not bad at all.

However it is probably very unlikely the market will value it at 27 times earnings, as the high multipier was largely due to the expected period of long growth. Lets say that after this period the company is finding expansion harder (As companies get larger high growth rates are far more difficult to obtain), and therefore the market values it at 17 times earnings- still a fairly high ratio, then your shares might be worth $3.30- a ten percent return over five years would seen pathetic considering you had invested in company that had performed brilliantly.

Trading currencies has been a method of making money, ever since currencies came into existence. But in the past, the major currency trading market, known as Forex was not available for everyone as it is now. It was restricted only for the major players such as banks and other financial institutions. Well, this is all history, because now you have the chance to enter this market with as minimum as $250, through the various online broker companies offering mini-accounts.

Software platforms vary, but there several forex currency pairs that dominate the market. Now remember that in this business, it’s all about currency pairs – USD/EUR, USD/JPN, USD/GPB, USD/CHF, and practically all types of combinations of the various currencies in the world. In the world of forex, you work with forex currency pairs. You buy one currency by selling another, for example you buy Euro by selling your US dollars, with the obvious idea of the Euro climbing against the dollar, so at the end of the day, you will be able to get more USD when you sell your EUR. In the context of all those currency pairs, the ones that truly dominate the market, and are responsible for about 80% of all transactions are the so called “major pairs” – Euro vs U.S. Dollar, US Dollar vs Japanese Yen, US Dollar vs Swiss Franc, and US Dollar vs British Pound.

currencyCertain Forex currency trading strategies can be applied to increase your chances of success, but nevertheless, we are talking about chances here. Risk is always a factor on the FX market. Therefore, you must be responsible. Lots of money could be made and lost at the same time, if things go in the wrong direction. Investors make assumptions, analysis, charts, trust their intuition, but the bottom line is that no trading system is perfect and unexpected events can occur all the time, such as the Katrina hurricane, or 9/11. Such events affect the market and the values of certain currencies. The forex currency pairs are influenced by political and economical factors. Interest rates and inflation rates are part of the economical aspect. Sometimes, entire governments make deals on the Forex market in order to change the value of their national currency. For example, the US government often employs a policy of keeping the USD low vs the EUR (the dollar is dropping against the euro) so that in Europe, goods produced in the US can be cheaper, and therefore, more demanded on the European market.

An interesting term that you will often hear is “leverage”. The leverage allows you to operate with cash much larger than you actually in your account. If the leverage on your account is 10:1, that means that with $250 you virtually have $2500 to buy and sell with.