Saturday, September 8, 2007

Forex Review: Taking Stock

The weekend is a good time to review what happened during the last week, take a look at long term charts, and to think about new trading strategies for the future.

As a relative newcomer to the game I'm taking my first good look at the idea of rollover. Basically, when you make a trade, it doesn't really involve your own money. You borrow one currency (the base currency) to exchange it for another (the quote currency). The margin deducted from your account for the trade can be thought of as extra money to ensure you can afford to buy back enough quote currency to pay back the original base currency lender.

Anyway, without getting into the details of timing, you pay interest on the currency you borrowed and earn interest on the currency you bought. If there is a difference in interest rates, and their often is, you can earn revenue for as long as you hold onto the quote currency. Of course, the reverse is also true, such that you could be making net interest payments too.

As for trading strategies, looking at the long term charts shows me that there is a lot of uncertainty and volatility in the markets these days. This spells risk. Times are dangerous. I've seen it suggested that now is a good time not to risk trading on the Forex if you are an inexperienced trader. This isn't going to stop me from playing with my tiny account though.

Personally, I'm looking at the USDJPY as a source of opportunity. Yes, as you know, opportunity is a synonym for risk in the arena of investment and speculation. The question is, how low can the USDJPY really sink? Is there going to be a fundamental change in the financial status of Japan with respect to the USA? As always, you have to consider your ability to stay in a position that doesn't move in the direction you want, and how much risk to your capital you are willing to allow.

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