Forex and Money Guide

Investment and get more guide to do more

noreply@blogger.com (Tattoo) — Thu, 26 Feb 2009 02:25:00 +0000

you can get money by your money, it call investment.

do investment by online and real investment.

online investment

online investment is one investment that you can not see the real business that run but you can get analysis from other people opinion by seach engine

Real investment

You can visit and see what this going on and decided what you want.

What is you prefer?

I think to get more option you need try online investment but be aware, there are many scam.

You need to find out more info and other people opinion about the business they run.
I think it is a hard and you will get more difficultness especially if you are beginner. if you have decided to go to online investment, the first time you need to joint some foru or social bookmarking and try to find people who run this business or people who have do this investment.

get more opinion from different people and other side. here you have an option by search engine stuff.
find to search what business you try to go to invest.

it is very important to do because here in internet have many scammer around. and you never know when they scam and when they do business.

so search in this blog and find answer.

Getting Started In Forex Options

noreply@blogger.com (Tattoo) — Sat, 21 Feb 2009 08:57:00 +0000

Many people think of the stock market when they think of options; however, the foreign exchange market also offers the opportunity to trade these unique derivatives. Options give retail traders many opportunities to limit risk and increase profit. Here we discuss what options are, how they are used, and which strategies you can use to profit.

Types of Forex Options

There are two primary types of options available to retail FOREX traders. The most common is the traditional call/put option, which works much like the respective stock option. The other alternative is single payment option trading--or SPOT--which gives traders more flexibility.

Traditional Options
Traditional options allow the buyer the right but not the obligation to purchase something from the option seller at a set price and time. For example, a trader might purchase an option to buy two lots of EUR/USD at 1.3000 in one month; such a contract is known as a "EUR call/USD put." (Keep in mind that, in the options market, when you buy a call, you buy a put simultaneously--just as in the cash market you buy one currency and simultaneously sell another.)

If the price of EUR/USD is below 1.3000, the option expires worthless, and the buyer loses only the premium. On the other hand, if EUR/USD skyrockets to 1.4000, then the buyer can exercise the option and gain two lots for only 1.3000, which can then be sold for profit.

Since FOREX options are traded over-the-counter (OTC), traders can choose the price and date on which the option is to be valid and then receive a quote stating the premium they must pay to obtain the option.

There are two types of traditional options offered by brokers:

American-style – This type of option can be exercised at any point up until expiration.
European-style – This type of option can be exercised only at the time of expiration.

One advantage of traditional options is that they have lower premiums than SPOT options. Also, because (American) traditional options can be bought and sold before expiration, they allow for more flexibility. On the other hand, traditional options are more difficult to set and execute than SPOT options. (For a detailed introduction to options, see Options Basics Tutorial.)

Single Payment Options Trading (SPOT)
Here is how SPOT options work: the trader inputs a scenario (for example, "EUR/USD will break 1.3000 in 12 days"), obtains a premium (option cost) quote, and then receives a payout if the scenario takes place. Essentially, SPOT automatically converts your option to cash when your option trade is successful, giving you a payout. Many traders enjoy the additional choices (listed below) that SPOT options give traders. Also, SPOT options are easy to trade: it's a matter of entering the scenario and letting it play out.

If you are correct, you receive cash into your account. If you are not correct, your loss is your premium. Another advantage is that SPOT options offer a choice of many different scenarios, allowing the trader to choose exactly what he or she thinks is going to happen. A disadvantage of SPOT options, however, is their higher premiums. On average, SPOT option premiums cost more than standard options.
Why Trade Options?
There are several reasons why options in general appeal to many traders:

-Your downside risk is limited to the option premium (the amount you paid to purchase the option).
-You have unlimited profit potential.
-You pay less money up front than for a spot (cash) FOREX position.
-You get to set the price and expiration date. (These are not predefined like those of options on futures.)
-Options can be used to hedge against open spot (cash) positions in order to limit risk.
-Without risking a lot of capital, you can use options to trade on predictions of market movements before fundamental events take place (such as economic reports or meetings).
SPOT options allow you many choices:

Standard options.
One-touch SPOT – You receive a payout if the price touches a certain level.
No-touch SPOT – You receive a payout if the price doesn't touch a certain level.
Digital SPOT – You receive a payout if the price is above or below a certain level.
Double one-touch SPOT – You receive a payout if the price touches one of two set levels.
Double no-touch SPOT – You receive a payout if the price doesn't touch any of the two set levels. So, why isn't everyone using options? Well, there also are a few downsides to using them:

-The premium varies according to the strike price and date of the option, so the risk/reward ratio varies.
-SPOT options cannot be traded: once you buy one, you can't change your mind and then sell it.
-It can be hard to predict the exact time period and price at which movements in the market may occur.
-You may be going against the odds. (See the article Do Option Sellers Have A Trading Edge?)

Options Prices
Options have several factors that collectively determine their value:
-Intrinsic value - This is how much the option would be worth if it were to be exercised right now.

The position of the current price in relation to the strike price can be described in one of three ways:

"In the money" - This means the strike price is higher than the current market price.
"Out of the money" – This means the strike price is lower than the current market price.
"At the money" – This means the strike price is at the current market price.
The time value - This represents the uncertainty of the price over time. Generally, the longer the time, the higher premium you pay because the time value is greater.
Interest rate differential - A change in interest rates affects the relationship between the strike of the option and the current market rate. This effect is often factored into the premium as a function of the time value.

-Volatility - Higher volatility increases the likelihood of the market price hitting the strike price within a limited time period. Volatility is factored into the time value. Typically, more volatile currencies have higher options premiums.

How It Works – A Scenario Say it's January 2, 2004, and you think that the EUR/USD (euro vs. dollar) pair, which is currently at 1.3000, is headed downward due to positive U.S. numbers; however, there are some major reports coming out soon that could cause significant volatility. You suspect this volatility will occur within the next two months, but you don't want to risk a cash position, so you decide to use options.

You then go to your broker and put in a request to buy a EUR put/USD call, commonly referred to as a "EUR put option," set at a strike price of 1.2900 and an expiry of March 2, 2004. The broker informs you that this option will cost 10 pips, so you gladly decide to buy.

This order would look something like this:
Buy: EUR put/USD call
Strike price: 1.2900
Expiration: 2 March 2004
Premium: 10 USD pips
Cash (spot) reference: 1.3000
Say the new reports come out and the EUR/USD pair falls to 1.2850--you decide to exercise your option, and the result gives you 40 USD pips profit (1.2900 – 1.2850 – 0.0010).

Option Strategies
Options can be used in a variety of ways, but they are usually used for one of two purposes:

-to capture profit or
-to hedge against existing positions.

Profit Motivated Strategies
Options are a good way to profit while keeping the risk down--after all, you can lose no more than the premium! Many FOREX traders like to use options around the times of important reports or events, when the spreads and risk increase in the cash FOREX markets. Other profit-driven FOREX traders simply use options instead of cash because options are cheaper. An options position can make a lot more money than a cash position in the same amount.

Hedging Strategies
Options are a great way to hedge against your existing positions to decrease risk. Some traders even use options instead of or together with stop-loss points. The primary advantage of using options together with stops is that you have an unlimited profit potential if the price continues to move against your position.

Conclusion
Although they can be difficult to use, options represent yet another valuable tool that traders can use to profit or lower risk. Options in FOREX are especially prevalent during important economic reports or events that cause significant volatility (when cash markets have high spreads and uncertainty). Below are some brokers that offer options services:

Energy Costs Push Up Consumer Prices in January

noreply@blogger.com (Tattoo) — Fri, 20 Feb 2009 18:49:00 +0000

Inflation crept back into the economy last month as consumer prices rose slightly after three months of declines, the government said Friday. The increase came as a steep slide in oil prices ended, lifting the cost of gasoline, energy and transportation

But analysts expect that the sharp downturn in the economy will probably keep inflation pressures in check in the months ahead. Indeed, prices in January were flat from a year ago, and economists said prices could continue to tumble as unemployment surges and spending weakens.

The Labor Department reported that the Consumer Price Index for January rose a seasonally adjusted 0.3 percent after a decline of 0.8 percent in December. The index measures how much consumers pay for a range of goods and services, from hotel rooms and cars to rent and clothing.
The so-called core rate of inflation, which excludes volatile food and energy costs, rose 0.2 percent, slightly more than economists’ expectations.

“A bit of inflation is encouraging,” said Mark Zandi, chief economist at Moody’s Economy.com. “It means businesses aren’t completely giving up and slashing prices. The fact that they can at least hold the line on their price cuts is a positive.”

The rise in consumer prices came a day after the government reported that wholesale prices halted five months of declines to rise a larger-than-expected 0.8 percent in January. Slumping oil prices hit a plateau last month, and gasoline prices jumped 15 percent.
“The boost to purchasing power from falling energy prices is basically over,” the chief economist at T. Rowe Price, Alan Levenson, said.

The average price of a gallon of gasoline fell from its summertime highs of $4.11 to less than $1.70 this winter as the price of oil collapsed. But as oil’s drop from above $145 hit a plateau near $35 to $40 a barrel, the price of gasoline has edged back to $2 a gallon as stockpiles fall slightly refineries cut their output because of lower demand.

In January, retail gasoline prices rose 6 percent while transportation costs rose 1.3 percent, their first increase since July, the government reported.

The cost of airfare, however, fell 2.1 percent last month as business and leisure travelers continued to cut back on far-flung vacations and business trips.

Consumer prices were flat in August and September and then dropped sharply in the last three months of 2008 as the credit crisis erupted, deepening a broad downturn. As consumers slashed their spending and businesses cut jobs, orders and output, prices fell at an annualized rate of 12.7 percent from October through December.

Most declines in consumer prices came from a collapse in crude oil prices, which fell from around $145 a barrel in July to $35 to $40 a barrel.

Retailers also slashed their prices during the holiday season, hoping that discounts of 70 percent and offers of free merchandise would lure reluctant customers to spend and help clear excess inventories of sweaters, flat-screen televisions and stereos.

For economists and policy makers, months of slumping consumer prices raised the specter that the economy was flirting with deflation, a downward spiral of falling prices, falling employment and lower economic growth. The so-called core rate of inflation, which excludes volatile food and energy costs, was minus 0.1 percent in October and flat in November and December.

“The Fed will not take kindly to a world in which the unemployment rate is rapidly increasing and yet core inflation has collapsed to zero,” said Abiel Reinhart, an economist at JPMorgan Economic Research. “They may act more aggressively.”

The Federal Reserve has cut interest rates to nearly zero, and it has signaled that it will print more money to try to right the economy. Several members of the Fed’s Open Market Committee, worried that the country was heading into a period of “excessively low inflation,” and some committee members saw a risk of deflation, according to the minutes of its most recent meeting, in late January.

The Fed cut its inflation outlook for the year to a range of 0.3 to 1 percent, from an earlier estimate of 1.3 to 2 percent.

Economic Concerns Send Global Shares Lower

noreply@blogger.com (Tattoo) — Fri, 20 Feb 2009 18:42:00 +0000

Fears that the country’s largest banks could be nationalized swamped Wall Street on Friday, pummeling stock markets and sending financial shares sharply lower. Bank of America fell near $3 a share, and Citigroup fell below $2.

As the recession drags on and banking losses pile up, investors are getting more concerned that the Obama administration could step in and take over some large banks, effectively wiping out stockholders, analysts said. Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, told Bloomberg Television that a short-term nationalization might be necessary.

“I don’t welcome that at all, but I could see how it’s possible it may happen,” Mr. Dodd said. “I’m concerned that we may end up having to do that, at least for a short time.”
In a signal of growing investor fear, the price of gold rose above $1,000 an ounce as investors ran for cover in a metal thought to have intrinsic value.

The same could not be said for bank stocks. The financial sector fell 7 percent overall while Bank of America, Citigroup and Wells Fargo all fell by 20 percent or more. Troubled regional banks were hammered as well, with of Ohio-based Fifth Third Bancorp flirting with $1 a share.
And analyst said that worries are likely to keep growing absent a step-by-step plan from the government that addresses the billions of troubled mortgage-related assets on banks’ balance sheets.

“All these banks are becoming insolvent,” said David Kovacs, chief investment officer of quantitative strategies at Turner Investment Partners. “These banks are undercapitalized. What they have on their balance sheets is bad debt. They don’t have the cash to lend. There is no solution, and time is hurting these entities.”

At 1:30 p.m., the Dow Jones industrial average was down 190 points to 7,276, while the broader Standard & Poor’s 500-stock index was off 2.8 percent. The technology-heavy Nasdaq was down 1.5 percent. The Dow was on track to close at its lowest levels in a decade.
“You can look at everybody’s trading screen and see nothing but red,” said Tim Smalls, head of United States stock trading at Execution LLC in Greenwich, Conn.
The slide in stocks came one day after the Dow Jones industrial average recorded its lowest close in six years, stock markets around the globe churned lower, and investors ran for cover in investments like gold and Treasury debt.

Markets in Asia and Europe closed lower on more glum economic data and a round of disappointing corporate news, including the bankruptcy filing of the automaker, Saab. The FTSE 100 in London fell 3.2 percent while the DAX in Frankfurt slid 4.8 percent. The CAC 40 in Paris fell 4.2 percent.

“We thought the low points of last fall were behind us, but we seem to be in for more disappointments,” said Vincent Juvyns, a strategist at ING Investment in Brussels. “The markets have lost all sense of direction, which makes it hard to take a position.”
Jean-Claude Trichet, president of the European Central Bank, said Friday that markets were experiencing an “ongoing correction,” but he would not put a timetable on when the crisis might lessen.

“We have to be very cautious in qualifying the duration,” Mr. Trichet told the European American Press Club.

The Labor Department reported that consumer prices had increased 0.3 percent in January, rising for the first time since July. The increase eased fears that the American economy was heading into a deflationary spiral of lower prices and lower economic growth, but consumer prices remained flat year-over-year, a sign of continuing pressure on prices as the recession deepens.

“It’s not terrible to see a break in the disinflationary spiral we’re in even if such a break is only temporary,” Dan Greenhaus, an analyst with the equity strategy group of Miller Tabak & Company, wrote in a note.

Asia saw a less dramatic sell-off, led by the Kospi index in South Korea, which fell 3.72 percent dragged down by financial and industrial stocks. In Japan, the Nikkei 225 slipped 1.6 percent, with equities in banks, retail and communications falling furthest. The Hang Seng in Hong Kong dropped 2.49 percent, with financials there also seeing the heaviest losses.

Currency in Poland Falls Amid Eurozone Fears

noreply@blogger.com (Tattoo) — Thu, 19 Feb 2009 16:03:00 +0000

Poland, despite being a member of the European Union and having one of the healthiest economies of the post-communist countries has yet to join the European Single Currency - the Euro. The country was due to join the Euro in 2012 but this is now being called into question by the Polish Central Bank. On Monday the country's current currency, the Polish zloty, hit its weakest level since the country joined the EU. According to the central bank, entering the ERM-II phase - a two year process which tests the stability of a currency before entering the eurozone - would be hard to support at this stage.

In 2009, the zloty has fallen 14 per cent against the euro and has been placed under increasing pressure by the hesitation of the central bank. Fears have grown over strict levels of lending in Poland - can the country finance the deficit in current accounts? The country is also heavily export dependent, which in the current sharp global growth slowdown means there is likely to be further concerns over the Polish economy. Only on Monday, Japan - the world's second largest economy - reported that their economy has contracted the most since the oil crisis of 1974. Last week, the eurozone experienced its own sharp fall in GDP. These and other growing fears for the global economy have given rise to a demand for the dollar as a haven which has seen it grow to highs not seen in months.

Meanwhile the Australian dollar fell to $0.6511 against the dollar and Y59.71 against the Japanese yen. Australian relies on Japan's imports and the bad news coming from the latter country on Monday increased pressure on the Australian dollar.

Over in the UK, the pound recovered to $1.4250 against the dollar and £0.8970 against the euro after last week's sharp drop. Overall, in the past 6 months the pound has fallen by nearly 30 per cent against the dollar, over 20 per cent against the euro and by 55 per cent against the yen. It has been a very rough ride for the pound indeed, and last week's drop was blamed partially for the news that European finance ministers planned to attack Chancellor Alistair Darling for his method of dealing with the currency slide. Another factor which might have affected the falls would be the fact that Lloyds announced a huge loss of £8.5 bn for its HBOS unit. The merger between the two banks was finalised in January, with the government owning a 43 per cent share.

Bank of England To "Print" New Money

noreply@blogger.com (Tattoo) — Thu, 19 Feb 2009 15:59:00 +0000

The Bank of England has reached its limit. Having been one of the most aggressive in the fight to beat recession over the past months, with interest rates now at the low point of 1%, they are now planning even more drastic measures.
In a bid to jump-start growth in the UK economy, the Bank is now set - by a 8 - 1 vote - to begin a process known as 'quantitative easing' (or QE). In very simple terms, this is the modern equivalent of printing fresh money in order to boost the cash and credit flow. The hope is that it by putting more cash into the economy, there is more for companies to spend - and more for the banks to lend.
This is the first time in 30 years that the Bank has taken such measures, and the Governor, Mervyn King, has already taken final steps to ask permission from the Chancellor for the go-ahead.
So how does quantitative easing work? What the Bank will do is buy corporate and government bonds from financial institutions for fresh supplies of sterling. Of course there are critics of the Bank's latest decision. There are many who feel that to enter QE would be irresponsible, and that the pound would suffer to new depths. There has already been mention of the situation in Zimbabwe where hyperinflation has been prevalent in light of money printing action. Some have even recalled the days of the Weimar Republic and even as far back as the reign of Henry VIII, when inflation took hold of the country.

Another danger of QE is the effect on a country's currency. The pound has already dropped on the news - who wants to hold a currency that is going to reduce in value through an increase in supply and inflation? Some are advising to invest in the foreign market, and any outsiders with holdings in sterling to get rid of them as soon as possible. Not a good sign for the pound in the time to come.

But the Bank is set to take every measure possible in order to prevent a sustained period of deflation, which could only prolong the already deep recession. What has hitherto been referred to as an 'unconventional' measure is now being pushed as the only course of action - and only time will tell if it is a reckless action or one that will avert further disaster.

Analyst Recommendations: Do Sell Ratings Exist?

noreply@blogger.com (Tattoo) — Wed, 18 Feb 2009 12:00:00 +0000

Ever tried to decipher an equity research report? If so, you are likely familiar with the ratings used by analysts (such as buy, hold, accumulate, outperform/underperform, accumulate, neutral, overweight, etc.) to sum up their opinion of a stock. What do these terms actually mean? Most investors just want to know whether a stock is "good" or not, but how can an investment decision be reached when you practically need a dictionary to sort through the jargon
In this article, we'll look at how to decipher the analyst rating system and discuss how useful analyst ratings are for the average investor.

The Background on Analyst Reports A research analyst is a financial professional who researches investments and makes recommendations. Most people think of analysts as equity analysts, who, as the name implies, research stocks (equities). In fact, analysts analyze everything from bonds to derivatives. In this article we'll be talking about equity analysts.

Analysts release their findings in research reports, which can be anything from one- or two-page summaries to detailed documents that are dozens of pages long.

An analyst report will generally contain the following items:

-A detailed description of the company and its industry including relevant financial numbers.

-An opinionated thesis explaining why the analyst believes the company will succeed or fail.

-A target price for the stock over the next year (or two).

-A recommendation or rating.

Most analysts put plenty of work into these reports, often traveling to the company's headquarters and getting a first-hand tour of operations. (For related reading, see Three Kinds Of Analysts And What You Need To Know About Them.)

Not All Ratings Are Created Equal

The bulk of an analyst's work is contained in the body of the research report. Despite this, the rating gets the lion's share of attention. It's easy to understand why: ratings are the sexy sound bites that can be easily repeated in the financial media. Plus, most investors don't have the time to sit down and read through a 20-page report.

The problem is that ratings scales are not uniform across Wall Street. At one brokerage "buy" may be the strongest recommendation, while at another, "buy" could be second to a "strong buy" rating. The second-highest ratings also have a number of different other names: "accumulate", "outperform", "moderate buy" or "overweight". A similar mix of terms appears further down the scale as the ratings become more negative. Finally, some brokerages use a number system to indicate their rating on a stock.

The chart below shows an approximation of where ratings fit in relation to each other:

Buy, Buy, Buy

Even greater cause for concern than the complicated system of terms is the tendency of ratings to be buys (or at least positive). The reasons for this are ingrained in how the financial industry works.
The causes for the popularity of buy ratings are found in the relationships that result when brokerages provide investment banking services to large corporations. The bad news for retail investors is that the investment banking side of the business is very lucrative for brokerages. Their desire to please their investment-banking client creates a huge conflict of interest. Issuing negative research on the stocks of their own corporate clients may cost brokerages profitable business. In other words, a brokerage firm would rather be wrong on any buy/sell recommendation than be right and lose a corporate client. (For more on this, see Research Report Red Flags.)

The stake in issuing buy ratings is especially high when a brokerage firm is underwriting a company's offering of securities. Think of it this way: if a large brokerage just finished underwriting a technology company's IPO, would it seem logical for the brokerage's analyst to put a poor rating (such as a sell or market-underperform) on the stock? Of course not! A sell rating might even cost the analyst his or her job.

Other key sources of revenue in the financial industry are the fees and commissions brokerages charge to execute customer orders. Research reports touting the fabulous things to come for stocks can indirectly increase sales for a brokerage as clients buy more stock.

Also remember that analysts are human too. Conflicts can form when an analyst covers a company in which he or she, or friends and family, owns stock. An analyst's disincentive to put his or her own portfolio at risk could affect a decision about whether to release negative news.
We should mention that on May 10, 2002, the Securities and Exchange Commission made changes to the rules that govern some of the conflicts of interest we've mentioned here. Changes were meant to protect individual investors in the wake of some of the analyst scandals following the dotcom meltdown. Some say the changes have resolved much of the problems; others say you can never completely free research from conflicts of interest.

What Good Are Analyst Reports?

We've discussed the numerous terms analysts use to rate stocks and why they so often reflect positively on companies. When you add all this up, does a buy rating mean you should purchase the stock? Probably not.

Realize that research reports and ratings are not meant to advise you personally. You’d think that the meanings of terms such as "buy" or "sell" are straightforward. Actually, firms emphasize that ratings are not advice and that investment decisions should not be made solely on an analyst rating. (Perhaps this helps explain part of the confusion in the differing rating scales.)

This disclaimer isn't a complete cop-out from the brokerage industry. Any decision to invest in a company is based not just on analysis of the stock but also on the investor's personal situation and strategy. A strong-buy rating for one investor might be a sell for another. A young executive might be totally comfortable with a risky high-tech stock that would be a terrible investment for a 90-year-old widower. Generally, you'd sit down with a financial planner to determine your risk tolerance, time horizon, asset allocation and so forth. The analyst doesn't know any of this information and thus can't make recommendations directly to you.

Conclusion

Although the analyst's rating is probably the most quoted part of a report, it may be the least useful. As a general rule, don't invest your money based solely on these recommendations.

This doesn't mean that analyst reports are useless. Research reports can contain some great information, but use them only as a source of data that complements your research, rather than completes it.

Working Through The Efficient Market Hypothesis

noreply@blogger.com (Tattoo) — Wed, 18 Feb 2009 11:54:00 +0000

An important debate among stock market investors is whether the market is efficient - that is, whether it reflects all the information made available to market participants at any given time.

The efficient market hypothesis (EMH) maintains that all stocks are perfectly priced according to their inherent investment properties, the knowledge of which all market participants possess equally. At first glance, it may be easy to see a number of deficiencies in the efficient market theory, created in the 1970s by Eugene Fama. At the same time, however, it's important to explore its relevancy in the modern investing environment. (To read more on behavioral finance, see Taking A Chance On Behavioral Finance, Understanding Investor Behavior and Mad Money ... Mad Market?)

Financial theories are subjective. In other words, there are no proven laws in finance, but rather ideas that try to explain how the market works. Here we'll take a look at where the efficient market theory has fallen short in terms of explaining the stock market's behavior.

EMH Tenets and Problems
First, the efficient market hypothesis assumes that all investors perceive all available information in precisely the same manner. The numerous methods for analyzing and valuing stocks pose some problems for the validity of the EMH. If one investor looks for undervalued market opportunities while another investor evaluates a stock on the basis of its growth potential, these two investors will already have arrived at a different assessment of the stock's fair market value. Therefore, one argument against the EMH points out that, since the balance of investors value stocks differently, it is impossible to ascertain what a stock should be worth under an efficient market.

Secondly, under the efficient market hypothesis, no single investor is ever able to attain greater profitability than another with the same amount of invested funds: their equal possession of information means they can only achieve identical returns. But consider the wide range of investment returns attained by the entire universe of investors, investment funds and so forth. If no investor had any clear advantage over another, would there be a range of yearly returns in the mutual fund industry from significant losses to 50% profits, or more? According to the EMH, if one investor is profitable, it means the entire universe of investors is profitable. In reality, this is not necessarily the case.

Thirdly (and closely related to the second point), under the efficient market hypothesis, no investor should ever be able to beat the market, or the average annual returns that all investors and funds are able to achieve using their best efforts. (For more reading on beating the market, see the frequently asked question What does it mean when people say they "beat the market"? How do they know they've done so?) This would naturally imply, as many market experts often maintain, that the absolute best investment strategy is simply to place all of one's investment funds into an index fund, which would increase or decrease according to the overall level of corporate profitability or losses. There are, however, many examples of investors who have consistently beat the market - you need look no further than Warren Buffett to find an example of someone who's managed to beat the averages year after year. (To learn more about Warren Buffett and his style of investing, see Warren Buffett: How He Does It and The Greatest Investors.)

Qualifying the EMH
Eugene Fama never imagined that his efficient market would be 100 per cent efficient all the time. Of course, it's impossible for the market to attain full efficiency all the time, as it takes time for stock prices to respond to new information released into the investment community. The efficient hypothesis, however, does not give a strict definition of how much time prices need to revert to fair value. Moreover, under an efficient market, random events are entirely acceptable but will always be ironed out as prices revert to the norm.

It is important to ask, however, whether EMH undermines itself in its allowance for random occurrences or environmental eventualities. There is no doubt that such eventualities must be considered under market efficiency but, by definition, true efficiency accounts for those factors immediately. In other words, prices should respond nearly instantaneously with the release of new information that can be expected to affect a stock's investment characteristics.

So, if the EMH allows for inefficiencies, it may have to admit that absolute market efficiency is impossible.
Increasing Market Efficiency?Although it is relatively easy to pour cold water on the efficient market hypothesis, its relevance may actually be growing. With the rise of computerized systems to analyze stock investments, trades and corporations, investments are becoming increasingly automated on the basis of strict mathematical or fundamental analytical methods. Given the right power and speed, some computers can immediately process any and all available information, and even translate such analysis into an immediate trade execution.

Despite the increasing use of computers, however, most decision-making is still done by human beings and is therefore subject to human error. Even at an institutional level, the use of analytical machines is anything but universal. While the success of stock market investing is based mostly on the skill of individual or institutional investors, people will continually search for the surefire method of achieving greater returns than the market averages.

Conclusion
It's safe to say the market is not going to achieve perfect efficiency anytime soon.

For greater efficiency to occur, the following criteria must be met:

-universal access to high-speed and advanced systems of pricing analysis,
-a universally accepted analysis system of pricing stocks,
-an absolute absence of human emotion in investment decision-making,
-the willingness of all investors to accept that their returns or losses will be exactly identical to all other market parti

The Importance of Time Value

noreply@blogger.com (Tattoo) — Wed, 18 Feb 2009 11:23:00 +0000

Most investors and traders new to options markets prefer to buy calls and puts because of their limited risk and unlimited profit potential. Buying puts or calls is typically a way for investors and traders to speculate with only a fraction of their capital. But these straight option buyers miss many of the best features of stock and commodity options - such as the opportunity to turn time-value decay into potential profits.

When they establish a position, option sellers collect time-value premiums, paid by option buyers. Rather than struggling against the ravages of time value, the option seller can benefit from the passage of time, and time-value decay becomes money in the bank even if the underlying is stationary. For option writers (sellers), time-value decay thus becomes an ally instead of a foe. If you have ever sold covered calls against stock positions, you can appreciate the beauty of selling time value.

In this article I focus on the importance of time value in the option-pricing equation. But before turning to a detailed look at the phenomenon of time value and time-value decay, let's review some basic option concepts that will make it easier for you to understand what we mean by time value.

Depending on where the underlying price is in relation to the option strike price, the option can be in, out or at the money. Let's look at this relationship while keeping in mind our central focus on time value.

When we say an option is at the money, we mean the strike price of the option is equal to the current price of the underlying stock or commodity. When the price of a commodity or stock is the same as the strike price (also known as the exercise price) it has zero intrinsic value, but it also has the maximum level of time value compared to that of all the other option strike prices for the same month.

Exhibit 1 provides a table of possible positions of the underlying in relationship to an option's strike price.

As can be seen in exhibit 1 above, when a put option is in the money, the underlying price is less than the option strike price. For a call option, 'in the money' means that the underlying price is greater than the option strike price. For example, if we have an S&P 500 call with a strike price of 1100 (an example we will use to illustrate time value below), and if the underlying stock index at expiration closes at 1150, the option will have expired 50 points in the money (1150 - 1100 = 50).

In the case of a put option at the same strike price of 1100 and the underlying at 1050, the option at expiration also would be 50 points in the money (1100 -1050 = 50). For out-of-the-money options, the exact reverse applies. That is, to be out of the money, the put's strike would be less than the underlying price, and the call's strike would be greater than the underlying price.

Finally, both put and call options would be at the money when the strike price and underlying expire at the exact same price. While we are referring here to the position of the option at expiration, the same rules apply at any time before the options expire.

With these basic relationships in mind, let's now take a closer look at time value and the rate of time-value decay (represented by theta, from the Greek alphabet).

If we leave volatility aside for now, the time-value component of an option, also known as extrinsic value, is a function of two variables:

(1) time remaining until expiration and

(2) the closeness of the option strike price to the money.

All other things remaining the same (i.e. no changes in the underlying and volatility levels), the longer the time to expiration, the more value the option will have in the form of time value. But this level is also affected by how close to the money the option is.

For example, two call options with the same calendar month expiration (i.e. both having the same time remaining in the contract life) but different strike prices will have different levels of extrinsic value (i.e. time value).

This is because one will be closer to the money than the other.

Exhibit 2 below illustrates this concept, indicating when time-value would be higher or lower and whether or not there will be any intrinsic value (which arises when the option gets in the money) in the price of the option. As exhibit 2 indicates, deep in-the-money options and deep out-of-the-money options have little time value.

Intrinsic value increases the more in the money the option becomes. And at-the-money options have the maximum level of time value but no intrinsic value.

Time value is at its highest level when an option is at the money because the potential for intrinsic value to begin to rise is the greatest right at this point.

In exhibit 3 below, we simulate time-value decay using three at-the-money S&P 500 call options, all having the same strikes but different contract expiration dates. This should make the above concepts more tangible. Through this presentation, we are making the assumption (for simplification) that implied volatility levels remain unchanged and that the underlying is stationary. This helps us to isolate the behavior of time value. The importance of time value and time-value decay should thus become much clearer.

Taking our series of S&P 500 call options, all with an at-the-money strike price of 1100, we can simulate how time value influences an option's price. Assume the date is Feb 8. If we compare the prices of each option at a certain moment in time, each with different expiration dates (Feb, Mar and Apr), the phenomenon of time-value decay becomes evident. We can witness how the passage of time changes the value of the options.

Exhibit 3 graphically illustrates the premium for these at-the-money S&P 500 call options with the same strikes. With the underlying stationary, the Feb call option has five days remaining until expiry, the Mar call option has 33 days remaining and the Apr call option has 68 days.

As exhibit 3 shows, the highest premium is at the 68-day interval (remember prices are from Feb 8), declining from there as we move to the options that are closer to expiration (33 days and five days). Again, we are simply taking different prices at one point in time for an at-the-option strike (1100), and comparing them. The fewer days remaining translates into less time value. As you can see, the option premium declines from 38.90 to 25.70 when we move from the strike 68 days out to the strike that is only 33 days out.

The next level of the premium, a decline of 14.70 points to 11, reflects just five days remaining before expiration for that particular option. During the last five days of that option, if it remains out of the money (the S&P 500 stock index below 1100 at expiration), the option value will fall to zero, and this will take place in just five days. Each point is worth $250 on an S&P 500 option.

One important dynamic of time value decay is that the rate is not constant. As expiration nears, the rate of time-value decay (theta) increases (not shown here). This means that the amount of time premium disappearing from the option's price per day gets greater with each passing day. The concept looked at in another way in exhibit 4, the amount of days required for a $1 (1 point) decline in premium on the option will decrease as expiry nears. Looking at the exhibit, you can see that at 68 days remaining until expiration, it takes 1.75 days for a one-dollar decline in premium. But at just 33 days remaining until expiration, the time required for a one-dollar loss in premium has fallen to 1.28 days.

In the last month of the life of an option, theta increases sharply, and the days required for a one-point decline in premium falls very fast. At five days remaining until expiration, the option is losing one point in just less than half a day (.45 days). If we look again at exhibit 3, at five days remaining until expiration, this at-the-money S&P 500 call option has 11 points in premium. This means that the premium will decline by approximately 2.2 points per day.

Of course, the rate increases even more in the final day of trading, which we don't show here. ConclusionWhile there are other pricing dimensions (such as delta, gamma, and implied volatility), a look at time-value decay is a good place to start when beginning to understand how options are priced. One important dynamic of time value decay is that the rate is not constant. As expiration nears, the rate of time-value decay (theta) increases (not shown here).

This means that the amount of time premium disappearing from the option's price per day gets greater with each passing day.

The concept looked at in another way in exhibit 4, the amount of days required for a $1 (1 point) decline in premium on the option will decrease as expiry nears. Looking at the exhibit, you can see that at 68 days remaining until expiration, it takes 1.75 days for a one-dollar decline in premium. But at just 33 days remaining until expiration, the time required for a one-dollar loss in premium has fallen to 1.28 days.

If we look again at exhibit 3, at five days remaining until expiration, this at-the-money S&P 500 call option has 11 points in premium. This means that the premium will decline by approximately 2.2 points per day.

Of course, the rate increases even more in the final day of trading, which we don't show here.

Conclusion

While there are other pricing dimensions (such as delta, gamma, and implied volatility), a look at time-value decay is a good place to start when beginning to understand how options are priced.

Straddle Strategy A Simple Approach To Market Neutral

noreply@blogger.com (Tattoo) — Wed, 18 Feb 2009 10:49:00 +0000

In trading, there are numerous sophisticated trading strategies designed to help traders succeed regardless of whether the market moves up or down. Some of the more sophisticated strategies, such as iron condors and iron butterflies, are legendary in the world of options.

They require a complex buying and selling of multiple options at various strike prices. The end result is to make sure a trader is able to profit no matter where the underlying price of the stock, currency or commodity ends up.

However, one of the least sophisticated option strategies can accomplish the same market neutral objective with a lot less hassle - and it's effective. The strategy is known as a straddle. It only requires the purchase or sale of one put and one call in order to become activated. In this article, we'll take a look at different the types of straddles and the benefits and pitfalls of each.

Types of Straddles

A straddle is a strategy that is accomplished by holding an equal number of puts and calls with the same strike price and expiration dates. The following are the two types of straddle positions.

Long Straddle

- The long straddle is designed around the purchase of a put and a call at the exact same strike price and expiration date. The long straddle is meant to take advantage of the market price change by exploiting increased volatility. Regardless of which direction the market's price moves, a long straddle position will have you positioned to take advantage of it.

Short Straddle

- The short straddle requires the trader to sell both a put and a call option at the same strike price and expiration date. By selling the options, a trader is able to collect the premium as a profit. A trader only thrives when a short straddle is in a market with little or no volatility.

The opportunity to profit will be based 100% on the market's lack of ability to move up or down. If the market develops a bias either way, then the total premium collected is at jeopardy. The success or failure of any straddle is based on the natural limitations that options inherently have along with the market's overall momentum. (For more, see Option Basics Tutorial)

The Long Straddle

A long straddle is specially designed to assist a trader to catch profits no matter where the market decides to go. There are three directions a market may move: up, down or sideways. When the market is moving sideways, it's difficult to know whether it will break to the upside or downside. To successfully prepare for the market's breakout, there is one of two choices available:
-The trader can pick a side and hopes that the market breaks in that direction.

-The trader can hedge his or her bets and pick both sides simultaneously. That's where the long straddle comes in. By purchasing a put and a call, the trader is able to catch the market's move regardless of its direction. If the market moves up, the call is there; if the market moves down, the put is there. In Figure 1, we look at a 17-day snapshot of the euro market.

This snapshot finds the euro stuck between $1.5660 and $1.54.

Figure 1
Source: TradeNavigator.com

While the market looks like it may breakthrough the $1.5660 price, there is no guarantee that it will. Based on this uncertainty, purchasing a straddle will allow us to catch the market if it breaks to the upside or if it heads back down to the $1.54 level. This allows the trader to avoid any surprises.

Drawbacks to the Long StraddleThe following are the three key drawbacks to the long straddle.
Expense Risk of loss Lack of volatility The rule of thumb when it comes to purchasing options is that in-the-money and at-the-money options are more expensive than out-of-the-money options. Each at-the-money option can be worth a few thousand dollars. So while the original intent is to be able to catch the market's move, the cost to do so may not match the amount at risk.

In Figure 2 we see that the market breaks to the upside, straight through $1.5660.

Figure 1
Source: TradeNavigator.com

This leads us to the second problem: risk of loss. While our call at $1.5660 has now moved in the money and increased in value in the process, the $1.5660 put has now decreased in value because it has now moved farther out of the money. How quickly a trader can exit the losing side of straddle will have a significant impact on what the overall profitable outcome of the straddle can be. If the option losses mount quicker than the option gains or the market fails to move enough to make up for the losses, the overall trade will be a loser.

The final drawback deals with the inherent makeup of options. All options are comprised of the following two values.

Time Value

- The time value comes from how far away the option is from expiring. (For more insight, read The Importance Of Time Value.)

Intrinsic Value

- The intrinsic value comes from the option's strike price being out, in, or at the money. If the market lacks volatility and does not move up or down, both the put and call option will lose value every day. This will go on until the market either definitively chooses a direction or the options expire worthless.

The Short Straddle

The short straddle's strength is also its drawback. Instead of purchasing a put and a call, a put and a call are sold in order to generate income from the premiums. The thousands that were spent by the put and call buyers actually fill your account. This can be a great boon for any trader. The downside, however, is that when you sell an option you expose yourself to unlimited risk. (For related reading, see Options Hazards That Can Bruise Your Portfolio.)

As long as the market does not move up or down in price, the short straddle trader is perfectly fine. The optimum profitable scenario involves the erosion of both the time value and the intrinsic value of the put and call options. In the event that the market does pick a direction, the trader not only has to pay for any losses that accrue, but he or she must also give back the premium he has collected.

The only recourse that short straddle traders have is to buy back the options that they sold when the value justifies doing so. This can occur anytime during the life cycle of a trade. If this is not done, the only choice is to hold on until expiration.

When Straddles Work BestThe option straddle works best when it meets at least one of these three criteria:

-The market is in a sideways pattern.

-There is pending news, earnings or another announcement.

-Analysts have extensive predictions on a particular announcement.

-Analysts can have tremendous impact on how the market reacts before an announcement is ever made.

Prior to any earnings decision or governmental announcement analysts, do their best to predict what the exact value of the announcement will be. Analysts may make estimates weeks in advance of the actual announcement, which inadvertently forces the market to move up or down. Whether the prediction is right or wrong is secondary to how the market reacts and whether your straddle will be profitable. (For more insight, read Analyst Recommendations: Do Sell Ratings Exist?)

After the actual numbers are released, the market has one of two ways to react: The analysts' prediction can add either to or decrease the momentum of the actual price once the announcement is made. In other words, it will proceed in the direction of what the analyst predicted or it will show signs of fatigue. A properly created straddle, short or long, can successfully take advantage of just this type of market scenario. The difficulty occurs in knowing when to use a short or a long straddle.

This can only be determined when the market will move counter to the news and when the news will simply add to the momentum of the market's direction.

Conclusion

There is a constant pressure on traders to choose to buy or sell, collect premium or pay premiums, but the straddle is the great equalizer. The straddle allows a trader to let the market decide where it wants to go. The classic trading adage is "the trend is your friend".

Take advantage of one of the few times that you are allowed to be in two places at once with both a put and a call.

Finding Profit in Pairs

noreply@blogger.com (Tattoo) — Wed, 18 Feb 2009 10:28:00 +0000

Quants" is Wall Street's name for market researchers who use quantitative analysis to develop profitable trading strategies. In short, a quant combs through price ratios and mathematical relationships between companies or trading vehicles in order to divine profitable trading opportunities. During the 1980s, a group of quants working for Morgan Stanley struck gold with a strategy called the 'pairs trade'. Institutional investors and proprietary trading desks at major investment banks have been using the technique ever since, and many have made a tidy profit with the strategy.

It is rarely in the best interest of investment bankers and mutual fund managers to share profitable trading strategies with the public, so the pairs trade remained a secret of the pros (and a few deft individuals) until the advent of the Internet. Online trading opened the lid on real-time financial information and gave the novice access to all types of investment strategies. It didn't take long for the pairs trade to attract individual investors and small-time traders looking to hedge their risk exposure to the movements of the broader market.

What Is Pairs Trading?

Pairs trading has the potential to achieve profits through simple and relatively low-risk positions. The pairs trade is market-neutral, meaning the direction of the overall market does not affect its win or loss.

The goal is to match two trading vehicles that are highly correlated, trading one long and the other short when the pair's price ratio diverges "x" number of standard deviations - "x" is optimized using historical data. If the pair reverts to its mean trend, a profit is made on one or both of the positions.

An Example Using Stocks

Traders can use either fundamental or technical data to construct a pairs trading style. Our example here is technical in nature, but some traders use a P/E ratio or other fundamental factors to measure correlation and divergence.

The first step in designing a pairs trade is finding two stocks that are highly correlated. Usually that means that the businesses are in the same industry or sub-sector, but not always. For instance, index tracking stocks like the QQQQ (Nasdaq 100) or the SPY (S&P 500) can offer excellent pairs trading opportunities. Two indices that generally trade together are the S&P 500 and the Dow Jones Utilities Average. This simple price plot of the two indices demonstrates their correlation:

For our example, we will look at two businesses that are highly correlated: GM and Ford. Since both are American auto manufacturers, their stocks tend to move together.

Below is a weekly chart of the price ratio between Ford and GM (calculated by dividing Ford's stock price by GM's stock price). This price ratio is sometimes called "relative performance" (not to be confused with the relative strength index, something completely different). The center white line represents the mean price ratio over the past two years. The yellow and red lines represent one and two standard deviations from the mean ratio, respectively.

In the chart below, the potential for profit can be identified when the price ratio hits its first or second deviation. When these profitable divergences occur it is time to take a long position in the underperformer and a short position in the overachiever. The revenue from the short sale can help cover the cost of the long position, making the pairs trade inexpensive to put on. Position size of the pair should be matched by dollar value rather than number of shares; this way a 5% move in one equals a 5% move in the other. As with all investments, there is a risk that the trades could move into the red, so it is important to determine optimized stop-loss points before implementing the pairs trade.

An Example Using Futures Contracts

The pairs trading strategy works not only with stocks but also with currencies, commodities, and even options. In the futures market, "mini" contracts - smaller-sized contracts that represent a fraction of the value of the full-size position - enable smaller investors to trade in futures.

A pairs trade in the futures market might involve an arbitrage between the futures contract and the cash position of a given index. When the futures contract gets ahead of the cash position, a trader might try to profit by shorting the future and going long in the index tracking stock, expecting them to come together at some point. Often the moves between an index or commodity and its futures contract are so tight that profits are left only for the fastest of traders - often using computers to automatically execute enormous positions at the blink of an eye.

An Example Using Options

Option traders use calls and puts to hedge risks and exploit volatility (or the lack thereof). A call is a commitment by the writer to buy shares of a stock at a given price sometime in the future. A put is a commitment by the writer to sell shares at a given price sometime in the future. A pairs trade in the options market might involve writing a call for a security that is outperforming its pair (another highly correlated security), and matching the position by writing a put for the pair (the underperforming security). As the two underlying positions revert to their mean again, the options become worthless allowing the trader to pocket the proceeds from one or both of the positions.

Evidence of Profitability

In June of 1998, Yale School of Management released a paper written by Even G. Gatev, William Goetzmann, and K. Geert Rouwenhorst who attempted to prove that pairs trading is profitable. Using data from 1967 to 1997, the trio found that over a six-month trading period, the pairs trade averaged a 12% return. To distinguish profitable results from plain luck, their test included conservative estimates of transaction costs and randomly selected pairs. You can find the full 34-page document here.

Those interested in the pairs trading technique can find more information and instruction in Ganapathy Vidyamurthy's book Pairs Trading: Quantitative Methods and Analysis, which you can find here.

Conclusion

The broad market is full of ups and downs that force out weak players and confound even the smartest prognosticators. Fortunately, using market-neutral strategies like the pairs trade, investors and traders can find profits in all market conditions. The beauty of the pairs trade is its simplicity. The long/short relationship of two correlated securities acts as a ballast for a portfolio caught in the choppy waters of the overall market. Good luck with your hunt for profit in pairs trading, and here's to your success in the markets.

Trading the Odds with Arbitrage

noreply@blogger.com (Tattoo) — Wed, 18 Feb 2009 10:20:00 +0000

"I don't throw darts at a board. I bet on sure things. Read Sun-tzu, The Art of War. Every battle is won before it is ever fought." Many of you might recognize these words spoken by Gordon Gekko in the movie Wall Street. In the movie, Gekko makes a fortune as a pioneer of arbitrage. Unfortunately, such risk-free trading is not available to everyone; however, there are several other forms of arbitrage that can be used to enhance the odds of executing a successful trade.

Here we look at the concept of arbitrage, how market makers utilize "true arbitrage," and, finally, how retail investors can take advantage of arbitrage opportunities.

Concepts of Arbitrage
Arbitrage, in its purest form, is defined as the purchase of securities on one market for immediate resale on another market in order to profit from a price discrepancy. This results in immediate risk-free profit.

For example, if a security's price on the NYSE is trading out of sync with its corresponding futures contract on Chicago's exchange, a trader could simultaneously sell (short) the more expensive of the two and buy the other, thus profiting on the difference. This type of arbitrage requires the violation of at least one of these three conditions:

-The same security must trade at the same price on all markets.
-Two securities with identical cash flows must trade at the same price.
-A security with a known price in the future (via a futures contract) must trade today at that price discounted by the risk-free rate.

Arbitrage, however, can take other forms. Risk arbitrage (or statistical arbitrage) is the second form of arbitrage that we will discuss. Unlike pure arbitrage, risk arbitrage entails--you guessed it--risk. Although considered "speculation," risk arbitrage has become one of the most popular (and retail-trader friendly) forms of arbitrage.

Here's how it works: let's say Company A is currently trading at $10/share. Company B, which wants to acquire Company A, decides to place a takeover bid on Company A for $15/share. This means that all of Company A's shares are now worth $15/share, but are trading at only $10/share. Let's say the early trades (typically not retail trades) bid it up to $14/share. Now, there is still a $1/share difference--an opportunity for risk arbitrage. So, where's the risk? Well, the acquisition could fall through, in which case the shares would be worth only the original $10/share. Further below we will take a look at how you can gauge risk.

Market Makers: True Arbitrage
Market makers have several advantages over retail traders: • Far more trading capital • Generally more skill • Up-to-the-second news • Faster computers • More complex software • Access to the dealing desk • And more

Combined, these factors make it nearly impossible for a retail trader to take advantage of pure arbitrage opportunities. Market makers use complex software that is run on top-of-the-line computers to locate such opportunities constantly. Once found, the differential is typically negligible, and requires a vast amount of capital in order to profit--retail traders would likely get burned by commission costs. Needless to say, it is almost impossible for retail traders to compete in the risk-free genre of arbitrage.

Retail Traders: Risk Arbitrage
Despite the disadvantages in pure arbitrage, risk arbitrage is still accessible to most retail traders. Although this type of arbitrage requires taking on some risk, it is generally considered "playing the odds." Here we will examine some of the most common forms of arbitrage available to retail traders.

Risk Arbitrage: Takeover and Merger Arbitrage
The example of risk arbitrage we saw above demonstrates takeover and merger arbitrage, and it is probably the most common type of arbitrage. It typically involves locating an undervalued company that has been targeted by another company for a takeover bid. This bid would bring the company to its true, or intrinsic, value. If the merger goes through successfully, all those who took advantage of the opportunity will profit handsomely; however, if the merger falls through, the price may drop.

The key to success in this type of arbitrage is speed; traders who utilize this method usually trade on Level II and have access to streaming market news. The second something is announced, they try to get in on the action before anyone else.

Risk Evaluation
Let's say you aren't among the first in, however. How do you know if it is still a good deal? Well, one way is to use Benjamin Graham's risk-arbitrage formula to determine optimal risk/reward. His equations state the following:

Annual Return= CG-L(100%-C)/YP

Where:
-C is the expected chance of success (%).
-P is the current price of the security.
-L is the expected loss in the event of a failure (usually original price).
-Y is the expected holding time in years (usually the time until the merger takes place).
-G is the expected gain in the event of a success (usually takeover price).

Granted, this is highly empirical, but it will give you an idea of what to expect before you get into a merger arbitrage situation.

Risk Arbitrage: Liquidation Arbitrage
This is the type of arbitrage Gordon Gekko employed when he bought and sold off companies. Liquidation arbitrage involves estimating the value of the company's liquidation assets.

For example, say Company A has a book (liquidation) value of $10/share and is currently trading at $7/share. If the company decides to liquidate, it presents an opportunity for arbitrage. In Gekko's case, he took over companies that he felt would provide a profit if he broke them apart and sold them--a practice employed in reality by larger institutions.

Valuation
A version of Benjamin Graham's risk arbitrage formula used for takeover and merger arbitrage can be employed here. Simply replace the takeover price with the liquidation price, and holding time with the amount of time before liquidation.

Risk Arbitrage: Pairs Trading
Pairs trading (also known as relative-value arbitrage) is far less common than the two forms discussed above. This form of arbitrage relies on a strong correlation between two related or unrelated securities. It is primarily used during sideways markets as a way to profit.

Here's how it works. First, you must find "pairs." Typically, high-probability pairs are big stocks in the same industry with similar long-term trading histories. Look for a high percent correlation. Then, you wait for a divergence in the pairs between 5-7% divergence that lasts for an extended period of time (2-3 days). Finally, you can go long and/or short on the two securities based on the comparison of their pricing. Then, just wait until the prices come back together.

One example of securities that would be used in a pairs trade is GM and Ford. These two companies have a 94% correlation. You can simply plot these two securities and wait for a significant divergence; then chances are these two prices will eventually return to a higher correlation, offering opportunity in which profit can be attained. (For more on this subject, see "Finding Profit in Pairs.")

Find Opportunity
Many of you may be wondering where you can find these accessible arbitrage opportunities. The fact is much of the information can be attained with tools that are available to everyone. Brokers typically provide newswire services that allow you to view news the second it comes out. Level II trading is also an option for individual traders and can give you an edge.

Finally, screening software can help you locate undervalued securities (that have appropriate price/book ratio, PEG ratio, etc.).

There are also several paid services that locate these arbitrage opportunities for you. Such services are especially useful for pairs trading, which can involve more effort to find correlations between securities. Usually, these services will provide you with a daily or weekly spreadsheet outlining opportunities that you can utilize to profit.

Conclusion

Arbitrage is a very broad form of trading that encompasses many strategies; however, they all seek to take advantage of increased chances of success. Although the risk-free forms of pure arbitrage are typically unavailable to retail traders, there are several high-probability forms of risk arbitrage that offer retail traders many opportunities to profit.

The Greatest Currency Trades Ever Made

noreply@blogger.com (Tattoo) — Wed, 18 Feb 2009 10:03:00 +0000

The foreign exchange (forex) market is the largest market in the world because currency is changing hands whenever goods and services are traded between nations. The sheer size of the transactions going on between nations provides arbitrage opportunities for speculators, because the currency values fluctuate by the minute.

Usually these speculators make many trades for small profits, but sometimes a big position is taken up for a huge profit or, when things go wrong, a huge loss. In this article, we'll look at the greatest currency trades ever made.

How the Trades Are Made

First, it is essential to understand how money is made in the forex market. Although some of the techniques are familiar to stock investors, currency trading is a realm of investing in and of itself. A currency trader can make one of four bets on the future value of a currency:

-Shorting a currency means that the trader believes that the currency will go down compared to another currency.

-Going long means that the trader thinks the currency will increase in value compared to another currency.

-The other two bets have to do with the amount of change in either direction - whether the trader thinks it will move a lot or not much at all - and are known by the provocative names of strangle and straddle. (For details on those strategies, read Get A Strong Hold On Profit With Strangles and Straddle Strategy A Simple Approach To Market Neutral.)

Once you're decided on which bet you want to place, there are many ways to take up the position. For example, if you wanted to short the Canadian dollar (CAD), the simplest way would be to take out a loan in Canadian dollars that you will be able to pay back at a discount as the currency devalues (assuming you're correct).

This is much too small and slow for true forex traders, so they use puts, calls, other options and forwards to build up and leverage their positions. It's the leveraging in particular that makes some trades worth millions, and even billions, of dollars. (For more on the mechanics of the forex market, see our Forex Tutorial and Getting Started In Forex.)

No. 3: Andy Krieger Vs. The Kiwi

In 1987, Andy Krieger, a 32-year-old currency trader at Bankers Trust, was carefully watching the currencies that were rallying against the dollar following the Black Monday crash. As investors and companies rushed out of the American dollar and into other currencies that had suffered less damage in the market crash, there were bound to be some currencies that would become fundamentally overvalued, creating a good opportunity for arbitrage. The currency Krieger targeted was the New Zealand dollar, also known as the kiwi.

Using the relatively new techniques afforded by options, Krieger took up a short position against the kiwi worth hundreds of millions. In fact, his sell orders were said to exceed the money supply of New Zealand. The kiwi dropped sharply as the selling pressure combined with the lack of currency in circulation. It yo-yoed between a 3% and 5% loss while Krieger made millions for his employers.

One part of the legend recounts a worried New Zealand government official calling up Krieger's bosses and threatening Bankers Trust to try to get Krieger out of the kiwi. Krieger later left Bankers Trust to go work for George Soros. (For more on how this works, see Trading The Odds With Arbitrage.)

No. 2: Stanley Druckenmiller Bets on the Mark - Twice

Stanley Druckenmiller made millions by making two long bets in the same currency while working as a trader for George Soros' Quantum Fund.

Druckenmiller's first bet came when the Berlin Wall fell. The perceived difficulties of reunification between East and West Germany had depressed the German mark to a level that Druckenmiller thought extreme. He initially put a multimillion-dollar bet on a future rally until Soros told him to increase his purchase to 2 billion German marks. Things played out according to plan and the long position came to be worth millions of dollars, helping push the returns of the Quantum Fund over 60%.

Possibly due to the success of his first bet, Druckenmiller also made the German mark an integral part of the greatest currency trade in history. A few years later, while Soros was busy breaking the Bank of England, Druckenmiller was going long in the mark on the assumption that the fallout from his boss's bet would drop the British pound against the mark. Druckenmiller was confident that he and Soros were right and showed this by buying British stocks. He believed that Britain would have to slash lending rates, thus stimulating business, and that the cheaper pound would actually mean more exports compared to European rivals. Following this same thinking, Druckenmiller bought German bonds on the expectation that investors would move to bonds as German stocks showed less growth than the British. It was a very complete trade that added considerably to the profits of Soros' main bet against the pound. (Read more about currency devaluation in What Causes A Currency Crisis?)

No. 1: George Soros Vs. The British Pound

The British pound shadowed the German mark leading up to the 1990s even though the two countries were very different economically. Germany was the stronger country despite lingering difficulties from reunification, but Britain wanted to keep the value of the pound above 2.7 marks. Attempts to keep to this standard left Britain with high interest rates and equally high inflation, but it demanded a fixed rate of 2.7 marks to a pound as a condition of entering the European Exchange Rate Mechanism (ERM). (Learn more about why some countries peg their rates in Floating And Fixed Exchange Rates.)

Many speculators, George Soros chief among them, wondered how long fixed exchange rates could fight market forces, and they began to take up short positions against the pound. Soros borrowed heavily to bet more on a drop in the pound. Britain raised its interest rates to double digits to try to attract investors. The government was hoping to alleviate the selling pressure by creating more buying pressure.

Paying out interest costs money, however, and the British government realized that it would lose billions trying to artificially prop up the pound. It withdrew from the ERM and the value of the pound plummeted against the mark. Soros made at least $1 billion off this one trade. For the British government's part, the devaluation of the pound actually helped, as it forced the excess interest and inflation out of the economy, making it an ideal environment for businesses.

A Thankless Job

Any discussion around the top currency trades always revolves around George Soros, because many of these traders have a connection to him and his Quantum Fund. After retiring from active management of his funds to focus on philanthropy, Soros made comments about currency trading that were seen as expressing regret that he made his fortune attacking currencies. It was an odd change for Soros who, like many traders, made money by removing pricing inefficiencies from the market. Britain did lose money because of Soros and he did force the country to swallow the bitter pill of withdrawing from the ERM, but many people also see these drawbacks to the trade as necessary steps that helped Britain emerge stronger. If there hadn't been a drop in the pound, Britain's economic problems may have dragged on as politicians kept trying to tweak the ERM. (For related reading, see Working Through The Efficient Market Hypothesis.)

Conclusion

A country can benefit from a weak currency as much as from a strong one. With a weak currency, the domestic products and assets become cheaper to international buyers and exports increase. In the same way, domestic sales increase as foreign products go up in price due to the higher cost of importing.

There were very likely many people in Britain and New Zealand who were pleased when speculators brought down the overvalued currencies. Of course, there were also importers and others who were understandably upset.

A currency speculator makes money by forcing a country to face realities it would rather not face. Although it's a dirty job, someone has to do it.

9 Tricks Of The Successful Trader

noreply@blogger.com (Tattoo) — Wed, 18 Feb 2009 09:53:00 +0000

For all of its numbers, charts and ratios, trading is more art than science. And just as in artistic endeavors, there is talent involved, but talent will only take you so far. The best traders hone their skills through practice and discipline. They perform self analysis to see what drives their trades and learn how to keep fear and greed out of the equation. In this article we'll look at nine steps a novice trader can use to perfect his or her craft; for the experts out there, you might just find some tips that will help you make smarter, more profitable trades, too.

Step 1. Define your goals and then choose a style of trading that is compatible with those goals. Be sure your personality is a match for the style of trading you choose.

Before you set out on any journey, it is imperative that you have some idea of where your destination is and how you will get there. Consequently, it is imperative that you have clear goals in mind as to what you would like to achieve; you then have to be sure that your trading method is capable of achieving these goals. Each type of trading style requires a different approach and each style has a different risk profile, which requires a different attitude and approach to trade successfully. For example, if you cannot stomach going to sleep with an open position in the market then you might consider day trading. On the other hand, if you have funds that you think will benefit from the appreciation of a trade over a period of some months, then a position trader is what you want to consider becoming. But no matter what style of trading you choose, be sure that your personality fits the style of trading you undertake. A personality mismatch will lead to stress and certain losses. (For more, see Invest With A Thesis.)

Step 2. Choose a broker with whom you feel comfortable but also one who offers a trading platform that is appropriate for your style of trading.

It is important to choose a broker who offers a trading platform that will allow you to do the analysis you require. Choosing a reputable broker is of paramount importance and spending time researching the differences between brokers will be very helpful. You must know each broker's policies and how he or she goes about making a market. For example, trading in the over-the-counter market or spot market is different from trading the exchange-driven markets. In choosing a broker, it is important to read the broker documentation. Know your broker's policies. Also make sure that your broker's trading platform is suitable for the analysis you want to do. For example, if you like to trade off of Fibonacci numbers, be sure the broker's platform can draw Fibonacci lines. A good broker with a poor platform, or a good platform with a poor broker, can be a problem. Make sure you get the best of both.

Step 3. Choose a methodology and then be consistent in its application.

Before you enter any market as a trader, you need to have some idea of how you will make decisions to execute your trades. You must know what information you will need in order to make the appropriate decision about whether to enter or exit a trade. Some people choose to look at the underlying fundamentals of the company or economy, and then use a chart to determine the best time to execute the trade. Others use technical analysis; as a result they will only use charts to time a trade. Remember that fundamentals drive the trend in the long term, whereas chart patterns may offer trading opportunities in the short term. Whichever methodology you choose, remember to be consistent. And be sure your methodology is adaptive. Your system should keep up with the changing dynamics of a market. (For related reading, see What is the difference between fundamental and technical analysis and Blending Technical And Fundamental Analysis.)

Step 4. Choose a longer time frame for direction analysis and a shorter time frame to time entry or exit.

Many traders get confused because of conflicting information that occurs when looking at charts in different time frames. What shows up as a buying opportunity on a weekly chart could, in fact, show up as a sell signal on an intraday chart. Therefore, if you are taking your basic trading direction from a weekly chart and using a daily chart to time entry, be sure to synchronize the two. In other words, if the weekly chart is giving you a buy signal, wait until the daily chart also confirms a buy signal. Keep your timing in sync.

Step 5. Calculate your expectancy.

Expectancy is the formula you use to determine how reliable your system is. You should go back in time and measure all your trades that were winners, versus all your trades that were losers. Then determine how profitable your winning trades were versus how much your losing trades lost.

Take a look at your last 10 trades. If you haven't made actual trades yet, go back on your chart to where your system would have indicated that you should enter and exit a trade. Determine if you would have made a profit or a loss. Write these results down. Total all your winning trades and divide the answer by the number of winning trades you made. Here is the formula:

E= [1+ (W/L)] x P – 1

where:

W = Average Winning Trade
L = Average Losing Trade
P = Percentage Win Ratio

Example:
If you made 10 trades and six of them were winning trades and four were losing trades, your percentage win ratio would be 6/10 or 60%. If your six trades made $2,400, then your average win would be $2,400/6 = $400. If your losses were $1,200, then your average loss would be $1,200/4 = $300. Apply these results to the formula and you get; E= [1+ (400/300)] x 0.6 - 1 = 0.40 or 40%. A positive 40% expectancy means that your system will return you 40 cents per dollar over the long term.

Step 6. Focus on your trades and learn to love small losses.

Once you have funded your account, the most important thing to remember is that your money is at risk. Therefore, your money should not be needed for living or to pay bills etc. Consider your trading money as if it were vacation money. Once the vacation is over your money is spent. Have the same attitude toward trading. This will psychologically prepare you to accept small losses, which is key to managing your risk. By focusing on your trades and accepting small losses rather than constantly counting your equity, you will be much more successful.

Secondly, only leverage your trades to a maximum risk of 2% of your total funds. In other words, if you have $10,000 in your trading account, never let any trade lose more than 2% of the account value, or $200. If your stops are farther away than 2% of your account, trade shorter time frames or decrease the leverage. (For further reading, see Leverage's Double-Edged Sword Need Not Cut Deep.)

Step 7. Build positive feedback loops.

A positive feedback loop is created as a result of a well-executed trade in accordance with your plan. When you plan a trade and then execute it well, you form a positive feedback pattern. Success breeds success, which in turn breeds confidence - especially if the trade is profitable. Even if you take a small loss but do so in accordance with a planned trade, then you will be building a positive feedback loop.

Step 8. Perform weekend analysis.

It is always good to prepare in advance. On the weekend, when the markets are closed, study weekly charts to look for patterns or news that could affect your trade. Perhaps a pattern is making a double top and the pundits and the news is suggesting a market reversal. This is a kind of reflexivity where the pattern could be prompting the pundits while the pundits are reinforcing the pattern. Or the pundits may be telling you that the market is about to explode.

Perhaps these are pundits hoping to lure you into the market so that they can sell their positions on increased liquidity. These are the kinds of actions to look for to help you formulate your upcoming trading week. In the cool light of objectivity, you will make your best plans. Wait for your setups and learn to be patient.

If the market does not reach your point of entry, learn to sit on your hands. You might have to wait for the opportunity longer than you anticipated. If you miss a trade, remember that there will always be another. If you have patience and discipline you can become a good trader. (To learn more, see Patience Is A Trader’s Virtue.)

Step 9. Keep a printed record.

Keeping a printed record is one of the best learning tools a trader can have. Print out a chart and list all the reasons for the trade, including the fundamentals that sway your decisions. Mark the chart with your entry and your exit points. Make any relevant comments on the chart. File this record so you can refer to it over and over again.

Note the emotional reasons for taking action. Did you panic? Were you too greedy? Were you full of anxiety? Note all these feelings on your record. It is only when you can objectify your trades that you will develop the mental control and discipline to execute according to your system instead of your habits.

Bottom Line

The steps above will lead you to a structured approach to trading and in return should help you become a more refined trader. Trading is an art and the only way to become increasingly proficient is through consistent and disciplined practice.

Remember the expression: the harder you practice the luckier you'll get.

Forex FAQ

noreply@blogger.com (Tattoo) — Tue, 17 Feb 2009 18:03:00 +0000

What is Foreign Exchange?

The Foreign Exchange market, also referred to as the "Forex" or "FX" market, is the largest financial market in the world, with a daily average turnover of approximately US$1.5 trillion. Foreign Exchange is the simultaneous buying of one currency and selling of another. The world’s currencies are on a floating exchange rate and are always traded in pairs, for example Euro/Dollar or Dollar/Yen.

Where is the central location of the FX Market?

FX Trading is not centralized on an exchange, as with the stock and futures markets. The FX market is considered an Over the Counter (OTC) or ’Interbank’ market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network.

Who are the participants in the FX Market?

The Forex market is called an ’Interbank’ market due to the fact that historically it has been dominated by banks, including central banks, commercial banks, and investment banks. However, the percentage of other market participants is rapidly growing, and now includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, and private speculators.

When is the FX market open for trading?

A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, then London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.

What are the most commonly traded currencies in the FX markets?

The most often traded or ’liquid’ currencies are those of countries with stable governments, respected central banks, and low inflation. Today, over 85% of all daily transactions involve trading of the major currencies, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and the Australian Dollar.

Is Forex trading capital intensive?

No. FXA requires a minimum deposit of $250. FXA allows customers to execute margin trades at up to 200:1 leverage. This means that investors can execute trades of $10,000 with an initial margin requirement of $50. However, it is important to remember that while this type of leverage allows investors to maximize their profit potential, the potential for loss is equally great. A more pragmatic margin trade for someone new to the FX markets would be 20:1 but ultimately depends on the investor’s appetite for risk.

What is Margin?

Margin is essentially collateral for a position. If the market moves against a customer’s position, FXA will request additional funds through a "margin call." If there are insufficient available funds, FXA will immediately close out the customer’s open positions.

What does it mean have a ’long’ or ’short’ position?

In trading parlance, a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. In this scenario, the investor benefits from a rising market. A short position is one in which the trader sells a currency in anticipation that it will depreciate. In this scenario, the investor benefits from a declining market. However, it is important to remember that every FX position requires an investor to go long in one currency and short the other.

What about terms like "bid/ask", "spread", and "rollover"?

FXA has an extensive Glossary that provides detailed definitions of all Forex related terms.
What is the difference between an "intraday" and "overnight position"?
Intraday positions are all positions opened anytime during the 24 hour period AFTER the close of FXA’s normal trading hours at 4:30pm EST. Overnight positions are positions that are still on at the end of normal trading hours (4:30pm EST), which are automatically rolled by FXA at competitive rates (based on the currencies interest rate differentials) to the next day’s price.

How are currency prices determined?

Currency prices are affected by a variety of economic and political conditions, most importantly interest rates, inflation and political stability. Moreover, governments sometimes participate in the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price. This is known as Central Bank intervention. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and volume of the Forex market makes it impossible for any one entity to "drive" the market for any length of time.

How do I manage risk?

The most common risk management tools in FX trading are the limit order and the stop loss order. A limit order places restriction on the maximum price to be paid or the minimum price to be received. A stop loss order ensures a particular position is automatically liquidated at a predetermined price in order to limit potential losses should the market move against an investor’s position. The liquidity of the Forex market ensures that limit order and stop loss orders can be easily executed.

What kind of trading strategy should I use?

Currency traders make decisions using both technical factors and economic fundamentals. Technical traders use charts, trend lines, support and resistance levels, and numerous patterns and mathematical analyses to identify trading opportunities, whereas fundamentalists predict price movements by interpreting a wide variety of economic information, including news, government-issued indicators and reports, and even rumor. The most dramatic price movements however, occur when unexpected events happen. The event can range from a Central Bank raising domestic interest rates to the outcome of a political election or even an act of war. Nonetheless, more often it is the expectation of an event that drives the market rather than the event itself.

How often are trades made?

Market conditions dictate trading activity on any given day. As a reference, the average small to medium trader might trade as often as 10 times a day. Most importantly, by not charging commission, FXA customers can take positions as often as necessary without worrying about excessive transaction costs.

How long are positions maintained?

As a general rule, a position is kept open until one of the following occurs: 1) realization of sufficient profits from a position; 2) the specified stop-loss is triggered; 3) another position that has a better potential appears and you need these funds.

I am interested in foreign exchange trading, but would like some additional information. Any suggestions?

In The Forex Market section we describe the foreign exchange market in some detail. In order to gain a practical understanding of foreign exchange trading, there is no better way than to open a demo account, where you can experience what it’s like to trade the Forex market without risking any capital.

Don’t Overtrade!

noreply@blogger.com (Tattoo) — Tue, 17 Feb 2009 18:00:00 +0000

If you are experiencing a run of wins, don’t get getting carried away in the flush of success. You don’t want to give it all back.

Over Trading is the greatest single cause for losses in the markets. Whether you are winning now or losing now, ninety-five or more percent of all traders trade too often.

Even a daytrader trading a five minute chart has no need to trade every day nor to trade all day long. You should be filtering your trades so that you take only the best of the best.

Overtrading was a problem that took me a long time to overcome because I did not know what I was looking for. Overtrading is a very serious problem, and veteran traders learn to avoid it. In fact, one way to know if a trader is a mature professional is to know if that trader conquered the problem of overtrading.

The biggest problem with overtrading is that you don’t even know you’re doing it. You can overtrade by trading too many contracts (too much size), trading too often, attempting too many positions or sitting and staring at the screen all day.

One trader I met, who was following a system in twenty markets, received entry signals in fourteen of the twenty. The entry prices were such that probably only two or three of them had any chance of being filled. Yet this trader boldly called in to enter all fourteen orders. After the first six, his broker refused to take any more orders. Had they all been filled, the trader would have been several thousand dollars over margin.

Good traders immediately cut back on size when they are losing or have an equity draw-down.
The total commitment you make on any entry should be relative to a reasonable expectation of the profit potential for that trade. Each trade is different and must be weighed on its merits.

How do you know how many contracts to trade? Certainly you are in a pickle if you always have to trade in single lots. That is not to say that there are never times when a single lot is the right thing to do. It’s okay when you’re scalping , or trading options . However, wherever possible try to trade a least two contracts. You need one to cover costs, and the other to give you a profit.
If it’s late in the day and you are a daytrader who normally does a five lot, perhaps you should use a smaller size due to the fact that the trade hasn’t as much time to develop as one made earlier in the day.

Bond Advice Leaves Pain in Its Wake

noreply@blogger.com (Tattoo) — Tue, 17 Feb 2009 17:56:00 +0000

David Rubin built a big business over two decades crisscrossing the country to show local governments how to raise more money.

But a close look reveals that his consulting firm, CDR Financial Products of Beverly Hills, Calif., left pain in its wake from Florida to New Mexico. The Internal Revenue Service has cracked down on dozens of communities, which have been saddled with unfinished public projects, financial losses and more debt than they can manage.

Though consultants like CDR and Mr. Rubin turn up again and again in places where bond deals have turned sour, they are virtually unregulated. The Municipal Securities Rulemaking Board is now appealing to Congress to expand its authority to cover consultants and other advisers in the municipal bond business as well as bankers and brokers.

Christopher Taylor, who retired as director of the rules board in 2007, says even harsher action is needed. Common industry practices have led governments to refinance their debts more often than necessary and take on excessive risk, he says, adding that some practices should be banned outright.

CDR, for its part, says that while its advice to its clients has been creative and inventive, it has always taken care to follow the rules, and a spokesman said a vast majority of the transactions in which the firm took part had raised no legal concerns.

For years, Mr. Rubin and his consulting associates have helped put local officials in touch with bankers and traders who can add sophisticated features to the bonds that states and cities issue to pay for public works. The banks would charge fees, officials were told, but the special features would more than make up for those costs.

In some places, Mr. Rubin’s firm also contributed to political campaign funds. In New Mexico, federal authorities are investigating whether CDR made improper payments to Gov. Bill Richardson’s campaigns in exchange for work on a $1.6 billion transportation bond issue, a disclosure that caused Mr. Richardson to withdraw from consideration to join the Obama administration.

While bond underwriters are barred from making political contributions, financial advisers like CDR are not. And financial intermediaries often pitch municipal bond deals as a team, with many features in a proposed package. The investigators in New Mexico want to know if CDR’s contributions helped sell the package, landing lucrative deals for participants who were barred from making contributions.

The investigators are also scrutinizing the way the bond proceeds were handled at CDR’s direction. One type of trade the firm recommended was subsequently banned — but not before CDR helped New Mexico execute eight such trades. CDR; the law firm of Ballard, Spahr, Andrews & Ingersoll; the accounting firm of Grant Thornton; and the Bank of Albuquerque took a cut on each trade, earning $556,000 in total.

Another type of transaction, involving an interest-rate swap, has run up unexpected costs. CDR earned fees of about $493,000 for its swaps work, paid by the Royal Bank of Canada, Goldman Sachs and Lehman Brothers.

A spokesman for CDR, Allan Ripp, said the transactions were legal at the time. As for the swaps, he said that CDR’s employees had provided valuation data in “a very specific role,” without recommending them.

New Mexico officials said they believed the state’s finances were better off because of CDR’s services but were unable to provide a complete accounting.

Little is known about Mr. Rubin, who has avoided public comments and even opportunities to be photographed. He began his career in real estate and started the consulting firm at age 25, initially working to structure bonds for low-cost housing. When he was appointed to the Los Angeles Housing Authority in 2002, he was credited with creating a new type of bond structure.
What was not announced was that dozens of bond deals with CDR participation were being audited — and sometimes disallowed — by the Internal Revenue Service.

The I.R.S. makes sure the bond proceeds are used for legitimate government works, like roads and schools. The interest on municipal bonds is tax-exempt, which amounts to a federal subsidy of about $35 billion a year. The money is not supposed to serve as a source of work and fees for money managers, who could otherwise make an easy profit by investing proceeds at the generally higher rates on taxable investments.

Yet records show that in dozens of bond deals, that is exactly what happened. The public works were not carried out — but CDR and other intermediaries earned fees and sometimes broke the investment rules.
In Gulf Breeze, Fla., for example, a local housing authority issued bonds worth $220 million to provide homes for low-income families — then spent not a penny on housing. The funds sat untouched in an account, except for about $12 million that was used to pay CDR and other financial companies. The I.R.S. uncovered that Mr. Rubin’s firm stood to earn more if the money was unused.

In Arkansas, Pulaski County issued $43 million of bonds to buy houses for sale to people with impaired credit. Half a dozen firms, including CDR, collected fees on the deal, and one Arkansas family was introduced by President George W. Bush at a White House conference.
“This project is not only good for the soul of the country,” Mr. Bush said, citing the broad economic ripple effects of home ownership, as reported by The Associated Press. “It’s good for the pocketbook of the country as well.”

But back in Arkansas, the pocketbook benefits went to the financial intermediaries, while would-be homeowners like the family hailed by the president walked away. A bank, Société Générale, collected $1.9 million and in turn paid CDR quarterly fees of $16,125.
Only a small fraction was ever spent on housing, according to Patricia Dicker, a county official who called the bond deal terrible.

A spokesman for Société Générale said the bank had no comment.
Mr. Ripp said the quarterly payments were royalties for a type of derivative that CDR created. “CDR had a very specific role that it fulfilled, and believes it fulfilled it very well,” he said.
The I.R.S. challenged the bonds’ tax exemption, accused Société Générale of breaking the investment rules and questioned the bank’s relationship with CDR, forcing a settlement.
When challenged by the I.R.S., a local government typically hires lawyers and works out a settlement, sometimes quietly paying restitution. That protects the buyers of the bonds from having to pay tax on their interest. It also keeps the problems quiet since the I.R.S. is generally barred from discussing tax cases.

“If this had been visible to the marketplace, we wouldn’t have had these problems,” said Mr. Taylor, the former rule maker.

The I.R.S. has disallowed at least seven housing bond deals that were assisted by CDR, in Florida, California, Virginia, Oklahoma, Arkansas and North Dakota, according to notices filed in a municipal data base.
There were even problems in New Mexico. The year before the transportation bonds were sold, the firm helped a regional housing authority there issue bonds that were later stripped of their tax exemption by the I.R.S., which found an improper relationship between CDR and Société Générale.

The Securities and Exchange Commission tried to impose sanctions on CDR, to little effect. After the Gulf Breeze debacle, it issued a cease-and-desist order. But CDR reports a spotless disciplinary history in its S.E.C. registration. Its offices were raided by the F.B.I. in 2006, though the government has not disclosed what it found.

By the time of the raid, a new type of deal had come into vogue: municipal bonds linked to swaps. These deals posed much greater risks than the real estate bonds and were more profitable for dealers.
In Philadelphia, CDR became the city’s “swap adviser” after Mr. Rubin contributed tens of thousands of dollars to officials. The Philadelphia city treasurer, Corey Kemp, was indicted in 2004 on charges of receiving gifts and favors from companies vying for city business — including CDR.

Mr. Kemp went to prison; CDR was not charged with wrongdoing. The firm remained Philadelphia’s swap adviser for three more years.
It went on to help the city-owned gas utility with a swap, earning $225,000. The swap protected against interest rate increases while allowing the utility to issue variable-rate bonds, which are less expensive.

But the deal foundered during last year’s market turmoil. JPMorgan Chase took over the bonds, shortening their life to five years, from 25. Now Philadelphia has to come up with $60 million a year and pay about $45 million to get out of the swap contract.

Low on cash, the city utility has raised its customers’ heating bills this winter.
Mr. Ripp said CDR had played a narrow role. “To point the finger at CDR — and suggest that they’re culpable in creating a transaction that benefited no one — is misguided,” he said.
Rob Dubow, Philadelphia’s finance director, said he could not explain why the city kept working with CDR after the corruption trial. “Clearly,” he said, “it has not turned out well for us.”

A Likely Auto Adviser Is Strong in Union Ways

noreply@blogger.com (Tattoo) — Tue, 17 Feb 2009 17:54:00 +0000

Michelle Galanter Applebaum, who got to know Mr. Bloom in the 1990s when she was a managing director at Salomon Brothers, said he was different from other investment bankers because of his unusual interest in helping workers, unions and beleaguered industries.
“He felt he could play a meaningful role of fixing it from the inside,” said Ms. Galanter Applebaum, who is now managing director of Steel Market Intelligence. “He is a passionate, committed guy, totally idealistic.”

For all his accomplishments in the steel industry, Mr. Bloom is not well known in the auto industry. The Treasury Department has not been clear about exactly what role he will play. After the giant steel makers the LTV Corporation and Bethlehem went bankrupt early this decade, Wilbur L. Ross Jr., the financier, sought to acquire their steel mills and employ many of their workers, without having to pay for retirees’ health coverage.

Mr. Bloom, working with Mr. Gerard, negotiated with Mr. Ross to form a VEBA, a Voluntary Employee Beneficiary Association, in which a percentage of the profits from Mr. Ross’s company, International Steel Group, would go to the VEBA to help finance prescriptions for the retirees.
“I found him first of all very, very pragmatic, not overly ideological,” and “a very, very good negotiator,” Mr. Ross said.

He added that Mr. Bloom, who has moved seamlessly between labor and corporate finance — was not one to make lopsided deals.

Mr. Trbovich, the former steelworkers’ official, said that once when Mr. Bloom was negotiating with Mr. Ross, “he laid out a whole different way to look at a financing proposal than the one that was under discussion.”

“Ross listened attentively, and when Ron was done, Ross said, ‘The force is with the young man,’ ” Mr. Trbovich said.

Mr. Gerard, the union’s president, said Mr. Bloom would represent not the U.A.W.’s members, but the Obama administration in seeking to assure a future for the nation’s automobile industry.
Mr. Gerard told of a meeting with 40 bankers in which a highly paid McKinsey consultant put together a business plan for a steel company “that was going to beat the hell out of the workers.”
“Ron asked, ‘Doesn’t this number belong here and doesn’t that number not add up,’ and Ron slowly dismantled this guy’s business plan to show it was a house of cards,” Mr. Gerard said.
“Ron knows how to separate the bull from reality.”

Dead End in Detroit for White-Collar Workers

noreply@blogger.com (Tattoo) — Tue, 17 Feb 2009 17:47:00 +0000

DETROIT — For all the ups and downs, and more downs, that white-collar workers here have lived through, they have always managed to put on a brave face, assuring one another that the American auto industry will come back stronger than ever.

But now that resolve has given way to grim resignation, as General Motors, Ford Motor and Chrysler have announced wave upon wave of job cuts.

After closing plants and shrinking their blue-collar work force, Detroit’s troubled Big Three are cutting white-collar jobs in their hometown at an unprecedented pace — more than 15,000 in the last year, with more to come.

Unlike union workers laid off from idled factories, salaried workers have no safety net of health care or guaranteed income for a year. At best, it’s a small severance or buyout, and a voucher for a discount on one of the hundreds of thousands of unsold cars that G.M. or Chrysler has sitting in inventory.

White-collar workers who walk out of the headquarters of the auto companies face few prospects in the Michigan economy. And with G.M. and Chrysler surviving on federal loans, facing a deadline Tuesday to submit new and broader restructuring plans to the government, the outlook grows only more bleak.

The market for the skills of auto engineers or designers in the prime of their careers has evaporated, with no hope in sight for a turnaround. Moving to another city is hardly an option when there are so few buyers for the suburban homes that would have to be sold first.
“I know it’s not great everywhere, but this is probably the worst place to find a job,” said Doug Zupan, a designer who took a buyout in November after working at Chrysler for six years. He was one of 5,000 salaried workers who accepted a buyout the day before Thanksgiving from his job at the Chrysler Technical Center in Auburn Hills, Mich.

Mr. Zupan, a 35-year-old father of three preschool-age children, said he was stunned by the sudden and rapid decline in an industry suffering through its worst sales in more than 25 years. “I am going to do my best to get out of the auto industry,” he said.

G.M., Ford and Chrysler have eliminated a total of 120,000 manufacturing jobs in the last three years. And now the cuts are drastically thinning the ranks of white-collar professionals, turning the once-bustling office towers of the companies into half-empty monuments to better days.
G.M. delivered another blow last week when it said it would reduce its global salaried work force by 14 percent, or 10,000 workers this year. In the Detroit area, that could mean an additional 3,000 workers will be out of a job by May 1. G.M.’s next round of white-collar cuts will not include buyouts. Chrysler has not said whether it plans more cuts.

The Detroit area housing market, already deeply depressed, has plummeted since the buyouts. In January, the foreclosure rate increased 102 percent from the same month a year earlier in Oakland County, Mich., home to a huge number of G.M. and Chrysler employees.
The state’s unemployment rate was 10.6 percent in December and continues to climb. Job fairs routinely create mob scenes, drawing thousands of out-of-work employees of the Big Three and their suppliers.

Jim Badhorn was a Chrysler engineer for 21 years before he took the buyout. Among his accomplishments was designing the rear doors of the Chrysler 300 sedan, one of the company’s last hit products.

Recently, he attended a job fair held by a military contractor but was quickly disappointed. So many people showed up that the police blocked off the parking lot, he said. “You couldn’t even find the end of the line.”

He considers himself fortunate to be a renter in the Detroit area, where the “for sale” signs are multiplying. “I have friends whose houses have lost 40 percent of their value,” said Mr. Badhorn, who lives in the suburb of Birmingham.

Last November, every white-collar worker in the company was offered a one-time buyout — $75,000 for those with 10 years or more and $50,000 for those with fewer than 10 years. With Chrysler on the brink of collapse without more federal loans, Mr. Badhorn grabbed the buyout and put much of his $75,000 into a college fund for two of his daughters.

Frustrated by the tight job market, Mr. Badhorn works off his stress by hitting the gym every day. He’s lost 15 pounds since November, but it hasn’t made him feel any better about his circumstances. “I’ve pretty much come to the conclusion that I’m going to have to move if I want to earn what I made before, or close to it,” he said.

The cuts are extending to the vast network of employees who worked on contract to the Detroit companies. Craig Meyer, employed by a supplier named Aerotek, was told by phone that his seven years as a contract designer at Chrysler were over as he was driving to the home of his in-laws the night before Thanksgiving.

Mr. Meyer has been collecting unemployment since, although the $362 he gets a week is less than half what he was making at Chrysler. “We’re just about able to pay the bills each month,” he said. “Food and gas is when we need to start to dip into savings.”
The prospects are getting worse for Detroit, not better. Last year, United States car sales dropped 18 percent, to 13.2 million, and industry executives expect just 10 million car sales in 2009 and possibly for years to come.

“Those white-collar jobs aren’t going to come back any more than the blue-collar jobs are,” said Kevin Boyle, a Detroit native and author of historical books on the city. “As bad as it is everywhere, it’s not as bad as it is in Detroit right now.”

The unemployment rate for white-collar occupations in Michigan was 5.4 percent in the fourth quarter of 2008, a full percentage point higher than the national average for those jobs, according to Department of Labor estimates.

Mr. Zupan’s $50,000 buyout from Chrysler is supporting him, his wife and his three children — ages 4, 2, and 6 months — while he looks for work. He’s finishing a master’s degree in business administration at the University of Michigan, paid for until last semester by Chrysler, when it could afford to invest in the education of its white-collar staff. He recently took out loans to have an additional financial cushion.

His last nest egg is the 300C he bought with his $25,000 buyout voucher. Mr. Zupan said he might sell it if he needed the money.

Forex Alert: Becareful playing In forex

noreply@blogger.com (Tattoo) — Mon, 16 Feb 2009 02:41:00 +0000

There are so many site offer free forex and give a free away.

Becareful to choose one of them, there are many forex scam out there, we do not know what they do , but becareful with your own money, find more info regarding the site you choose to play on.

Get more Forex Info

noreply@blogger.com (Tattoo) — Sun, 15 Feb 2009 16:08:00 +0000

Get more Forex Info In this Blog,also find some info about investment

MONEY GUIDE: MAKING NEST EGGS LAST

noreply@blogger.com (Tattoo) — Sun, 08 Feb 2009 09:29:00 +0000

After 20 years of so-called investor education--articles like this one, books, TV shows, Web sites, brochures--a majority of retirement savers still don't know what they're doing. They can't tell a stock from a bond, and (despite Enron) still believe that their company's stock is less risky than a diversified mutual fund. "Education," in short, has failed.

In its place, more than half of all retirement plans now offer some form of investment advice, according to the Profit Sharing/401(k) Council of America. A handful of cutting-edge plans offer workers a money manager to handle their accounts. The manager takes a look at what you're doing now. If it's too risky or inadequate, you'll receive a proposal for something better. Advisers stand by to answer your questions by phone or Web. Once you approve the plan, the manager takes over your account--monitoring it and making investment decisions. You can forget about the money and get on with the rest of your life.

Several advisory firms offer managed accounts for 401(k)s, including Financial engine GuidedChoice, Ibbotson Associates and Morningstar Retirement Manager. They supply all the workers in the plan with individual reports, showing the range of monthly retirement income they can expect from their current investment mix. "It's an eye-opener, a reality check," says Robert Kleckner, head of Alcoa's savings plan administration and a customer of Financial Engines. For the first time, investors see the real-life implications of their investment choices. Once they get over their shock, they tend to save more money. They also start making plans to work for a few extra years.

Some 401(k)s offer personal money management at no extra cost, including plans offered by Merrill Lynch and Charles Schwab. Others charge workers 0.1 percent to 0.6 percent of assets a year--still a bargain compared with hiring outside investment advice.

These advisers also evaluate any company stock in your 401(k). You normally shouldn't invest more than 10 percent of your money there, says Financial Engines' CEO Jeff Maggioncalda. He won't accept accounts from workers who want to hold more than 20 percent. GuidedChoice CEO Sherrie Grabot says you shouldn't hold more than 10 percent in company stock if you expect to retire in fewer than 20 years. The more stock you own, the more you should save to balance that risk.

Data scams have kicked into high gear as markets tumble

noreply@blogger.com (Tattoo) — Tue, 03 Feb 2009 00:50:00 +0000

Cybercriminals have launched a massive new wave of Internet-based schemes to steal personal data and carry out financial scams in an effort to take advantage of the fear and confusion created by tumbling financial markets, security specialists say.

The schemes — often involving online promotions touting fake computer virus protection, get-rich scams and funny or lurid videos — already were rising last fall when financial markets took a dive. With consumers around the world panicking, the number of scams on the Web soared.
The number of malicious programs circulating on the Internet tripled to more than 31,000 a day in mid-September, coinciding with the sudden collapse of the U.S. financial sector, according to Panda Security, an Internet security firm.

It wasn't a coincidence, says Ryan Sherstobitoff, chief corporate evangelist at Panda.
"The criminal economy is closely interrelated with our own economy," he says. "Criminal organizations closely watch market performance and adapt as needed to ensure maximum profit."
Among those caught in the most recent barrage of scams was Justin Terrazas, 27, a beverage merchandiser from Seattle. He clicked on a Web link that infected his MacBook Pro laptop with a data-stealing program. Not realizing the laptop was compromised, Terrazas later typed his Bank of America debit card number and PIN to pay his Verizon cellphone bill online. The data-stealer swiftly siphoned his information.

A few days later, someone used Terrazas' debit card account to make a $501.41 online purchase from Modabrand.com, a designer clothing store. The merchandise was shipped to London, leaving Terrazas to unravel a big mess.

"This is definitely something you don't need in your life," he says.

The boom in cyberthreats that occurred during the last three months of 2008 could accelerate, especially if the economy continues to falter, security specialists say. Organized cybercrime groups have become increasingly efficient at assembling massive networks of infected computers, called botnets, and deploying them to amass large caches of stolen data, according to several surveys and dozens of interviews with security and privacy analysts. Meanwhile, scammers have honed the trickery used to turn stolen data into cash.

"There is a well-funded, well-educated horde continually probing for cracks and finding their way in" to consumers' financial information, says Roger Thornton, chief technology officer of security firm Fortify Software.

"They are breaching … the highest levels of the global finance infrastructure and a majority of our home computers."

Last fall, virulent programs called Trojans began to circulate more widely in e-mail and instant-message spam, got embedded in tens of thousands popular Web pages and spread in a widening barrage of online ads. Click on the wrong thing, and you would download an invisible Trojan crafted to steal sensitive data and allow the attacker to control your computer.

All types of con games — from e-mail phishing scams, which try to trick you into typing sensitive data at fake websites, to cyberhijacking, in which crooks use stolen user names and passwords to pilfer online accounts — increased, according to security firms, government regulators and law enforcement officials.

Targeting data storehouses

Hackers also are intensifying attacks on data storehouses.
Last week, Heartland Payment Systems disclosed that intruders cracked into the system it uses to process 100 million payment card transactions a month.
And Tuesday, Monster.com announced it would impose a mandatory password change for all North American and Western European users of its popular employment website. Thieves recently broke into Monster's databases to steal user IDs, passwords and other data that could be useful in a variety of scams.

"There are limitless opportunities in data of this quality," says Robert Sandilands, anti-virus director at the security firm Authentium.
To cybergangs, the implosion of the financial markets and widespread job cuts have translated into more opportunities.

Not long after banking giant Wachovia failed, phishing e-mail began circulating asking current and former customers to type in personal information to a website to complete mandatory installation of a new Internet security certificate. The website was a counterfeit, and some users who fell for the scam had their computers infected with the Gozi Trojan, which funnels stolen data to a computer server equipped to instantly sell the data to other criminals, according to the security firm SecureWorks.

Some thieves have stuck to the path of least resistance, snaring account user names, passwords and Social Security numbers. Cybercrime groups have gone further, sending tainted links in e-mail and instant messages, and spreading viruses via the direct messaging systems used on the social-networking websites Facebook, MySpace and Twitter.

Facebook encourages users to report any suspicious messages, but there's only so much it — and the other networking sites — can do to stop cybercriminals.

"We'll investigate and take appropriate action, which may include disabling the sender's account and blocking certain links from being posted," says Facebook spokesman Barry Schnitt.
But cybergangs now routinely activate hundreds of accounts by the minute, dedicating them to criminal pursuits.

Tainted links also are increasingly turning up in routine search queries on Google, Yahoo search and Windows Live search. The search companies also say they can do little to stem the rising tide of cybercrime. Google spokesman Jay Nancarrow says only that the search giant has "strict policies" against fraudulent practices, which it takes pains to enforce.

The FBI and Secret Service have created partnerships with police agencies around the world to combat cybercrimes. U.S. agents have been able to infiltrate several organized crime groups to make dozens of arrests, says Shawn Henry, assistant director of the FBI Cyber Division. Even so, "The offense tends to outpace the defense," Henry says. "The cyberthieves are extremely creative."

The threat from insiders

Some cybercriminals have begun to spread malicious programs by corrupting online banner ads. Security firm Finjan reports that new tools being sold on criminal forums can be used to infect online ads that use Adobe's popular Flash player.

The wide availability of such tools — and the fact that thousands of tech-savvy workers are being laid off in today's economy — is raising concerns that some of the jobless might see cybercrime as a way to survive.

"Unemployed IT personnel potentially can find easy income by purchasing and using crimeware," says Finjan CTO Yuval Ben-Itzhak. "We expect a rising number of people will try."
Some novice cybercrooks won't need anything fancier than a Web browser to get rolling. M. Eric Johnson, director of the Center for Digital Strategies at the Tuck School of Business at Dartmouth College, recently tried typing simple search queries, such as "insurance record," in Google and on file-sharing networks Gnutella and LimeWire.

He collected 3,328 files with potentially sensitive medical information; about 5% held data that could be used to fraudulently buy drugs or bill treatments. Data thieves are using such simple steps, too, he says.

Data-stealing gangs could begin reaching out to laid-off or disgruntled employees who know their employers' tech systems, security experts warn. Database security firm Application Security's recent audits of 179 organizations found 56% had suffered at least one data breach in the past 12 months. The survey does not reveal how any particular breach happened.

"It's a three-legged beast," says Pat Clawson, CEO of Lumension Security. "There is an absolute crunch in IT spending, there are more profit-minded hackers, and employees with access to valuable data" are willing to sell access to criminals.

About 75% of the 1,400 tech operations and information management professionals recently surveyed by Lumension and Ponemon Institute said cybercrime remains a major concern, despite efforts to thwart hackers.
"In the next year or two, these challenges will increase in both breadth and depth of threats," says Larry Ponemon, chairman of Ponemon Institute.

'It's so easy'

In a recent episode that reflected the complexity of leading-edge attacks, three different thieves collaborated to steal $99,000 from a credit union, says Tom Miltonberger, CEO of security firm Guardian Analytics.

The first thief pilfered a credit union member's online account user ID and password, and gave it to a second thief. That person then logged on several times to see images of cleared checks and to monitor the balance available on a pre-approved home equity line of credit, says Miltonberger, who investigated the case.

That information went to a third thief, who drew up a forged fax request with instructions to transfer funds from the home equity line of credit into the checking account, and then to wire those funds to another account. Because the forged signature was so good, the credit union carried out the transfer.

No one has been arrested in the case.

In another recent attack, someone acquired the user name and password for a system administrator at CheckFree.com, the nation's largest e-bill payment system. Using those log-in credentials, an intruder gained access to CheckFree's domain name service account — an account that permits the administrator to redirect traffic trying to access CheckFree's home page to other legitimate company pages.

For several hours, the intruder redirected anyone typing www.mycheckfree.com to a Web server in the Ukraine that tried to install a password-stealing Trojan. Although as many as 160,000 customers may have been affected, none had any of his or her data stolen, says Lori Stafford-Thomas, a spokeswoman for Fiserv, the parent company of CheckFree. "CheckFree sites are all up and running properly and securely," she says.

But the attempt was a sign of things to come, says Amit Klein, CTO of security firm Trusteer.
"The moral of this attack is that it's so easy to take over your (website)," Klein says. "I just need to get ahold of your user name and password once. And we all know how easy it is to get your credentials."

Beverage merchandiser Terrazas knows all too well the downside of having one's sensitive data stolen. He says Bank of America covered the illicit charge to his debit card and gave him a new card account number. But he had to alter several other financial accounts to reflect the change, and he no longer trusts using his debit card to pay bills or make purchases online.
"It's a bummer that somebody took my information," he says. "But if I don't want this to happen again, this is what I have to do."

Are These Simple Trading Mistakes Costing You Money In The Forex Market

noreply@blogger.com (Tattoo) — Tue, 03 Feb 2009 00:41:00 +0000

The 2% rule is a powerful tool in Forex trading. By adopting this rule you`re using a strategy that decreases the size of your losses during losing streaks, an important consideration. There is, however one small caveat that you need to be aware of when using the 2% rule to calculate how many Forex shares you are going to buy. As you know, the number of shares you can purchase is determined by your maximum loss and the size of your stop. This means that by increasing your risk, you can also increase the dollar value of the position you open. By simply shrinking your stop size, that is by setting a tighter stop loss, you can increase the dollar value of the position you open.

To avoid a situation where you could end up with excessively large positions that may put your Forex trading float at risk, you can choose to introduce an extra rule. This rule would limit the dollar value of a position to be no more than a set percentage of your entire Forex trading float.
For example, you might decide that you`ll never open a position that has a dollar value of more than 25% of your entire Forex trading float. This rule would only be executed if, after calculating the formula that determines how many shares you buy, you find the dollar value of that position would greater than 25% of your float. If this happened, you would scale down the position to make sure it did not exceed that 25%.

The percentage that you decide upon will depend on the type of system you`re trading, the size of your float, and your personal tolerance for risk. Generally, smaller Forex trading floats might use 25%, and larger Forex trading floats might use as little as 10% or even 5%. There are no definitive numbers, and the percentage that you choose will depend on your personal circumstances.

Once this tendency is corrected for you will have all your money management rules in place, ready to control your risk in the Forex market. Now you need to take the next step. Test your system to find out which of the variables best suit you, remembering always that position sizing is the most significant part of any system design. It is the lynchpin of money management. Once you`ve tested your system, and fine-tuned your rules, you will be well on your way to becoming a successful Forex trader.

Forex : How To Handle A String Of Investment Losses

noreply@blogger.com (Tattoo) — Tue, 03 Feb 2009 00:37:00 +0000

Everybody hates to lose and unfortunately no one is blessed with the ability of foresight, therefore losses are an unavoidable part of trading. When we enter a trade we will either be right, or wrong, and even if we broke-even we'd still be classed as being wrong — as nobody enters into a trade just to break-even! When unsuccessful traders encounter a string of losses they begin to engage in self-destructive patterns that help them escape the pain they are experiencing.

Bring to light these self-destructive actions that can help you realize what you are doing before it takes hold of your physical health. If you find yourself already engaged in these patterns hopefully this article can help you to get you back on track as quickly as possible.
What are the destructive patterns?

If you find yourself caught in a string of losses or a bad performing week/month be sure to monitor your behavior. It is during this time that you will be at your most vulnerable. You will begin to indulge in activities that at first seem harmless, but upon excessive use (or in time), begin to cause physical damage to your health.

Ask yourself the following question: during drawdown periods do I find myself over-indulging in these activities:

Food (especially junk food — e.g. chocolate, ice-cream, chips)?

Sex (includes viewing pornography)?

Alcohol?

Drugs (includes excessive smoking)?

Laziness (find it difficult to wake up in the morning)?

Entertainment?

All of the above taken in excessive doses can be detrimental to your own physical health (some even in small doses!).

These activities above during your losing period are only covering up the pain of confronting the true issue, and your body tries to rid the emotional pain by trying to "fix" it with physical pleasures. Unfortunately it is going about it in the wrong way, so what should you do?

Firstly... REALIZE WHAT YOU ARE DOING AND STOP IT!

You need to realize what you're doing and you need to STOP doing it immediately! You can either decide to stop, or you'll be forced to stop when your body eventually breaks down and prevents you from any form of movement. It will be much more beneficial to you in the long-term if you can decide to stop *NOW*.

Once you have stopped you now need to figure out a way to solve the pain — not by cutting out or neglecting it, but by staring it in the face. Bring your problems out into the light, be honest with yourself. There can be no growth without pain; you are experiencing the emotional pain, now it is time to find the error and therefore your growth.

Begin Your Review

The review process begins in two separate areas: You & Your System. Here are some checklists for you to go through to find out where the problem could lie:

"YOUR SYSTEM" CHECKLIST

Was your system thoroughly tested prior to trading it (or paper traded if you do not have the
capacity to program your system into back testing software)?

Did you test with out-of-sample data?

Do you even have a system???? If you do not, how do you even know if the method that you are trading is even profitable??

Is your system's code correct?

Did you over-optimize your system? (What have we discussed about over-indulging?)

Did you paper trade your system prior to placing capital on it?

Did you trade with a small amount of capital prior to placing the rest of your funds on it?

Do you know the system's limitations?

Did you properly drill your system? (See our blog article on why I am the system designer from hell)

"YOU" CHECKLIST

Is the current drawdown you are exhibiting with your system normal?

Are you comfortable with your system's historical drawdown performance?

Are you fully aware of the risks involved with your system and the instrument(s) you are trading?

Are you trading with funds that you are comfortable risking?

Are you relying too heavily on your performance?

Have you set realistic goals?

As you can see there are generally two areas that you need to explore: the mechanical aspect — your system — and the emotional aspect — you. Both can be responsible for making the way you feel the way you do. It will either be an error on the system's side with how the system was tested and/or programmed, or it can be your own psychological profile not being comfortable with the system's performance.

Your Answers = Change = Your Growth
What steps should we now take? Now that we have begun a corrective process where we have stopped the evil nature of our over-indulging ways to take control we should continue our "corrective nature" by invoking our findings and taking ACTION in correcting our errors.
If the problem was mechanical — fix it, if the problem was emotional either go about setting up new thought patterns, or change your current system. The answers lie in whether you need to expand your knowledge in system development, or whether you need to grow emotionally as a person.

Unfortunately there is no easy road, and even if there was everybody would be doing it. Hopefully this article has made you ponder over some of your behaviors during drawdown periods, be sure to keep an eye on yourself and as always take care of your body, because there's no use in making all the money in the world when you don't have the physical capacity to enjoy it