Forex Market - Whipsaw

A whipsaw is market trend that defies the odds.It can be thought of as the “fender bender.Despite how careful you are as you learn to drive a car and become coordinated, sometimes you cannot do anything to avoid being rear-ended.

Whipsaw is a term for what happens when everything points toward a specific direction in market trend, causing you to buy (if it looks as though prices are going to rise) or sell (if it seems they are about to fall), then the opposite effect occurs.

For example, if you purchase a security at five dollars per share because the stock seems to have fallen as far as it can go and appears to be starting an upward trend, then unexpectedly, the stock plummets to one dollar per share, this is considered a whipsaw effect. If this happens to you, as it surely will if you play the market long enough, the best thing to do is wait it out. The stock will do one of two things – it will either dissolve entirely, and the company will go bankrupt (this is what you do not want to happen), or it will rebound, and you can opt to wait for a chance to turn a profit or you can get out as soon as the purchase rate is reached.

Whipsaws are not the end of the world, and no one can expect to gain with every stock market purchase. However, if you find that you are involved in several of these instances, you should seriously reconsider your investment options. You may be reading the signs incorrectly, or you could be picking bad stocks. You should seek advice for any future investments you expect to make prior to purchasing any further stocks or securities.

Another way to overturn a bad investment like this is to proceed with an offset transaction – a purchase or sell that offsets the loss of a previous transaction. You could either purchase additional stock in the same company at the lower price if you expect it to recover, or you can opt for another hot commodity that is about to explode in price, either of which will help you offset your loss. You could also sell shares of a security in which you have a large amount of unrealized gain – gain that cannot be measured in liquid assets or cash due to increase in value of stock and security holdings – in order to replace the lost cash value.

Forex Market - Risk Management

One of the most important aspects of protecting your investments is balancing your risks with reassurances. There are several ways to do this one of the way is called
limit orders and balancing risks

A limit order is a standing amount at which you have agreed to buy or sell a particular security or other commodity. For instance, you have designated to your stockbroker that you will not sell X Security until its value reaches a minimum value of Y dollars. At the same time, you will not purchase the same X Security if it exceeds a value of Z. Setting limits for the price you pay for a particular security, as well as the price you will accept to sell it, protects you and your investment in several ways.

First of all, you are maximizing your gains, but mostly, you are avoiding loss. Any loss that occurs with limit orders will always be unrealized loss, or a loss that is not measurable in liquid assets or cash. In other words, until you sell the stock and reap the net loss, it will not affect your net worth. Since you have set a limit that does not allow your commodities to be sold for less than the original cost, you cannot possibly have a loss in your net worth. At the same time, you are also assuring at least a certain amount of profit by setting your sell point high enough to reap that particular profit.

Another way to protect your assets is to hedge. This means that you create and sell a futures contract stating that, when your shares reach a certain value in the future, you will sell your holdings at this predetermined price. When that price is reached, the order will be processed and the transaction completed. Of course, if you ever change your mind about a limit that you have set, you can place a stop order with your broker, which designates that you no longer wish to trade at the specified dollar amount.

You can also buy on margin. This is very similar to short selling, but instead of borrowing stocks to sell, you are essentially borrowing money to purchase stocks on your own when the market value is down. Then, when the value of the securities you have purchased rises and you are able to sell for a profit, you repay the loan and keep the excess from the sell, minus the broker fees. Of course, all dealings with a stockbroker incur a premium, or fee for services rendered, and it is nearly impossible to trade without a broker or broker service. However, online services are often less expensive than live agents, but you can research to determine what your best option is.

Forex Market - Currencies

The most common currencies found in Forex are the U.S. dollar, the British pound sterling, the Euro, the Japanese yen, and the Australian dollar. In the past, there would have been many more currencies to keep track of (such as the franc, the lira, or the Deutschmark). However, with the consolidation of most of the European market trading on Forex to the Euro, many currencies have been eliminated, making trade on Forex for other lands less complicated.

If you purchase a commodity in a particular currency, and that currency’s value falls against the U.S. dollar, you can actually make money by selling that same commodity in dollars. The same is true in reverse should the value of a foreign currency increase against a U.S. dollar. Of course, you can only take advantage of such a situation should the commodity be traded in both currencies and both markets in question. We will discuss this process, as well as other ways to take advantage of the Foreign Exchange Market (like arbitrage) in more depth in future chapters.

Once you are able to discern a base value of each particular currency and its conversion rate against others traded on Forex, you will be able to more closely monitor the change in currency conversion, including its inconsistency and volatility. Such ideas will not seem so “foreign”, and you will be caught up and knowledgeable right along with the pros. Then, you will need to learn how to read, understand, and ultimately interpret additional market trends.

Forex Market Today

While some countries have still not accepted the currency as their own (such as Britain, who still uses the sterling pound), the process of currency conversion has been simplified without the large number of various currencies that were previously dealt with. Instead of dozens of currencies, the main countries trade in five – U.S. dollars, Australian dollars, British pounds sterling, the Euro, and the Japanese Yen.

Today, the Foreign Exchange Market or Forex Market is international and worldwide. The Forex market is open 24 hours a day, 5 days a week, to accommodate all of the time zones for all of the major players. These now include most of Europe, the United States, and Asian markets, especially Japan. Even Australia has joined the international trading markets, and since such nations are halfway around the world from some of the other top players, time zones obviously must be taken into consideration.

Another completely separate but perhaps more important concern with trading in Forex market is understanding how trade works in multiple currencies. How can you compare the value of a stock across international lines if the values are expressed in two separate, non-equivalent currencies? And how do you measure gains and losses when conversion rate is constantly changing? That is the interest part pf Forex Market or Forex Trading