Education Archives - Page 18 of 64

What is the Difference Between Forex and Stock Market?

Forex vs Stocks – Difference between forex trading and stock market

The main difference between forex and stocks is that the forex market is highly liquid and has large volume (Around $6 Trillion per day) and the stock market has less volume (Roughly $200 billion per day); that forex is 24 Hour Market and stocks usually 8 Hour Market; that forex has minimal or no commissions (stocks can have pretty high commissions).

Silver and Gold at your doorstep! SilverGoldBull

Leverage
Forex leverage can be considered as the main reason why many traders choose forex for the stock market. Below is the comparison between stock and forex trading that one must be aware of.

There are various criteria one should meet before they do stock trading. It is not necessary that every shareholder is accepted for a margin account. This is what one should know about stock trading.

But this is not the case with forex trading. It is not like stock trading. To do business with leverage, one can easily sign up for a forex trading account. You just need to choose a good forex broker. The account opening process is fairly simple. No criterion for opening an account is required. In us, one is restricted to leverage of 50:1, whereas it changes from country to country.

Liquidity variations

One important difference between forex trading and the stock market is that trading of stocks means that one is purchasing shares of organizations that may cost from thousands of dollars. Due to the change in demand and supply, market-rate also differs. But if one is trading on forex then it is completely different from above. Even though the supply of a currency in a country is changing then also there is a huge quantity of money accessible for trading.

Paired trades

In trading of currencies, they are estimated in pairs. You are not only one to be worried about the economic wealth of the nation whose money is being traded and also with the economic wealth of the nation one is trading next to. An Individual’s worry differs from a market to another market. If one purchases the shares from Intel, their main worry is whether there will be any increment in the stock value. And one is less worried about the stock rates of other organizations. But this is not the case with forex. If one is purchasing or putting up for sale on forex, they have to think about the economies of both the nation. A winning trade on forex needs an examination of two financial entities and not examining only one entity. Forex also exhibits sensitivity to political and economic problems in different nations.

Rate sensitivity to trade movement

Stock trading and forex trading have different cost sensitivity to trade movement. Purchasing stock of ten thousand shares will have an impact on the stock rate. This is in the case of smaller organizations with fewer shares. As compared to stock trading, forex trade will have a very little or negligible impact on the currency’s market price.

There is larger freedom from guidelines

Stock trading may have many rules and regulations on the main exchanges. But this is not the case with forex trading. There is less regulation in forex trading. This regulation and limit on major exchanges force limits which one may not likely to welcome. It also provides protection to other investors to some extent whereas forex does not provide all these things.

Marketplace accessibility

The stock trading market has less accessibility than currency markets. It is now easy to trade stocks twenty-four hours per day and five days a week. Also, the trading of stock is not very easy. Most investors trade with a U.S. brokerage with trading time from nine-thirty am to four pm. Due to fewer trading hours, it discourages investors. But this is not the case with forex. Investors can easily trade six days a week and twenty-four hours per day. As forex has many traders, it is always trading in different time zones.

But in forex trading provides you to go short on a currency pair. These two positions have the same risks. Precautionary limit losses are not at all needed.

Final choice is yours

Many investors are well familiar with stock trading rather than with forex trading. The possibility of leveraging creates it simple to manage a large number of trades without any particular requirement. These are the advantages of forex trading. But taking part in forex trading also increases investment risk as well.

The most common question is: forex vs stocks which is more profitable? There are no consensus about this topic. Stocks over the years can raise and can be a good choice for long term investing but forex can be profitable too (do not forget that bigger leverage can give you a bigger profit). The best thing is to specialize in some trading niche (only dow stocks, only indexes or only major forex pairs or only gold, etc.)

How Much Money Circulates in Forex?

by Fxigor

The BIS Triennial Central Bank Survey provides news and statistics about the size and structure of global foreign exchange (FX) and over-the-counter (OTC) derivatives markets since 1986. Currency market data for the year 2019 we can see in OTC derivatives outstanding Report
Based on statistics we can see how much money circulates in the forex every year.

How much forex is traded daily?

According to the Bank for International Settlements triennial report of 2019, the foreign exchange market cap averaged $6.6 trillion per day ($6.6 trillion daily foreign exchange volume). In 2016. it was 5.1 trillion per day. So, the forex is the most actively traded market in the world and more than $6 trillion are traded on average every day. By comparison, this volume exceeds global equities trading volumes by 20-30 times.
More than 1,200 financial institutions in 53 countries contributed to the 2019 Triennial Survey. The final results are being published every December.

See below full statistics based on bis.org research:

Sharpe ratio

by Fxigor

In 1996, the Sharpe ratio was created by William Sharpe. Ever since then it’s been used as the referenced risk in finance. It is that popular because of its ease of use. In 1990, Professor Sharpe was awarded a Nobel prize in Economic Science for his effort towards CAPM. And this later contributes to its credibility.

What is sharpe ratio

The Sharpe ratio is number that adjusts a portfolio’s past performance—or expected future performance—for the excess risk that was taken by the investor.

The Sharpe ratio formula is given here as:

S(x) = (Rx – Rf)/ StdDev(X)

Where;
X= the investment, Rx = x average return rate
Rf = best available rate of return, StdDev(X) = standard deviation
A. Rx i.e. return if normally shared, maybe per year, month week or per day. This then reveals the shortcoming of the ratio; all returns on asset are not often normally shared.

Kurtosis: This is the peakedness or flatness of graph of a frequency distribution
skewness: This is a headache to the ratio because standard deviation may not be an option when these problems occur. Sometimes, it can be risky to apply this formula when returns are not in the normal distribution.
B. The risk-free rate of return (rf): This is applied to reveal if one is appropriately rewarded for taking a further risk. Normally, the most archaic in U.S T-bill is the risk-free rate on return. Though this kind of security is more stable, despite risk-free security has been debated by some that are supposed to match the period of comparable investment.
For instance, equities still remain an asset that persists for a long period. Perhaps we should not compare them with the long period risk-free asset present: IPS was issued by the government? Applying IPS that can persist for a long time would result in different ratio values because normally under interest rate clime, T-bills have lesser returns compare to IPS.

Wide selection of silver and gold bullion!

For example, a decade index returned to three percent of the year 2017 on inflation-protected securities was reported by BARCLAYS US TREASURY.
In contrast, within the same duration of time, a 7.4% index returned was reported by S and P 500. One may debate that investors giving preference to equities over bonds were fairly rewarded. If the Sharpe ratio has a bond index of 1.16% against 0.38% equity index means equities asset are riskier.

STANDARD DEVIATION
Since we’ve gotten excess return through subtracting the risk-free rate of return from the return of the risky asset, hence there’s a need to divide the answer by standard deviation of the calculated risky asset. As stated above, as the number rises, the investment gets better.
The way of sharing the returns is Sharpe’s ratio of soft rot. Bell curves were employed for convenience mathematically according to Nassim Nicholas and Mandelbrot in 2005.
Bell curves also never take a big shift into account.
Nevertheless, leverage does affect ratio if the standard deviation is small.
The return, as well as the standard deviation, can be two times their original size without hitches.
There’s an issue if the denominator is becoming too high. For instance, a stock price that’s supported 10 to 1 without much ado may drop by 10%, this is corresponding to a 100% fall in startup capital.

The Sharpe ratio and the risk

Knowing the relationship that exists between risk and Sharpe ratio is from calculating the denominator also refers to as total risk. Variance is calculated by squaring the standard deviation i.e. the denominator.
Why did Sharpe pick denominator to balance excesses? Since we are aware that Markowitz comprehends variance- which is one the way of measuring dispersion in statistics, something the investor detests. The standard deviation unit is the same as the measured data series.
Here are the examples showing reasons why investors should be mindful of variance:
Any investors are at liberty to pick 3 portfolios, having the expectation of returns of 10% on all in ten years.
The table given below depicts the given expectation. Investment horizon returns gained is shown per annum.
From the table, it’s shown that standard deviation shifts return from expectation.
In the absence of risk standard deviation is zero. This means the expectation is equal to returns.

Expected Average Returns
Year Portfolio A Portfolio B Portfolio C
Year 1 10.00% 9.00% 2.00%
Year 2 10.00% 15.00% -2.00%
Year 3 10.00% 23.00% 18.00%
Year 4 10.00% 10.00% 12.00%
Year 5 10.00% 11.00% 15.00%
Year 6 10.00% 8.00% 2.00%
Year 7 10.00% 7.00% 7.00%
Year 8 10.00% 6.00% 21.00%
Year 9 10.00% 6.00% 8.00%
Year 10 10.00% 5.00% 17.00%
Average Returns 10.00% 10.00% 10.00%
Annualized Returns 10.00% 9.88% 9.75%
Standard Deviation 0.00% 5.44% 7.80%

How to use Sharpe ratio ?

Sharpe ratio may be used to measure return, can also adjust risk so as to compare the investment manager’s performance.
For instance, say one investment manager makes fifteen percent returns and the other twelve percent return. The latter looks excellent in performance. Though the latter took higher risks than the former, the former risk-adjusted return may be better. To buttress this example, 5% free-risk rate is available, the first managers have eight percent standard deviation, five percent for the second manager. The first would realize the Sharpe ratio of 1.25. then 1.4 goes to the second manager, this is better compared to the first manager. Hence as a result of this calculation, the second manager depending on the risk-adjusted got better returns.
NOTE:
Ratio 1: Good
Ratio2: Very good
Ratio3: Excellent

Negative Sharpe ratio

A negative Sharpe ratio means that the performance of a manager or portfolio is below the risk-free rate and can endure for long periods of time. It is interesting that the negative Sharpe ratio is problematic to evaluate during the volatile market. A portfolio with a small negative excess return can be punished if the volatility associated with it is large.

Bottom line

Evaluation of risk and compensation is done together while making investment decisions, and this is the main focus of Modern Portfolio Theory.
Generally, variance or its square root drifts compensation away from the investor. So in order to choose an investment, it is advisable to deal with risk and reward together. Sharpe ratio will be helpful in making investment decisions that will yield bigger returns even when the risk is considered.

How To Read A Forex Quote

by Fxigor

Do you want to start trading? If yes, then one of the first things you should learn is reading a forex quote. However, it is very easy but still, some people don’t know how to do it. So if you also have any confusion regarding the forex quote, then this article will teach you how to read a forex quote properly. Now without wasting any time, let’s get started.

Currency pairs explained

How do currency pairs work? A currency pair is a pair of two different currencies, the first currency is called as a base and the second currency is called a quote. Market convention currency pairs rule is that the price of the base currency is always calculated in units of the quote currency. Currencies as AUD (Australian Dollars), USD (US Dollars), JPY (Japanese Jen), GBP (British pounds), and EUR (Euros), Canadian dollar (CAD) are mostly used as base currencies. Coming to the quote currency, it can be any other commonly used base currency.

In this example, the base currency is EUR and the quote currency is USD. This example is showing the worth of 1 Euro is 1.33 dollars. The base always equals to 1 no matter what currency you use. A comparison of these two currencies is called forex convention, the base will be EUR. On the flip side, if the base is USD, the (USD/EUR = .7519) would be the quote.

How to read currency pairs – Bid and Ask Quotes

A forex quote is the price of one currency in terms of another currency and has two parts, which are a bid and an ask. To help you understand better, here is another example – EUR/USD = 1.3300/05.

So how to read forex numbers in this case?

In this example, 1.3300 is the bid and 1.3305 is the ask. Though if you view them in regular circumstances, then the difference between them is not high. Coming to the convention, it is the last 2 numbers of the given four trailing numbers. Now it would spell-like EUR/USD = 1.3300/1.3305 where 1.3300 is the bid price and 1.3305 is the ask.

The difference between the base and quote currency is that the first currency in this currency pair is referred to as the base currency and the second currency is called the quote currency and the price of the base currency is always calculated in units of the quote currency.

Forex quotation – Knowing Bid and Ask Meaning

Now if you are thinking that the bid is the price that you will pay to buy a currency pair, then you are highly mistaken. However, you should look at these from the forex broker’s perspective. Since you want to buy the stuff, so you won’t pay the bid, instead, you will pay the ask (3.3605). On the other hand, you would accept the bid (3.3600.) made by the broker if you were selling.

Spread is the term that is used to refer to the difference between the bid and the ask. The commission that the broker takes is called a spread.

Spreads and Pips

Pip is one of the most common terms in forex contexts. When it comes to forex currency quote, the smallest unit (of value) is called a pip. For example-

EUR/USD = 1.3300/1.3305

In this example, we have 5 pips and it is the difference between base and quote currency. As you know the bid price is the first number, which is 1.3300 and the second number is the ask, which is 1.3305. So 5 pip is the spread in this example.

Conclusion

In the past few years, forex trading has become very popular and millions of people are connected with it and making a lot of money. Because of its amazing return on investments, many new people are coming to this industry in the hope that they will also make huge money. So if you also want to get successful with forex trading, then you must learn all the basic first. All the important information related to the forex quote is mentioned above. Hope this article will clear some of your doubts.

Avoiding Unnecessary Forex Trading Costs – Signal Sellers Scam

by Fxigor

Signal Sellers as Unnecessary Forex Trading Costs
The forex market is enormous and possesses a trading volume of a daily average that is worth more than five trillion dollars. Also, this system is not under tight regulation. This means that it is easy for some forex scams to occur which tend to make the promise that the trader will earn fast profits via the application of secret trading formulas that are indicated as being based on algorithms along with the implementation of methodologies for trading that are classified as proprietary. Or there may be the presentation of forex robots that engage in conducting the trading activities on your behalf.

Who is the signal seller ?A signal seller grants the provision of a system that indicates that it will engage in the identification of times that are deemed favorable in regard to the buying and selling assets. The system can be presented in a manual form. In this case, the trader is required to enter the information pertaining to the trading efforts. On the other hand, the system may be automated in order for the trade to be conducted when there is the occurrence of a signal.

Where is the problem? Why signal selling is Unnecessary Forex Trading Costs
If traders trade short time trades, and risk-reward is 1:1 for example than winning ratio will be around 51% for the best market systems. Even the biggest trading companies can not create an excellent system that will bring profit every day or every month. Of course, using a lot of trading systems and quantitative trading, big companies can be profitable every month. The trick is not in the forex signal – the secret is in portfolio management.

When someone is a new forex investor, it is realized that one of the key challenges that are posed for this person is the matter of being able to determine which operator he or she will trust on the scene of the forex market as well as which ones to avert having any dealings with. Careful consideration must be given to signal operators.

It is noted that there are some systems based on the reliance of analyses that are technical, while others may seem to be based on the reliance of trending news. As well, some systems may claim that they apply a combination of both of these elements. However, all these systems extend the guarantee that they grant the provision of information which will yield opportunities for favorable profit earnings from trading.

A wide criticism pertaining to signal sellers is that if it was plausible to apply the usage of their systems in order to come ahead of the market, it would seem strange for the person to share this information on a wide scale. This is based on the fact that the person would be more benefited to use this system to make large profits for himself or herself.

But the problem is not in sharing or some special secret – the problem is to understand statistics in trading, odds, and probability. Holly Grail does not exist.
Are forex signals reliable? Signals are reliable only if they are tested statistically. So black box signals can be dangerous.

How much forex is traded daily?

What is sharpe ratio

The Sharpe ratio and the risk

How to use Sharpe ratio ?

Bottom line

Main Forex Info

Main navigation:

Forex social network