Specifics of futures trading

July 28th, 2010

The financial market consists of different markets, for example futures market.

The futures trading allows traders to use the capital more efficiently and to increase profit on each profitable deal. The futures contracts make it possible to decrease considerably the potential risks and to protect the positions against losses.

What are futures and how to trade futures?

A futures contract is an agreement between two parties, according to which both parties agree to settle a bargain by a certain date in future. One of the parties undertakes to sell the asset specified in the contract and another party obliges to buy it. Entering into a contract, neither party pays.

Trading futures contracts has a number of advantages. The first is that the trader does not have to pay the full cost of a contract, he/she only makes so-called security deposit. As a rule the security deposit is about 5-10% of value of a contract. You can find the value of the security deposit at the web-site of the stock exchange, on which the futures is traded. Thus, the leverage is formed, for the use of which it is not needed to pay, as it is done in stock trading.

Another advantage of the futures contracts trading consists in low transaction costs. The futures trading allows to use different strategies in order to advance the possible profit and to hedge risks.

The futures trading has two approaches:

- closing of the open positions until the expiration of a futures contract
- delivery of an asset before the expiration of a futures contract

There are several types of futures contracts:

- Commodity futures, assumes that the buyer has to buy and the seller to sell the underlying item of the contract at a set date.

- Financial futures, assumes that only cash settlements are made between participants in the amount to the difference between the contract price and the actual price of the underlying asset when the contract expires without the physical delivery. This type of a contract is used for hedging against the risks.

How to trade futures?

The futures contract trading slightly differs from the trading on the international currency market Forex. The technical and fundamental analysis, same charts and indicators are used on the futures market. However, the futures market has a number of distinctions from Forex market. On Forex market the position can be opened for months or even years, but the futures contract has the specific closing date. If it is not closed by you, then it will be closed forcibly.

The abbreviation of futures contract consists of several parts. The first symbols point to the item (gold, oil, Dow index); next symbols indicate the month and year of futures delivery.

Generally accepted designation of the month in futures contract:

Month Code
January F
February G
March H
April J
May K
June M
July N
August Q
September U
October V
November X
December Z

Also during the futures trading you pay the spread (the difference between the bid price and ask price) as well as the commission. The amount of the commission is stated in the specification of futures contracts.

Futures trading is carried out on the futures exchanges, the well-known futures markets are:
- New York Mercantile Exchange, NYMEX, NMX
- Chicago Board of Trade, CBOT, CBT
- Chicago Mercantile Exchange, CME
- International Petroleum Exchange, IPE
- London International Financial Futures Exchange, LIFFE
- London Metals Exchange, LME

InstaForex Company offers its clients a possibility to trade CFD for the futures. At present over twenty of such-like trading instruments are at our clients’ disposal. At the page of the contracts specification of the company’s official website you can find out more about the futures.

Added by Alexey Skachilov,
InstaForex
Clients’ relationship manager

How to make the right forecast on Forex market?

July 8th, 2010

All traders working on the international currency market use analytical reviews and forecasts. This substantial component plays a great role in reaching success and making a permanent profit. As all decisions taken by a trader in the market work must base on some forecasts and researches that is why Forex market forecasts are so necessary for the traders.

Today there is a great many of different sources which provide Forex forecasts as an additional of service. A trader must decide on one of the information resources. But before making your mind who will be your information deliverer on Forex market it is necessary to rely on your market view, as all market forecasts are nothing but somebody’s suppositions concerning the situation expected on the market in the nearest time. A trader must learn well to combine his opinion with the analysts’ opinion who make the forecasts.

Using the analytical forecasts a trader must base on the following rules:

1. A trader must determine the range of sources, from their forecasts he will use the information about the existing processes on Forex market. Nowadays there are a lot of sources on the market which deserve the investors’ attention. The trader can apply to analytical reviews issued by the official resources as well individual traders.

2. Almost all forecasts of Forex market are paid that is why in order to be sure in the received information worth paying attention to the publication popularity. At present, it is rather easy to find it out. You just have to know the public opinion that is actively promoted by thematic forums and blogs.

3. The forecast quality. This assessment criterion can be also easily educed as almost all analytical outlooks are paid and if a trader decides to pay money for Forex market forecast, then the most reliable and competent source must be chosen for this matter.

It would be wrong to say that using the forecasts for Forex market is low efficient. However, even big financial institutes interested in the quality of the provided analytical information do not give a 100% guarantee of a positive result. And none of the financial companies can give, that is why it is better to choose the one which has the biggest and longest work experience on the market.

Added by Evgeny Galaev,
Chief Manager of InstaForex Client Relations Department

The influence of the Central Bank on Forex market

July 2nd, 2010

The fundamental analysis is one of the most important elements of the analysis and forecasting on the Forex market. The technical analysis is also a powerful instrument, however, the forecasts made on the basis of the fundamental analysis are more precise and the process of the analysis will allow to go to the root of the situation at the market.

One of the most important processes affecting the movement on the market is the process of the interest rates’ change by the central banks, in most cases this leads to the activation of the market. In this article we will discuss the connection between the change of the interest rate and exchange rate.

Each state has its own interest rate policy of the central banks. When it is formed, such major instruments as the base rate and bank rate for the transactions on the financial market are used. All decisions about the change in the interest rates are taken on the assumption of different macroeconomic indices. The market is the most unpredictable in the moment when the interest rates are change unexpectedly. That is why each trader, who uses the fundamental analysis, should pay attention to the forecasts and reports. Basing on his/her knowledge the trader should make the conclusions regarding the probable behavior of the market in future. This will allow to avoid the probable losses and to use the situation for his/her benefit.

The basic concept of the interest rate

Traders, using the fundamental analysis, have to take into account the role of the interest rates. This moment is very important for the traders who work during the day. The explanation is very simple. The trader, who works on the Forex market during the day, orients on the certain amount of the profit. That is why such trader has a particular level of the intraday income. Correspondingly, the higher is the level, the greater are the sums used by the trader.

However, such type of trading should not be considered as the opportunity to earn quickly the large sums of money. It is far from true. The fundamental analysis of the Forex market is a vast science, which requires form the traders the intellectual flexibility and efficient application of knowledge. This implies that trading on the Forex market the dynamics of the market should be taken into account, since the currency fluctuations can lead either to the profit or to large losses.

How the value of the interest rate is determined?

Primarily, you should remember that the interest rate is the leverage of the Central bank on the national currency and is one of the links of the monetary policy. Every Central Bank has a Board of Directors, which takes the decision concerning the short-term interest rates. The interest on credit is determined by the short-term interest rate, which is issued by the Central Bank to the commercial banks. In case the inflation starts the Central Bank, depending on the targets, will try to influence the national currency due to the control over the interest rates. When the counter inflationary decisions are taken, the interest rates are raised. In such way, the volume of active money will be decreased and this in its turn will lead to the decline of the inflation. If the decision is taken to advance the money supply then the interest rate will be lowered.

It is impossible to foresee which decision will be made by the Central Bank. That is why the trader should study the fundamental analysis. The trader should know the economic indices, which will help to forecast what measures will be accepted by the Central Bank in regard to interest rates. In this connection it is worth to pay attention to the following indicators:

Housing Price Index

Employment rate

Consumer Price Index

Consumer Spending Index

How these data can be used?

Earlier, we have talked about the indices, which should be taken into account by the trader, using the fundamental analysis. Besides, the Central Bank can take into account other data also, however, the indices which you can see above are the base. That is why the traders have to follow their dynamics. If the indices improve then the economy develops normally. In this case the level of the interest rates is unchanged, or it is increased partly. If the readings of indices worsen than the level of the interest rates declines. In such way the amount of funds, which are in circulation, increases.

What should the trader do when the level of the interest rate changes?

Very often the forecasts can be mistaken, because the measures taken on the control over the interest rate can be unexpected. That is why each trader should carefully study the fundamental analysis in order to know what to do even in cases of force majeure. At first, the trader should remember that in case the interest rates are decreased unexpectedly, then the bulk sale of currency is possible. This is connected with the fact that the majority strives to protect themselves against the possible losses.

Conclusion

The fundamental analysis of Forex market is a complicated system, which consists of different indicators. Nevertheless, despite the fact that it is almost impossible to study all details of the fundamental analysis, the knowledge of the basic factors is necessary for the successful trading on the international Forex market. The interest rates are one of the bases of the fundamental analysis.

Added by Alexey Badianov,
InstaForex
specialist in finance

Figures of the trend continuation

June 23rd, 2010

Besides reversal patterns on the charts of technical analysis of Forex market the figures of the trend continuation can be singled out. The trend figures illustrate a short period of the market correction. The most important figures of the market continuation are flags, pennants, triangles, wedges and rectangles. Below we will discuss every figure in detail.

Flags and Pennant

Flags and pennants are the most often models of the trend continuation, as a rule, they can be noticed in a very energetically developing trend. The dynamics of the flag and of the pennant have much in common. Both of these figures arise after a dynamic market movement, forming almost a straight line on the graph.

The figure actually is a pause in the trend development, during which the price is almost at one and the same level. A pennant looks as a small triangle on the chart whereas a flag is a short-term price range. After the figure has broken the curve, the prior trend continues, passing the distance equal to that of the figure.

Flag and pennant are the reliable trend continuation figures, when they are moving against the trend. Thus, a flag which is inclined downside gives a bullish signal. If the flag is inclined upwards, the signal is bearish. Before the emergence of the figure, the market activity is high. After the trend continuation pattern has arisen, the activity starts to fall. When the break happened, the activity is upturning again. Another feature of a flag is that when the market is lowering, the figures are being formed much faster, than during the ascending market. The appearance of these patterns on the actively expanding market denotes that a puncture is possible.

It should also be mentioned that flags and pennants are directed not against but along the prior trend and are more a trend retrace.

flag

Flag

pennant

Pennant

Unlike rebound figures, the figures of the trend continuation can very often denote the false direction of the trend. The things are more complicated with the figure of the trend reversal “triangle”.

Triangle

Triangles can be viewed as flags without flagpoles. Four types of triangles are distinguished: symmetrical, uprising, downfalling and expanding.

A symmetrical triangle is built by symmetrically converging support and resistance lines, drawn though at least four points. The symmetrical convergence of these lines reflects the existing on the currency market balance between demand and supply. Consequently, the breakthrough can emerge in any direction. But if there is a bullish symmetrical triangle, the break is likely to be directed like the previous trend, proving the name of triangle as a figure of trend continuation.

Triangle

Uprising Triangle

An uprising triangle is formed by the horizontal resistance line and the uprising support line. This figure demonstrates the situation when the demand exceeds the supply considerably. The break is upward, and further on the target is the price level which is positioned at a distance equal to the base of the triangle from the point of the break through.

Downfalling triangle

A downfalling triangle is a mirror reflection of the uprising one. It is formed by a horizontal support line and a declining resistance line. The figure illustrates the situation on the market when the supply is much higher than demand. The price breakthrough happens in this situation to the bottom. The trading volume is gradually declining in accordance to approaching the high, but it surges at the moment of the break.

Expanding Triangle

An expanding triangle, or megaphone, is an inverted image of any prior discussed triangles, where not the base of the triangle, but its corner is adjusted to the line of the prior trend. The change of the trading volume happens accordingly, the volume increases proportionally to the formation of the expanding triangle.

The break can be considered concluded if the close price was fixed outside the corresponding line, that is either above or below one of the triangle sides. After the break the curve is usually rebounding towards the punctured side.

Wedges

Wedge is closely related to the patterns of triangle and pennant. It is similar in form and the time of formation, but from the viewpoint of form and analysis, it resembles a pennant without a flagpole more. It’s usually broken through in the direction opposite to its incline, but coinciding with the direction of the prior trend. Depending on the trend, the wedge can be bullish or bearish. By the wedge on the chart it is possible to see only the trend continuation.

Wedge

Rectangles

The figure Rectangle demonstrates the market consolidation period. After its breakthrough, the currency is likely to continue the previous trend. But its disruption can, however, lead to the transition from the trend continuation to the recoil.

Rectangle

This figure is easily distinguished, and it can be considered as a small sideways trend. When it is formed along the up-trend and the price breaks though it upwards, the rectangle is called bullish.

Added by Andrey Misyuk,
InstaForex Clients’ relationship manager

Arbitrage on Forex

June 17th, 2010

The arbitrage concept means several ‘buy’ or ‘sell’ deals in order to profit from unequal prices of the same or resembling assets at the same time in different markets or in one market, but at different times.

Also there is the concept as Forex arbitrage. It is ‘buy’ or ‘sell’ operations made by a trader and a required further reverse deal for the purpose of making profit.

Controlling its risk, Forex arbitrage can be very beneficial. The meaning of Forex arbitrage is following: profit is made by mean of buying/selling of financial instruments at different times. In addition, a trader has opportunity to complete financial transaction in different market. Forex arbitrage means obligatory making both buy/sell deal in Forex and a reverse operation, which will bring a profit.

There are several types of arbitrage available. It is simple arbitrage, which involves using of just two currencies and a complicated type, which involves trading with three and more currencies.

Depending on what profit one can make there are following types of arbitrage:

- Temporary arbitrage is the most accepted type of arbitrage. Its meaning is in quotes difference of currency pairs at different times. The temporary arbitrage can be of two kinds:

1. “Purchase-Sale”. A trader buys a currency at a lower price in order to sell it at a higher price and get profit.

2. “Sale-Purchase”. Trader sells currency at higher price in order to buy at lower price in the future.

- Crossing arbitrage is one of the most complicated types of arbitrage. During the crossing arbitrage simultaneous synchronous exchange rates changing takes place in two pairs. Such cross-imbalances appear in Forex all the time.

- Intermarket arbitrage occurs in case of if you want to earn on exchange rates difference in different currency markets.

However, the using of Forex arbitrage is not always profitable, as in today’s conditions exchange rates in various exchanges do not differ often that does not allow traders to obtain additional profit.

The main essence of arbitrage is the complication of fixed-date buy/sell deals of currency options. The option must be executed without fail and its conditions depend on its type and the conditions of the contract.

In general, the choice of strategy depends on many factors related to each other, which trader must consider during the trading.

Added by Alexandr Kornilov,
InstaForex Clients’ relationship manager