16.
RISK ON/RISK OFF: WAX ON, WAX OFF
One of the first things new clients ask is what risk on/risk off means. This is a piece of financial market jargon that all traders should know, because it can determine the direction of a currency. Risk on/risk off refers to changes in investment behavior in response to global economic conditions. For example, when risk is perceived as being low, risk on/risk off states that investors tend to engage in higher-risk activities; in contrast, when the risks are perceived as high, investors tend to move toward lower-risk investments.
Risky currencies include emerging markets and some of the less liquid G10 currencies, such as the Scandis (the Norwegian krone and Swedish krona), CAD, AUD, and NZD. Interestingly, most of the higher-risk currencies are also the currencies of commodity producers. According to risk on/risk off, these currencies should fall when risk is perceived as being high.
In contrast, the JPY, the CHF, and, occasionally, the USD are considered safe havens and tend to be bought during periods when risk aversion is high. The JPY is probably the most-famous safe haven; it can rally when the risk is centered in Japan. For example, after the 2011 Japanese tsunami, the yen surged.
Bonds
Fixed income and bond markets have a more intuitive connection to the forex market because they’re both heavily influenced by interest rate expectations. However, short-term market dynamics of supply and demand interrupt most attempts to establish a viable link between the two markets on a short-term basis. Sometimes the forex market reacts first and fastest depending on shifts in interest rate expectations. At other times, the bond market more accurately reflects changes in interest rate expectations, with the forex market later playing catch-up (because it takes longer to turn a bigger ship around).
Getting Started with a Practice Account
For newcomers to currency trading, the best way to get a handle on what currency trading is all about is to open a practice account at any of the online forex brokers. Most online forex brokers offer practice accounts to allow you to experience the real-life price action of the forex market. Practice accounts are funded with “virtual” money, so you’re able to make trades with no real money at stake and gain experience in how margin trading works.
Practice accounts give you a great chance to experience the minute-to-minute price movements of the forex market. You’ll be able to see how prices change at different times of the day, as well as how various currency pairs may differ from each other. Be sure to check out the action when major news and economic data is released, so you can get a sense of how the forex market reacts to new information.
In addition to witnessing how the forex market really moves, you can
Start trading in real market conditions without any fear of losing money.
Experiment with different trading strategies to see how they work.
Gain experience using different orders and managing open positions.
Improve your understanding of how margin trading and leverage work.
Start analyzing charts and following technical indicators.
www.dummies.com and type “Currency Trading For Dummies Cheat Sheet” in the search box.)
INTERPRETING YOUR RESULTS REALISTICALLY
Trading in a practice account is the 21st-century form of paper trading. Paper trading is writing down trades on paper based on real-time market prices but not having any real money at risk. Practice accounts are a souped-up version of paper trading — you only have to click and deal, and the trading platform does all the recording for you.
Whether you’re trading in an online forex practice account or paper trading on stock quotes from the morning newspaper, be sure to keep in mind that your results aren’t real because you never had any real money at stake.
Think of it this way: If you make a handshake bet with a friend on a sports game, you’re probably not going to be too concerned with whether you win or lose. You may not even watch the game. But if you bet $50 or $100 on the game, you’re probably going to watch the whole game and cheer and yell while you do. The difference: Your emotions come alive when real money is on the line.
Practice accounts are a great way to experience the forex market up close and personal. They’re also an excellent way to test-drive all the features and functionality of a broker’s platform. However, the one thing you can’t simulate is the emotions of trading with real money. To get the most out of your practice-account experience, you have to treat your practice account as if it were real money as much as you can.
Chapter 3
Who Trades Currencies? Meet the Players
IN THIS CHAPTER
The forex market is regularly referred to as the largest
