The founder of Essex Investment Management has been beating the Russell 3000 by a wide margin. How does he do it? His fascinating array of picks, from Apple to Comcast.

More than 50 years of experience in the investment arena give this canny pro the ability to identify big market trends and the companies that will reap the most rewards from those trends. The nimble Joseph McNay also knows when to put the brakes on—as he did in February 2008, when he cited gold as the single best place to put money. His is a talent that has served clients well through these many years by delivering exceptional performance. His flagship long-short fund is beating the Russell 3000 index this year by a wide margin. We met recently with McNay, 78, founder and chief investment officer of Essex Investment Management, in his Boston office, and found him brimming with ideas.

Barron’s: Are you still bullish on gold?

McNay: In the long term, gold is still in a bull market, because most governments are still in financial trouble and printing money, but we are now in a correcting phase. We chose to save the system with a major influx of money which will cause big problems later: an increasing rate of inflation and the risk of hyperinflation—and a major loss in the value of our currency. The only saving grace is that foreign countries, in many cases, are worse off and, consequently, destroying their currencies faster than we are; therefore the dollar on a relative basis appears okay. At some point, we will be forced to go back on a gold standard and at a much higher price.

In the near term, what’s your read on the market?

In the short term, the market is slightly overbought, and that shows up in the bull/bear spread [an indication of investor sentiment], which is elevated and bearish. Small-cap relative strength has led the market, and it has turned sharply negative recently—and we are getting a correction in those stocks. Short interest is very low, negativism has evaporated, and that is bearish, near-term.

How long do you think the correction lasts?

We look for a pullback to the 50-day moving average on the S&P 500, which is around 1320, and so it could last a few weeks or a month. The put-call ratio is still low, indicating people are too positive.

Why do you rely so much on technical analysis?

It is a way of measuring investors’ emotions and their current actions, and it is good for reading extremes. The long-term trend is actually still positive, and going up.

We are in a very tough environment, but we are doing a little better than many might think. The U.S. is more solid than most of the other economies. Japan is a disaster, and Europe is in tough shape and, consequently, the U.S. is more attractive on a relative basis. The U.S. has high unemployment, real estate has been slow to recover, and a recovery will take longer than people think. And the total debt of the federal, state and local governments as a percentage of gross domestic product is the highest since World War II, and is continuing higher.

The U.S. is growing the money supply at a very fast rate, a minimum of 10%. So we have problems, but others’ problems are much worse than ours.

How do you view the interest-rate environment?

Short-term interest rates are the lowest in our lives. This is an important consideration in investing: People have to do something with their money, and there is lots of it out there.

If you put it in fixed income and buy anything with longer-term maturities, your risk is enormous—because as interest rates rise, which they will, bond prices will go down. On the other hand, you can put it in very short-term maturities, you won’t lose it, but you won’t get paid anything either. So it makes common stocks and gold-related investments the most interesting places to invest. You want to be in companies that grow faster than money loses its value, so that you maintain your purchasing power. The aging population, one of my investing themes, wants more income for their investments. So stocks that pay dividends have more appeal. Starting in the late 1960s, companies were rewarded for delivering growth and reinvesting in their businesses, and dividend payouts started going down.

We are entering a period where that is reversing, and the companies that pay dividends are the ones whose stocks are going up, and so more companies will be doing it. We are in the early phases of dividends starting to be increased by major corporations.

If Apple is considering it, then the world has changed.

I think Apple [AAPL] will do it. Their accumulation of cash is enormous, and the rate of return they are receiving is way down. Corporations have the highest cash levels ever. That sets up some interesting dynamics. We’ll have dividend increases, but we will also have buyouts of companies. But there is a negative: Profit margins are at an all-time high and, while that is wonderful, it must be looked at very carefully, because margins could be risky here, and that means there is a greater degree of risk in the 15 times price/earnings ratio that stocks are trading at on average.

What’s this mean for a growth-stock investor such as your self?

Growth is where the opportunity is. Small-cap growth, mid-cap growth and large-cap growth stocks are all undervalued.Microsoft [MSFT] is a great example, at 12 times earnings, growing nicely and paying a 2½% dividend. What a fabulous place to have money. Apple is only 10 to 12 times next year’s earnings, and it has one of the best growth rates in the world.

The Nasdaq just passed 3000. Does that worry you?

That’s low compared to where it was a few years ago.

People said it would never get back to 5000.

We will be technically scared when it does get back to 5000. How long it takes to get there, and how high the earnings are, will make a difference. It also includes Apple, which has the largest market capitalization in the world. But it is still growing. Apple’s biggest problem will be its own success. At some point, it will be hard for it to continue to grow. Yet, for the moment, it still has good new products. It can still add to its growth. Apple is one of the largest holdings of my clients.

Joe McNay’s Picks…

Recent

Company Ticker Price

Microsoft MSFT$32.85

Apple AAPL585.56

Morgan Stanley MS19.47

Zynga ZNGA13.06

Comcast CMCSA29.80

CBS CBS31.51

Walt Disney DIS43.46

Time Warner TWX35.83

Intuit INTU60.18

SVB Financial SIVB66.11

Skyworks Solutions SWKS28.29

Cavium CAVM33.12

Verisk Analytics VRSK44.99

Westport Innovations WPRT46.90

Clean Energy Fuels CLNE19.99

Chart Industries GTLS73.61

Fuel Systems Solutions FSYS25.81

Golar LNG GLNG40.25

Golar LNG Partners GMLP36.69

Staar Surgical STAA10.27

Regeneron REGN115.75

Vivus VVUS20.14

Herbalife HLF70.75

…And Pans

Oil (per barrel)$105.11

Source: Bloomberg

Are you excited about Facebook’s IPO?

Of course, the answer is yes. In the whole area of content and mobile communications, and everything that is going on over the Internet, Facebook is the most dynamic. It is also opening up opportunities for many, many other specialized companies. The way I have played Facebook going public is to buy Morgan Stanley [MS], which is the lead underwriter and could make as much as $100 million in the offering. I have also bought Zynga[ZNGA], the gaming company, which is 12% of Facebook’s revenue.

You mentioned content as an area of interest.

Content is becoming the most favorable aspect of the Internet. Content was being delivered effectively free before, but now companies have to buy the right to the content, and so the companies with content are winners. Comcast [CMCSA], which bought NBC Universal, has its own distribution system, and content and will be a major winner. CBS (CBS) is a major content supplier, and Walt Disney [DIS] is a great content supplier. Even Time Warner [TWX) is in that category.

What else excites you?

Mobile payments is one of our big themes. Square is a company founded by the same fellow who started Twitter. It is growing dynamically by targeting the 30 million small merchants and craftspeople that have traditionally not accepted credit cards. Square's device is a small cube that fits in the headphone jack of a smartphone, and turns it into a point-of-sale terminal. Square isn't public yet, and so we've focused on Intuit [INTU]. Intuit’s GoPayment technology is similar to Square’s, and they charge the same transaction fee. About 70% of those that use Intuit’s mobile-payment option are new customers that wind up using Intuit’s tax products and their QuickBooks accounting software. It is obviously very positive for Intuit. This is a new dynamic to what was already a dynamic growth story. QuickBooks has been taking share against H&R Block and other tax preparers.

Any others along those lines?

In mobile, two great, small growth stocks are Cavium [CAVM], which makes chips that power the [new] 4G/LTE phone, andSkyworks Solutions [SWKS], a supplier to Apple’s iPad and iPhone. Another one I would include is SVB Financial Group[SIVB].

Silicon Valley Bank?

We have 200 new issues in line to go public. We have a major new-issue market forming. SVB is an absolute beneficiary of this. They bank a number of small technology companies out on the West Coast, many of which will be going public.

What’s another theme?

Big Data. International Business Machines [IBM], for instance, is betting their franchise on analytics, and they are going full bore into it, and it shows you how important they think it is for the future of companies. Social media is creating a huge amount of data, and if it is properly analyzed, it can be extremely useful for marketing and sales. The small-cap stock that we like in this area is Verisk Analytics [VRSK]. They’ve had a franchise in insurance analytics, and now they are moving into health care. In their last two quarters, they’ve shown acceleration in their health-care business, where there is a lot of room for analytics as well as with electronic medical records.

Anything else?

We are huge in natural gas. We love that trucks are going to be running on natural gas. The leader in engines for natural gas cars and trucks is Westport Innovations [WPRT] and we are a major Westport investor. A company called Clean Energy Fuels[CLNE] is building the fueling stations for natural gas across the major trucking routes that run through the middle of the U.S. and down to Mexico.

Chart Industries [GTLS] is supplying the pumps for the natural-gas filling stations. Fuel Systems Solutions [FSYS] makes the systems for hybrid and alternative-fuel vehicles.

The stocks all got a boost recently, when General Motors and Chrysler said they were coming out with pickup trucks powered by compressed natural gas and gasoline. It is a very important investment area, and liquefied natural gas is a big deal. We have been big investors in Golar LNG [GLNG], which ships liquefied natural gas, and its subsidiary Golar LNG Partners [GMLP], which is structured as a master limited partnership, and carries the contracts and pays a dividend.

The U.S. is oversupplied in natural gas. We don’t even have a place to store it anymore. The faster we are able to switch from coal or gasoline to natural gas, the better for our country. Not only will utilities and truckers be helped, but should this continue it will be very good for the chemical companies as the price of their feedstock goes down. We think there’s a good chance oil will go down in price, also.

So, have you been selling oil stocks?

We’ve cut our position in major oil-exploration stocks a lot. Oil-service companies will see less growth and so they are less interesting.

What about your aging population theme? What are some ways to play that?

The post World War II baby boomers are 60 and older. Their health needs require new treatment, of which their eyes are the most obvious. Staar Surgical [STAA] makes lenses for the eyes and is extremely well-positioned. Regeneron Pharmaceuticals[REGN], a biotech company, makes treatments for serious eye diseases and we like it very, very much. Elan Pharmaceuticals[ELN] is one of the great generic drug companies, but they also have the leading product going through the Food and Drug Administration for Alzheimer’s. I’m unusually optimistic about this one.

What else?

Weight is a big problem in the U.S., and we own a small biotech company, Vivus [VVUS], which has an obesity drug that is under consideration by the FDA. Then there’s Herbalife [HLF], which sells nutritional supplements. It has a new distribution model, and sales are going up beautifully. It has great cash flow dynamics. Its distributors operate wellness centers, where people head after working out for their protein shakes, and that has resulted in a recurring revenue stream. It is hugely popular in the Hispanic community, and it is using social media.

Pans?

We could be approaching a bubble in some of the Internet-oriented areas. LinkedIn, a social media site that people network on for jobs, looks overpriced at about 90 times earnings. I like the yield on utilities, but they are up in price and aren’t growing that fast.

Thanks so much, Joe.

Investors took flight from gold (GC-FT1,713.502.200.13%), sending it down by nearly $100 (U.S.) an ounce after the Federal Reserve chairman delivered three hours of testimony without once indicating he felt the need to create more money.

The downdraft in gold spread to silver (SI-FT34.980.330.96%), which had been trading at $37 an ounce before the rout, but fell to $34.65 in late trading. The big hit to precious metals was a major factor in a fall on the resource-dominated Toronto stock market.(TSX-I12,644.01-96.46-0.76%)

“Clearly, the single most identifiable catalyst was what Bernanke didn’t say,” said Jon Nadler, senior analyst at Kitco Metals, a Montreal-based gold trader.

Gold’s plunge to less than $1,700 an ounce marked the biggest one-day percentage drop for the metal in more than three years. Mr. Nadler said some investors had been expecting that Mr. Bernanke, in Congressional testimony, would indicate the Fed was open to another round of so-called quantitative easing – a policy that creates new money and causes people to flock to the perceived safety of gold to protect themselves from inflation.

Instead, Mr. Bernanke merely delivered a cautious assessment of the recovery. He said he remains unimpressed by the recent pickup of activity in the U.S. economy, and told lawmakers that the number of long-term unemployed was a “reason for urgency” because the longer people remain out of work the harder it is for them to win new jobs.

But not so urgent that Mr. Bernanke thought it necessary to signal the need for further monetary stimulus.

As he spoke, orders to sell gold poured onto futures markets, causing speculators to panic and liquidate positions, creating a vicious circle of prices plunging even more and additional selling pressure.

During the early stages of the price collapse, Mr. Nadler said, there was a huge order to sell about one million ounces of gold, further spooking market players.

Evidence that the United States economic has turned a corner is piling up, including a sharp drop in the unemployment rate to 8.3 per cent in January from around 9 per cent for much of 2011. Stock markets generally are on an upward trend.

U.S. gross domestic product expanded at an annual rate of 3 per cent in the fourth quarter, compared with a previous estimate of 2.8 per cent, the Commerce Department said Wednesday. Another report showed manufacturing activity in the Chicago area increased faster than Wall Street analysts were expecting in February. Anecdotal evidence collected by the 12 regional Fed banks suggests the recovery is gaining traction, according to the latest Beige Book, which also was published Wednesday.

Yet Mr. Bernanke is reluctant to make too much of it, a stance that is frustrating some economists who say the Fed risks falling out of step with the economic reality.

In his testimony Wednesday, he acknowledged that 2012 is looking up, but described the data to date as “limited,” suggesting it will take at least a couple of more months of positive data to sway the Fed in another direction. Mr. Bernanke gave no indication that he intends to rethink plans to leave the Fed’s benchmark lending rate near zero until at least he end of 2012.

“Notwithstanding the better recent data, the job market remains far from normal,” Mr. Bernanke said in his opening statement to the House Financial Services Committee.

He appeared skeptical the unemployment rate would continue its fast decline, saying “continued improvement in the job market is likely to require stronger economic growth in final demand and production.”

Few expect such an improvement. The U.S. economy is growing barely fast enough to generate a significant number of new jobs. With the European debt crisis unsettled and oil prices rising because of worries over the political situation involving Iran, the recovery is running into considerable headwinds. Another recession appears unlikely, but it will be difficult for the U.S. economy to maintain its momentum.

A buildup of inventories was the biggest driver of economic growth in the fourth quarter, suggesting output could slow a bit in the first half of 2012 as companies sell from stockpiles. Consumption was stronger at the end of 2011, and recent consumer confidence indicators indicate that could continue. Trade is subtracting from GDP because of weaker demand from Europe.

According to the Beige Book, the economy “continued to increase at a modest to moderate pace” in January and early February, the same assessment made in the last report on Jan. 11. In November, the Beige Book described the economic growth as “slow to moderate.”

Quantitative easing, or QE, sees the Fed add to banks’ reserves by creating money to purchase financial assets. Mr. Bernanke told lawmakers that much of that money is unspent; that suggests the Fed believes its previous efforts to stoke demand could yet help the economy – once lenders feel better about their prospects.

“They are sitting there,” Mr. Bernanke said of the banks’ reserves. “They aren’t doing much.”

Builders’ sentiment rises for 5th straight month, to highest level since in nearly 5 years

In this Feb. 13, 2012 photo, a builder works on a new single-family home in North Andover, Mass. U.S. homebuilders are gradually growing more optimistic about the depressed housing market and believe homes sales could pick up sharply at the beginning of 2012. (AP Photo/Elise Amendola)

U.S. homebuilders are gradually growing more optimistic about the depressed housing market and believe homes sales could pick up sharply when the spring buying season begins.

The National Association of Home Builders/Wells Fargo said Wednesday that its builder sentiment index rose for a fifth straight month in February to 29, up from 25 in January. The index has climbed 15 points since September and is now at its highest level since May 2007.

Builders have generally become more hopeful during that stretch about current sales, sales six months out and foot traffic, the report shows.

Even with the brighter outlook, the industry has a long way to go. Any reading below 50 indicates negative sentiment about the housing market. The index hasn’t reached 50 since April 2006, the peak of the housing boom.

A key reason homebuilders are more optimistic is they are seeing more people express interest in buying a home. And rising interest has occurred alongside other improvements that suggest the troubled housing market could pick up after four weak years.

Sales of previously occupied homes rose in December for a third straight month. Mortgage rateshave never been lower. And home construction picked up in the final quarter of last year.

Still, home prices continue to fall, and builders keep slashing their prices to stay competitive. Last year was the worst for new-home sales on records dating back to 1963.

Ian Shepherdson, chief U.S. economist for High Frequency Economics, said the index is now consistent with new-home sales rising to more than 450,000 annually. While that’s below the 700,000 considered healthy, it would be an improvement from the recent trend of just over 300,000.

“The story here is that pent-up demand is being freed by much easier mortgage conditions, low rates and rising employment,” Shepherdson said. “It’s real.”

But some economists have questioned the foundation for the growing optimism. Pierre Ellis, an analyst at Decision Economics, notes that new-home sales are up just 1.7 percent from September through December, the latest government data on sales.

“Recorded sales of new homes have hardly budged since September,” Ellis said. He said the credibility of the builders’ survey is “shrinking month by month.”

New homes make up a small portion of housing sales. But they have an outsize impact on the economy. The builder trade group says each new home built creates an average of three jobs for a year and generates about $90,000 in taxes.

Builders are struggling to compete with foreclosures, which have forced down prices of previously occupied homes. And many people are finding it hard to qualify for loans or meet higher required down payments.

Low appraisals are scuttling some deals after contracts have been signed. As a result, some people who want to buy a new house are holding off because they can’t sell their home.

Those in a position to buy are benefiting from lower prices and mortgage rates. The average rate on the 30-year fixed mortgage is at record lows below 4 percent. Yet those factors have done little to boost home sales.

Builders have pointed to some regional pockets of strength. New Orleans, Pittsburgh and other smaller areas ofTexas, in particular, have reported increased buying.

One of the strongest major currencies in the world since the onset of the 2008 crisis has been the Japanese yen.  This is a dramatic change of fortune for what has long been—and what should be—a weak currency.

Take a look at Figure 1, which tracks the dollar / yen exchange rate.  In late 2008, a dollar would buy you 110 yen.  Today, a dollar will not buy you even 80.  And remember, the dollar has been relatively strong over the past four years.  The yen’s performance against the euro or British pound would be even more dramatic.

Anyone who follows Japan must legitimately be scratching their heads in confusion right about now.  In a market in which investors have been shunning risk for the past four years, why would the currency of the most heavily indebted major country in the world rise?  Japan’s sovereign debts stand at 220 percent of GDP, and the country has struggled to rein in its mammoth budget deficit.  Japan has routinely had budget deficits in excess of 10% of GDP.

What’s more, investors are not really getting compensated for holding yen.  Japanese short-term rates have been at or near zero for the better part of two decades, and even the 10-year bond yields a measly 1%.

Have currency traders lost their minds?  Perhaps.  But the yen’s rise is not so hard to explain when you consider a couple points.  First, the yen was the primary funding currency for the assorted carry trades beloved by so many hedge funds.  In a typical carry trade, a trader will borrow in a low-yielding currency like the yen and put the proceeds into a higher yielding currency like the Canadian or Aussie dollars or, until recently, the euro or pound.  The trader would make money in two ways.  First, they earn an interest rate spread, the difference between their borrowing rate and their lending rate.  This is how banks operate in the lending markets as well, borrowing cheaply and lending dearly.

But there is also a secondary benefit.  These activities of traders tend to create trending markets.  Low yielding currencies tend to trend downward and high yielding currencies tend to trend upward.  So, in addition to the interest rate spread, traders also enjoy gains from a nice pair trade.

Or at least they used to.  A couple things caused this trade to fall apart.  First, when the capital markets ceased functioning during the 2008 meltdown, there was a rush by traders and investors of all stripes to deleverage.  When the world as we knew it was ending, it didn’t make a lot of sense to owe a lot of money.    Traders responded by closing out their carry trades, which caused the pair trade to operate in reverse.  They scrambled to buy yen rather than sell them.  It wasn’t exactly a short squeeze, but the results were much the same.  Buying begets buying, and the former object of intense shorting shot to the upside in 2008 and early 2009, causing the yen to gain on all major world currencies.

So why, might you ask, did the yen not drift lower in the years that followed?  Here, the answer is less clear, but a few reasons are likely.  First, the carry trade lost its appeal for a lot of burned traders, and many came to view it as picking up nickels in front of a steamroller; too much risk for too little return. And secondly, the attention of active currency traders shifted to Europe and its sovereign debt crisis, giving the yen some breathing room.

But more fundamentally, the yen now has a lot of competition as a funding currency from other low-yielders, not least of which would be the dollar.  In a world in which nearly every major currency yields close to zero, the yen is no longer unique as a funding currency.  So those traders that do try their luck at the carry trade have their choice of currencies to short.

Still, even with all of this as explanation, the yen’s persistent rise has been baffling, particularly when you consider that Japan’s exports are down.  When you see a trend like this that is hard to explain, you might want to question its sustainability.

Financial writer John Mauldin referred to Japan as “a bug in search of a windshield” in his recent bookEndgame, and I consider this an apt metaphor.    Japan’s gargantuan debts and deficits have only been possible due to the country’s historically high savings rate—a savings rate that has been trending downward in recent years and may well turn negative soon.

When Japan has to turn to the international bond markets to fund its deficits, it’s not going to enjoy a 1% yield on its 10-year obligations.  No one in their right mind would lend Japan money at 1%.  No one in their right mind would lend Japan money at all!

In the rolling global debt crisis, Japan will be the next major domino to fall.  When it finally has to access the international bond markets, its yields will rise to punishingly high levels.  At that point Japan will have one of two choices, both of which will almost certainly result in a hyperinflationary meltdown: default or using the printing presses to meet current obligations.

Bottom line: If you are a long-term investor, stay out of all Japanese assets.  The risks simply aren’t worth it given the attractive options you can find in the United States and Europe.  If you are a short-term trader, get ready.  At some point in the next 1-3 years, Japan could prove to be the best shorting opportunity of your trading career.

In this lesson, we will talk about what we traders or investors concern the most-Forex Profit. Of course, everyone that enters an investment market expect to profit. No one buy an investment security in order to lose money. However, the cruel reality of the market is that someone is gaining money because another person is losing money.

For those who are new to the Forex market, knowing the fundamental philosophy and calculation of Forex trading profit is crucial.

Long and Short

The basic philosophy of profiting in any kind of security market is almost always to “buy low, sell high”. The Forex market is no different than other markets in this sense. Referring different status of buying and selling, people in the financial market uses the long position and the short position to express them.

Long Position

In Forex market, if you have bought a currency pair, you have entered into a long position. You bought because you believe that you were “buying low”, so you would be waiting for opportunity to “sell high”. And when that happens, you close the long position you were in.

Short Position

If Long is “buying low and selling high”, then Short is “selling high and buying low”. What is  the difference between these two?

It is the timing and order of buying and selling.

A short is selling before buying.

Yes, you can sell before you buy. You can sell without owning the stuff you just sold. In the financial market, it is common for people to short a security, they just borrow the security and s

ell it. Of course, if there is a demand, there will always be people willing to do it with a fee.

In Forex, a short to is to sell a currency pair (sell base currency and buy counter currency). And you wait for the price to go low enough so that you can buy back the pair. (i.e. selling high and buying low.) At that time you have closed your short position.

Square

Being Square or flat is when you have no position in the market. In this state, you have no risk because you are not holding a security or owing one. In a long, you can go flat buying selling what you bought. In a short, you can buy what you sold to square up.

Profit and Loss

Everyone who trades currency online trades with a margin account. A margin account requires you to deposit a sum of cash (deposit) so that you can control a bigger sum of money (margin deposit).
For example, if the leverage ratio is 100:1, then you can control a sum of $100,000 by depositing $1,000 as the margin deposit. So that you will be trading with the amount of $100,000!

What does this have to do with your Forex profit and loss? The brokers use a way to calculate your profit or loss and if your margin balance falls below a certain level, your broker has the right to close your positions without even noticing you!

The calculation of your margin balance = initial margin deposit + unrealized profit and loss + realized profit and loss
We will talk about realized and unrealized profit and loss in the next session.

The level of margin balance you have to maintain to prevent this from happening is usually denoted by a ratio which we call the margin ratio requirement. For typical small accounts, it is usually 100%.

This can be very dangerous when the market is going against you. Therefore, make sure you are clear about the margin requirements and liquidation policies of your broker. This is very different from other kind of margin-based equity trading where the brokers would issue margin calls. Your Forex account can just vaporize overnight without you realizing!

Unrealized and Realized Forex Trading Profit and Loss

So you have bought a currency pair. And just as you hoped, the price went up higher. At this point, if you sell immediately, you would gain some profit. But until you have really sold it, we call it unrealized profit.

Same for losses for other positions, until you close your positions, your profit and loss are considered unrealized and calculated with the market price at that point of time.

When you square up your positions, the profit and loss goes to your margin balance. These profit and loss are realized.

Forex prices fluctuate constantly, and hence your unrealized profit and loss and your margin balance.

Forex Pips Explained

Forex Pips or points are the smallest units of currency prices increase or decrease. Forex profit and loss are calculated in terms of number of pips. For some pairs, the norm is to trade in 1/10 pips or 0.5 pips.

Major currency pairs are usually quoted in 5 significant figures. For example, EUR/USD 1.3776

If it goes from 1.3776 to 1.3777, it has gone up by 1 pip. If it goes from 1.3776 to 1.3775, it has gone down by 1 pip.

For this pair and most other pairs, 1 pip equals 0.0001.

If you bought 10,000 EUR/USD and the pair went up for 1 pip, your unrealized profit equals 10,000 x 0.0001 = USD 1

Forex Profit and Loss are denominated in the base currency.

Remember,
if you are in a long position, price increase means profit while decrease means loss;
if you are in a short position, price decrease means profit while increase means loss.
These are all based on the “buy low, sell high” or “sell high, buy low” principle.

If you are trading non-US pairs, your profit and loss are still denominated in the base currency. So if your margin balance is in USD which is common, you need to convert the profit or loss back to USD with the exchange rate at the moment.

Forex Profit and Loss and Margin Requirement

The last thing you want to see for your margin account is that it falls below the required ratio and positions be liquidated by the brokerage. To prevent this from happening, we need to be clear with pips and profit and loss calculations so that the trade or position you are about to enter is not too big.

Always keep an eye on the price point at which your account would fall below the margin requirement. One of the most stupid but sadly common mistake a forex trading beginner could make is to set his stop-loss price below that price point. It will never reach the stop-loss, because the position will have been liquidated before it got there!

There are as many Forex sites on the internet as sand on a beach, however, almost all of them are used as either a marketing tool or simply as an article directory that publish articles with regurgitated information related to Forex. If you are looking for organized information which really teaches you systematically how to trade currency, you’ll probably feel frustrated after wasting an afternoon going from site to site that are filled with affiliate links.

Feeling the same way as you are, I decided to write a free online Forex day trading course that really provide good currency trading training. I research the subject personally using resources other than google so that what you find here is not something I just copied from some other sites. We all know that the internet is flooded with rubbish information “written” by internet marketers. I know you hate it, because I use the internet, too.

In this article, I’m going to give you an overview of what we will talk about. What will cover things from basics to advance. No useless talk.

First, we need to know what are currency pairs, what are long and short positions, how to calculate profit and loss and understanding price quotes of currencies.

Currency Pair

What currency trading really fascinates me is that you are actually selling money for money and buying money with money. The whole experience makes you really think about the whole monetary system in the modern society.

What actually is money?

It is simply a vehicle that carries buying power. It can be a piece of paper, stone or metal. In our world, money is quickly becoming purely digital. Money is just a number that exists only in our mind. So when we are trading currency, after all the operations, we need to store our buying power somewhere. And that is usually still one kind of currency. Therefore, we trade currencies by exchange one currency with another. We call this a “Currency Pair”.

Currency pairs are expressed with ISO (International Standardization Organization) codes.

Your first step to becoming a forex trading expert is to familiarize yourself with these common terms and nicknames of the currency pairs.

In this crazily chaotic world, US dollar is still the safest currency, therefore, most of the major currency pairs are U.S. Dollar pairs, i.e. involving US dollar on one side of the deal.

In contrast, currency pairs that do not involve US dollar are called “Cross-currency pairs” or “Crosses”.

Obviously, crosses are used to target specific currencies in case of significant news or events that affect the prices.

Base Currency/Counter Currency

So now you know currency pairs are denoted as GBP/JPY in case of sterling-yen, for example, what are the difference between the currency in the front (GBP) and the one in the back (JPY)?

The one written in the front in called the “base currency” while the one in the back are called the “counter currency” or “secondary currency”.

Traditionally, base currency is the stronger one compared to the counter currency.

The base currency is also the face amount of the trade. Remember, when you buy or sell a currency pair, you are buying one currency and sell another at the same time. So for example, if you buy 10,000 USD/JPY, you bought USD10,000 and sold equivalent amount in JPY. If you sell 10,000 USD/JPY, you sold USD10,000 and bought equivalent amount of JPY.

One last thing but definitely not the least, the PROFIT of a trade is denominated in the counter currency instead of the base currency. Of course, losses are denominated the same way, too.

So this is our first lesson in this forex trading course. See you in the next lesson in which we will be talking about profit and loss of a forex trade.

What is a Currency Trading Platform

Currency Trading Platforms are independent Forex dealers who have a certain credibility and capability. They provide bid ask prices of currencies to investors 24 hours a day, everyday except holidays. They are also responsible for take the buy sell request of investors. A currency trading platform itself are allowed to trade with other investors with its own capital. When there are scarce transactions in the market, a currency trading platform can act as the counter party to complete a transaction so that customers do not need to wait for a counter investor to appear. And by doing so, currency trading platforms maintain the liquidity of the market by promoting continuous flow of transactions.

How to Pick the Best Currency Trading Platform?

There are countless currency trading platform from different regions or countries existing in the Forex market. On the outside, they are all the same. But in fact, there are subtle differences which can mean a lot to your forex trading career. For forex trading beginners, it is dazzling to pick the best out of all the currency trading platforms. Forex Trading Systems Centre is committed to help forex beginners to succeed in the market. We are going to make it simpler for you to pick the most suitable one.

Common Selection Criteria of Currency Trading Platforms

First of all, let us review how average investors select a platform to work with:

Looking for a Bargain
These investors pick platforms that offer cheap packages and a lot of additional “benefits” like account setup bonuses.

Looking for Convenience
They look for currency trading platforms great support and services. For example, 24 hours free phone support, online forex forums and forex trading advices.

Passive Selection
This group of people pick whatever agents or friends recommend.

Independent Review
No careless blind follows. These investors research and compare different platforms all by themselves.

In a new emerging market, there are more type 1 investors. In Asia, perhaps due to cultural and regional reasons, there are more type 1,2 and 3 investors compared to US. But obviously, these are less wise methods to make an important choice like picking a currency trading platform. Together with the development the market, there are more careful type 4 investors. They do decisions objectively, asking wise questions. In selecting the best currency trading platform, there are two main focuses: First, the credibility of the agency. This is a question concerning the safety of your capital and the execution of your transaction commands. Second, technical capability of the platform. Is the platform stable? Is the currency exchange rates reported real time?

Credibility of a Currency Trading Platform

First, one of the most important evidence of credibility we look for, is whether there are independent regulators in the country of the currency trading platform. If there is, make sure you check the registration of the platform at the official regulator. Usually, the regulator is responsible of making related rules for the forex trading market that aim at controlling the dealers and protecting the rights of investors. Investors can check the condition of the platforms’ registration, customer complains if any or make a complaint on the website of the regulator.

Online Forex business begin in Europe and US around late 90’s. Different government treated the industry differently due to its high risk, highly speculative nature and the complexity of regulations. Some European countries and places like Japan and Hong Kong, began to accept the business and trying to regulate it. These include US, Britain, Australia, Canada, Japan and Hong Kong. The ways they did it are very different, however, they mainly regulate the forex market according to the regulations of securities and futures, adding additional guidelines and provisions when necessary.

Recommended Currency Trading Platforms

Easy-Forex
Full leverage on funds: Enabling 100% use of funds for leverage, no extra collateral
Leverage ratio: 1:50, 1:100, 1:200; plus special tailor-made leverage ratios.
Mini and various scope accounts; Special terms accounts: Yes
Minimum Initial Deposit: US$25.-
Minimum Transaction Size: US$5,000.-
Non-currency Forex products: Gold; Silver; Oil & other energy commodities
Quotes on wide selection of currencies: All main currencies
Fixed Spreads: 2-5pips
Upload account on-line: Yes

Currency Exchange Basics

Blessed is he who is poor in spirit. Same for beginners that want to learn how to trade forex. They must keep their patience and learn gradually. Never open a real trading account before you have real understanding and confidence in forex trading. Do not compare with others. Everyone has different learning curve and progress. In virtual demo trading, you can make yourself familiar with different operation strategies and conditions. When the probability of winning grow higher and higher day by day and your monthly profit increases every month, you are well on the way to opening your first real foreign currency trading account.

1. Currency Trading For Dummies: Never Risk What You Can’t Afford To Lose

It takes capital for all kinds of investment including forex trading. You should never use a sum of money that you need for living for forex trading and hope that it gives you a return. This is not investment. This is gambling. I have seen too many people deceiving themselves by calling what they do “investment” while in reality they are merely gambling. Many did not end pretty. The pressure of using a sum of money that you can’t afford to lose would leave you unable to make objective decisions and hence increasing your investment risk.

2. Forex Trading For Beginners: Get A Demo Account

This is a must do. Before you risk a dime of your money, get a demo account and practice with numbers. You can get a demo foreign currency trading account easily by doing a google search for forex brokers. Don’t compare with other traders. Focus on your own progress and do what you should do. The one thing absolutely critical for forex trading success is discipline. Make a schedule, decide how long you would practice everyday and stick with it. Monitor your progress by journaling your probability of winning and the account value. Before you notice, you have made a long way on your journey of becoming a great forex trader. Remember, even the biggest forex trader started as a beginner.

3.Basic of Currency Exchange Basics: Never Depend On Luck

When the number of your winning trades exceed the number of your losing ones and your account value is increasing constantly, you might feel very encouraged and think that you have finally grasped the key to forex trading. But don’t make this conclusion too quickly. If you lost $2,000 in 5 trades and make $3,000 in another one, although your account value increased, but that doesn’t mean that you have mastered the skills. You might just be lucky. Be cautious in all your decisions and continue to learn the basics of forex trading.

4.Intuition Without Currency Trading Strategies Is Putting Your Money At Risk

It is not enough to produce winning results in demo accounts, you need to understand forex basics and know the cause of producing winning trades. During your practice, you should aim at developing your personal profiting operation habits. Intuition is very important for investments. But Intuition without strategies is unacceptable and won’t get you anywhere.

5.Foreign Currency Trading Basics: Use Stop Loss

When you are burying your head inside the trades, don’t forget to set a stop loss range and use it to manage your risk so that you won’t suffer huge losses that kick you out of business. The range of stop loss should be determined with reference to the size of your found. Normally it is around 3-10%. When the amount of loss reaches the limit of your tolerance, close the position without regret. Keep yourself cool and do not find excuses to allow yourself go forward like a hopeless gambling addict. And even if the market turn the other way 5 minutes after you closed the position, don’t feel pity because you have get rid of the risk to lose all of your money. You must draft a trading strategy and follow it. You are the master of your trade, don’t become a slave of risk and adrenaline.

You should always control the amount of your trades according to your account value and avoid over-trading. For example, if your account value is less than $3,000, you should maintain only one open position at a time. If your account value is between $3,000 and $5,000, and unless you are very sure that the trend of the market is doing great for you, you shouldn’t maintain more than 2 open positions at a time. If you have $10,000 in your account, it is probably better to keep it under 3.

This is a rough idea of how many open positions to keep at one time. The idea is to estimate the risk you can take and formulate a trading strategy that works safely. Having too many openings at the same time is not good because it is easy to give rise to an uncontrollable loss.

6. Forex Basics: Learn To Consistently Execute Trading Strategies Without Excuse

One of the most devastating mistake you can make in forex trading is to find excuses to avoid closing a position and realizing the loss when you have reached your stop loss point in a trade. If you keep giving yourself false hope and excuse to wait for the market to turn, you would only expose yourself to unlimited loss.

The market is cruel. It won’t turn the other way just because some stupid guy is waiting for it to do that. You would eventually have to give up and close the position anyway, because it may go to a point where it scares you. But the sad part is by that time you already lost a substantial part of your capital. You cannot have too many this kind of experience before you will never come back to forex trading.

You center of this stupidity is clear-greed. Proverb says “So are the ways of every one that is greedy of gain; which taketh away the life of the owners thereof.” It is the worst thing you want to avoid, because it can make lose an amount that you cannot hope to recover and worse still, it would kill you confidence and strength.

You can avoid this kind of mistakes. That is to force yourself to obey the strategy you have set. Once the risk passes the decided region, don’t hesitate, close it.

7.Foreign Currency Trading Basics: Have Enough Money

This advice may sound trivial but it is extremely important. The smaller your account value, the higher the risk. A $1000 account cannot tolerate even one mistake, however, even the biggest forex trader in the world cannot completely avoid making wrong judgements sometimes.

8.All About Forex and Currency Trading: Learn From Mistakes

Mistakes are inevitable. Do not waste time blaming yourself. Treat your mistakes as opportunities to learn. Just like a Christian walking with the Lord Jesus. When we make a mistake, we admit it, repent, push delete and sign back up again. The faster you admit you mistakes, analyze them and learn from them, the faster you grow. Learn to control yourself. Don’t be led by emotions and feelings. Know that all traders learn from losses instead of wins. Understand the reason behind every loss trades and walk on the path of righteousness.

9.Renewing Your Forex Trading Concepts: The Greatest Enemy Is Yourself

The greatest enemy of a trader is his/her own greed, impatience, uncontrolled temper, carelessness, egotism. These bad personalities would induce bad trading decisions. Don’t open a position simply because you have nothing to do or you feel bored, instead, follow your strategies and identify profitable opportunities. Even if you only had one trade for 3 days, but that trade brought you handsome profits, it means that you have made a good decision. This takes great patience.

10.Best Forex Trading Education: Journaling Every Reason For Your Trades

For whosoever hath, to him shall be given, and he shall have more abundance: but whosoever hath not, from him shall be taken away even that he hath. If you treasure what you have learnt, you will learn even more quickly. If you don’t, what you think you know would slip through your fingers without even you noticing.

Journaling is one of the action that indicates that you are treasuring what you have learnt. Everyday, take detail record of the causes that give rise to a particular result. Were there any incidents or information that pushed you towards your decision? And what was the profit or loss of that trade? Analyze the situation and ask yourself “what can I learn from this experience?”

You experience will become your best teacher. Next time when the similar situation comes up, your journal will help you make the right decision quickly. And the losing experiences will tell you how to avoid the same kind of mistakes to happen again. I suggest keeping a digital journal, because you can use things like search function to help find what you need to refer to quickly.

11.Learn Forex Day Trading From The Masters: Refer To Experiences Of Others

Your trading decisions should be based on your own interpretation and feeling about the market, but there is great value to look at others’ opinions, too. If your analysis is the same as another seasoned trader, good. But on the other hand, if they differ from each other, you don’t have to panic right away. Look at the reasoning of his/her interpretation and try to compare it with yours objectively. If you are still very confident about your own decision, go for it! If it wins, it wins. If it doesn’t, you learn from mistakes. Either way you come out on the top!

12. Go With The Flow, Not Against It

Get this ancient investment principle on your heart: end losing positions as quickly as possible, prolong profiting positions as long as possible. Another important principle is that never let a winning position to become a losing one. In the case of sudden turn over, choose to close the position without profit instead of allowing it to go negative hoping it would turn around again. All these are base on a wisdom: flow with the current.

13. Never Try To Recover By Trading In A Rush

When you face a loss, keep cool. Don’t let go of your rationality and rush to recover yourself by opening new positions. For most of the time, this would only make things worse. Think about it, if you close a losing position and open a new one immediately after, you are implying that your original forecast and decision were completely incorrect. Do not try to play guessing games with the market. It is always better to miss a supposing profitable opportunity than producing real losses.

14. Best Forex Trading Education: Learn Step By Step, Never Try to Run Before You Can Even Walk

With a humble attitude, refine your trading skills in demo accounts. When your technique becomes more mature and your profit keeps increasing consistently, you decide to enter the real market and try the real thing. But then you will notice the difference between the virtual and the real. It is like a samurai sword fight. You practice with a wooden sword. You familiarize yourself with the skills and feeling of fighting with a wooden sword. But when you fight someone with a real sword, you will suddenly feel that it is a whole different ball game. Suddenly it is a matter of life or death.

You don’t need to risk life in forex trading, but the pressure is just as great. In a demo account, you trade with a risky shift because you know that it is fake. Not a dime of your money is risked. Even if you win the champion in a virtual trading contest, it doesn’t necessarily guarantee that you will do as well in a real account. There is something about forex trading you can only learn when you are trading with your real money. Keep yourself humble, for there is grace for the humble.

15. Do Virtual Trading As If It Is Real

Do virtual trading like it is real. The more you engage yourself in the practice with real seriousness, the quicker you can develop suitable skills and habits that work in the real world. Convince yourself that you are working with a real fund and constantly reviewing whether what you are doing can be done in a real account with real money.

16. Avoid High Volatility During Virtual Operation

Forex trading beginners should avoid time period that fluctuate vigorously and unpredictable. One of these occasions is a New York Sunday night. It is Monday morning in Asia. During this period, currency prices fluctuate and are very difficult to anticipate the changes. Another unpredictable time period is New York Friday, especially during morning. On this day, many people in the market are trying to handle all the trades of the week which may give rise to very unexpected fluctuations. Also, considering the current unstable US economy, many people would consider selling US dollar. If you start learning foreign currency trading, you would feel more confused and less likely to build up a healthy confidence.

17. Practice With Demo Account At A Regular Hour Everyday

At the beginning of your forex trading life, you should fix a time at the same hour everyday to practice virtual trading. This will help you grasp the behavior of different currencies. During different hours of the day, a foreign currency would have a particular kind of behavior. It is very difficult to understand the different condition of changes. Fix time operations would make it easier for you to figure out the up down tendency of a particular currency. Before and after your daily trading session, read forex news and all kinds of information that affects the market, in order to help you make sound trading decisions.

Conclusion

It is difficult for businessmen to succeed in the business world, it is even more difficult for a forex trader to achieve success. Forex trading is not for the lazy. But if you are determined in this aspect, make up your mind and pursue it with diligence, humility and faith. You will reap what you have sowed in due time.

What is auto forex trading?

Forex Trading has evolved quite a bit over the history of mankind. It started from primitive hand to hand exchanging of bills, to telephone deals and to the instant online forex trading nowadays. I’ve seen people marking prices on blackboards with chalk and drawing simple “XO” charts. In contrary, now trend lines, MACD, RSI and countless other technical analysis tools appear on the screen with a click. Undoubtedly, computer is a very important changing force behind that shaped the trading and analysis of the forex market.

Automatic forex trading system is a complete trading system that is capable of recognizing the market, carrying out trades and deciding the entry and exit points of a transaction.

In May 1997, Deep Blue Supercomupter triumphed over the reigning World Chess Chmapion, Garry Kasparov. In 1991, The US army won the Gulf War by using large amount of computer simulations on strategies and tactics. Auto trading systems are of the same essence.

It sounds too good to be true for a software to exist that actually earn money automatically for you. Everyone like you and me wants to ask one question: Do forex automatic trading robots really work?

How does forex auto trading work?

Forex automatic trading systems can be categorized into two big groups: Arbitrage and Nonarbitrage. Arbitrage means capturing profit by manipulating the difference between two brokers. For me, I’m more interested in Nonarbitrage autotrade forex systems which require higher level of technical knowledge.

Nonarbitrage programs normally use historical data to analyze the market and identify technical indicators to determine buy sell decisions. For example, a trader who believes in moving average index can write a program that send out buying signals whenever the ten day moving average intercept with the twenty day one. The program must also take care of the data and variables after opening a position, like stop loss and stop win. Of course, in reality, it is much more complicated because the trader would have to consider many more technical indicators and combine the effects to make a decision. Here is problem: the number of technical indicators together with their combinations is more the number of stars in the sky. And I have not mention fine tuning all their parameters yet!

What are the adventages of forex automated trading?

The biggest adantage of forex automatic trading is probably discipline. The trading system make clear buy sell decisions all by itself mechanically. There is no human judgment and, hence, not affected by subjective emotions or other unstable psychological factors. And most systems consist of a stop loss algorithm which can effectively control the risk within tolerable range.  This kind of auto trading can also be applied on different currencies and even other financial vehicles like stocks and futures.

The disadventages of using automated forex system trading robots

Robot is robot.  Although it can do mechanical works for human, it can never do it one hundred percent like a man does it.  Forex system trading robots cannot ensure one hundred percent accuracy either.  When wrong decisions are made, the only option left is to stop the loss.  There are so many possible technical indicators and combinations; it is an enormous task to find an efficient program that works for long term.  Besides technical analysis, there are many other factors that affect foreign exchange market like wars and natural disasters.  There is no way for computers to forecast these factors and take them all into consideration.  Even if you can find an effective program that works for long term, you have to keep updating it and fine turning it continuously because of the changes that will always happen and change the environment of the market.

Final Thoughts on obtaining forex trading success

After all, computer auto trading system is a computer program.  In the center of a computer program is an algorithm which are produced by the logical thinking of the programmer.  Before a perfect auto forex trading system exists, there must be a perfect forex trading strategy in the first place.  Therefore, the key is still in the head of the trader and not the program.  Do not think that you can succeed in the forex market using a robot without a thorough understanding of forex trading strategies. It’s a good idea to read more forex trading systems blog where people share their experience using the systems.