The way to achieve true diversification is to include currency investments and active trading strategies into one’s portfolio. Currency investment takes many forms, from the very conservative buy-and-hold of government bonds nominated in foreign currencies to short-term speculation on forex. Currencies rise and fall out of sync with stock markets. For example, while the Dow has lost 34% in 2008 (Jan 01 to Dec 31), the Japanese Yen gained 23% in the same time period. Of course, the opposite may happen as well. It is important to note that currency exchange rates are affected by different factors than stocks. A stock has a natural tendency to follow the company’s earnings. If the company grows its business, the stock price follows. Currency value does not depend on the health of a country’s economy as much as on the actions of the issuing central bank and inflation. Consequently, the main difference between stocks and currencies is that stocks in general can be expected to grow long-term, while currencies change fast in respect to each other, following the general direction to lower purchasing power because of global inflation.

Because of this, holding currencies for extended periods of time is more risky than implementing a short term active forex trading strategy. Gains and losses realized in currency trading do not necessarily depend on the direction of the market, but are determined by the strategy itself. For example, a strategy built to trade short in bear market rallies can perform exceptionally well in the current environment with the dollar — but more importantly, it will add a negatively correlated component to the portfolio. Brokers provide a number of ways to implement an active trading strategy, including highly automated online forex trading terminals that have the ability to automatically analyze the market and place orders.

While investing in currencies is necessary for asset diversification and provides many benefits, including protection from loss of the purchasing power of the dollar, it is also not something that should be undertaken lightly. Investing in currencies is not similar to the more conventional forms of investment, and requires a skill set that most retail investors don’t have. This is precisely the reason why investment in currency is not recommended to clients by mainstream financial advisors – they consider it best to be safe than sorry and, frankly, this advice is the best one for many people whose itch to get rich fast overcomes their ability to reason.

However, when used as a diversification and hedging tool rather than a high risk speculative instrument, forex trading has a legitimate place in a portfolio. It is easy to get a first hand impression — any broker will be happy to offer a free forex demo for practice, without any obligations.

Then things go differently depending on the purpose of the trade. There are two primary types of participants in Foreign Exchange, non-speculative and speculative.  If the currencies are bought for further use, for example, by an  importer who needs the currency to pay its foreign supplier, the transaction needs to be cleared, i.e. actual delivery of currencies must occur.  This normally takes two days, and the parties need to pay each other in full – there is no leverage.  Such trades are usually done through banks. Speculative trades, on the other hand, are done on margin via forex brokers, and delivery doesn’t happen.  The trader only needs to have a small percentage of the amount he or she trades, typically 1%, and the rest is “lent” to him by the broker.  This “loan”, which isn’t quite a real loan, although it carries a very real interest, is repaid when the trader closes the trade. The remainder of the proceeds from the trade is credited to the trader’s account, be it positive or negative.  Most of the offers to trade forex online are of this variety. 

Other two types of markets for currency exchange are forward and futures. In the forward market, the buyer and seller agree on an exchange rate of the transaction and a date is set for a specific time in the future, at which point the trade is executed despite what the then current exchange rates may be.  In the futures market, standard forex futures contracts are listed on the exchange, and the maturity date of the standard contract is fixed.  Forex futures are freely bought and sold until maturity date, at which point they expire and get settled. Forex futures are traded openly at commodity exchanges.  Forex forwards and futures also can be used to trade forex online, although one needs to qualify for access to those professional forex instruments. 

I am not afraid that this formula for forex profits will stop working once I publish it – at no charge – for everybody to see and copy.  Please do copy and use as you see fit.  You can make money online with it for yourself, or you can sell this forex trading secret to other people if you wish.  

I am also not the discoverer of this most potent forex trading recipe.  It has been around forever, and there is historical evidence that ancient Babylonians have used a crude form of this techique in their currency exchange operations.  However, for some strange reason, it has apparently remained obscure through the centuries, and even the advent of the Internet doesn’t seem to help the propagation of this most reliable currency trading technique.

The awesome power of this method of forex trading has made millions for the select few that mastered it and thousands for the modest followers, including yours truly.  It has been proven in practice many times and yields spectacular results when applied properly.  This online trading strategy is applicable not only to forex, but also to all other capital markets, including stocks, bonds, options and futures. 

So, without further ado, here is the #1 secret of online forex trading:   

Know What You Are Doing.   

It is amazing how very few people follow this rule.  People commit their money to forex online trading because they hope to get rich quick, or because their neighbor does it, or because they read some ads in their local newspaper – without the slightest idea of what they are dealing with.  

The first thing a successful forex trader should strive to achieve is a solid understanding of the functioning of currency markets and why they move.  This is the basics of being able to make smart business decisions. 

It is this intrinsic understanding of market forces and internals that allows you to see the complete picture and make a decisive conclusion. The world of online currency trading is no less complex than the human body.  Would you attempt to perform surgery on your own appendix after reading an FAQ in the Internet? Then why do this to your own wallet?

Online trading of currencies can be a very profitable venture, but there is a certain time of year when those profits don’t seem so appealing.  It’s tax time!  

Forex tax rules are convoluted to say the least. The main issue is whether your particular online trading transactions fall under the same tax rules as regular commodities (governed by Internal Revenue Code Section 1256) or under the special rules of IRC Section 988 (Treatment of Certain Foreign Currency Transactions).

By default, Section 1256 applies to professional traders dealing with “forward contracts”, as opposed to spot forex. Using capital gains IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles), forex traders are allowed to get a preferential tax rate by splitting their capital gains on Schedule D with a 60/40 split. As a result, 60% of the capital gains are taxed at the rate for long-term capital gains, which is currently a low 15%, while the other 40% is taxed at the short-term capital gains rate, depending on the online trader’s tax bracket (can be up to 35%). The average rate that the forward contract trader can enjoy is thus reduced to 23%, or 12% less than the regular short-term rate.

The non-professional online forex trader using a retail platform for online trading is usually  dealing with spot forex, which normally falls under Section 988 providing for regular treatment of gains and losses.  Among other things, using Section 988 eliminates capital-loss limitations, so that ordinary losses can be fully used to offset any type of income.  Therefore, this section greatly benefits the losing traders – which includes most of the beginner online traders who don’t follow the rules of survival in online forex trading.

As a result of this conflict between IRC Sections, an online trader has some flexibility in taxation.  If you have made a loss for the year in spot forex, file it under Section 988 and use the loss to offset other income.  If you have made a significant gain, it may prove beneficial to consult a tax professional on the possibility of opting out of Section 988 and using Section 1256 instead for a reduction in tax.  This may or may not be possible depending on the exact instruments that you used in your online forex trading.

Still, dancing your way through the school is probably better than being conditioned for economic slavery.  At least when you grow up and get ready to take your future into your own hands, by trading forex online or otherwise, this “education” won’t drag you back.

And to answer the question, Truth University of Atlanta, GA is not real. Stomp the Yard was filmed in Atlanta, Georgia on the campuses of Morris Brown College, Georgia Institute of Technology, Morehouse College and Clark Atlanta University, and in the MAK Historic District of Decatur, Georgia.

Spikes and gaps are also common at these points in time – especially within 30 minutes of market opening. Watch your stops! Survival in online forex trading is easier when you know when to expect the turbulence. 

Here is a list of times to look for:

GMT is Greenwich Mean Time, EST is Eastern Standard Time. 

Euro Session 

London session opens daily at 8:00 GMT(3:00 EST) and closes at 17:00 GMT (12:00 EST). London is one of the largest financial centers in the world and has a market share no less than 30%.  Forex markets are affected by other transactions in London, such as LIBOR and gold fixes.  Pairs to watch during this session include USD/CHF, USD/CAD and EUR/USD.

New York Session / American Session

This session opens daily at 13:00 GMT (8:00 EST) and closes at 22:00 GMT (17:00 EST). The hot time in this session is usually when the euro traders are still active, which is between 13:00 and 17:00 GMT (8:00 – 12:00 EST).  This is when most of the daily volatility occurs. Forex trading patterns may be most frequently observed in USD/CHF, GBP/USD, USD/CAD and EUR/USD.

Asian Session

Tokyo starts off the morning at 12:00 GMT (19:00 EST) and ends at 21:00 GMT (04:00 EST).  Counterintuitively, this is when most patterns in currency pairs with the GBP develop, especially, GBP/JPY, GBP/CHF.  All asian currencies should be watched, too, of course, including USD/JPY, AUD/USD, NZD/USD pairs and their crosses. 

Now, what is backtesting? As the omniscient Wikipedia puts it, “Backtesting is a process, usually performed with aid of computers, by which traders try to estimate how financial instruments would have performed in the past had a particular mechanical trading system been employed to trade them.”   Sounds perfectly legitimate, but it isn’t.  

Backtesting is by definition performed on a finite set of data.  That could be anything, but usually it’s a set of price series.   Therefore, no matter how much or how long you backtest your forex trading strategy, the only result that you can get is that it behaves in a certain way in SOME circumstances – precisely, those that were used for the test.  It remains completely unknown how it behaves in ALL OTHER circumstances, i.e. untested – and that includes the future.  No method of backtesting, regardless of its complexity and involved precautions, can work around this.  No amount of backtesting can predict the future behavior of a forex trading strategy in real life.

So what is backtesting good for?  Well, if it is done properly and the sample is big enough, it is everything it is said to be – just if you use the word “may” instead of “will”.  A proper backtesting result is an indication of a tendency of a forex trading strategy to behave in a certain way.  Nothing more, nothing less.  It is not a guarantee.  Also, notice the word “proper”.   The many ways to get a result that does not indicate anything include using commercial backtesting software.  I’ll get into that some time.    

Still looking for the Holy Grail.

Forex mini trading is halfway between demo trading and real online forex trading.  Like demo accounts, most mini forex accounts have orders executed automatically by a computer which is way more forgiving than a human dealer executing real market orders.  Unlike a demo account, you have money at stake, which greatly enhances the trading psychology aspect of learning.  Also, forex mini trading makes it possible to practice money management techniques without risking too much capital.  

Because of automatic order execution, forex mini is mostly suitable for learning position trading and swing trading, where precise order execution is not so important.  If you develop a strategy of this type using mini forex, it usually can be applied in real market with minor modifications.  On the contrary, any type of scalping and day trading strategies that rely on immediate order execution to skim a pip here and there may work in forex mini, but are all but guaranteed to fail in real life.  The primary reasons are delays (the computer always executes promptly, while a dealer is often flooded with orders when the market moves fast) and slippage (the computer always executes at last quoted price, while such price may be simply unavailable in real market).  Spreads can be less favorable in real accounts as well.

One of the greatest features of a mini forex account is the ease of practical application of proper money management techniques.  It is our considered opinion that money and risk management are far more important than the trading strategy itself.  Indeed, it has been shown that random buy/sell decisions in combination with simple money management and position tracking strategies yield better results that any pure trading strategy.  Thus, unless you are willing to commit tens of thousands of dollars, your cash is a lot safer in a mini account.  There simply isn’t enough room for error to wipe it out with one unsuccessful trade. 

Now, why would anyone bother to open a real forex account if mini is obviously so much better?  Well, brokers know that, too, so they put a cap on the maximum amount of money in the mini account, or on the number of positions, or on position size, or maybe on all of the above.  You can make an astounding 1000% profit in forex mini trading, but it will still be only a measly $100 in absolute terms.  You’ll have to move out to the real world if you are to make any real money.  Experience with a mini account is just a great way to do that prepared.  

The most important thing about gold is that while all currencies are issued by their respective central banks, gold is not. This gives physical gold its greatest advantage: the lack of counter-party risk.  There isn’t a group of people able to permanently affect the value of physical gold.  Only short term manipulations are possible.  This also makes gold the only inflation-protected currency in the world.  However, note the deliberate use of the word “physical”.  The above does not apply to forex gold.  What you get under the ticker #GOLD in your forex platform is your broker’s IOU, likely backed by a chain of derivatives.  The quality of these derivatives depends on the broker, but in general, forex gold is quite a few highly leveraged contracts away from the real shiny and heavy stuff, introducing multiple counter-party risks. If any of these contracts are broken, forex gold is gone.  Therefore, while forex gold is a great short term speculative instrument, it is not an investment by any means.  

Having established that, here is the second important point: gold does not carry interest, which is again different from any other currency. In most forex accounts, interest is reflected in the form of swaps.  Swaps are calculated on the basis of the difference between the interest rates of the purchased and sold currencies, plus the broker’s cut.  As a result, long gold on forex has high, and sometimes prohibitively high carrying costs, especially when traded against a high interest rate currency.  By the same token, short gold against a high-rate currency is one of the best interest earners.  Thus, short is our preferred direction for trading gold online in a forex account.

Third, although physical gold is a necessary holding because of its risk-less properties, it is exceptionally hard to trade.  There are significant transaction costs, delivery is often delayed, shorting is next to impossible, no margins available, etc.  Forex gold, on the contrary, is available instantly for shorting on margin with very little money and as close to spot price as it gets.

Fourth, I’ll take the liberty to opine that gold is on a tear for fundamental reasons and will continue to be for the foreseeable future.  As the only non-inflationary and crisis-proof currency, gold will shine for years to come.  One’s exposure to gold should be somewhere between all long and zero, shorting gold is a Russian roulette these days.  However, gold’s path to new highs will be highly volatile.  There will be sharp drops such as the recent one that present great opportunities for shorting. 

Now we have all ingredients for a conservative strategy of an interest-bearing investment in physical gold using forex:

1. Buy and store as much physical gold bullion as you see fit.  This will be your long crisis-proof and inflation-protected position.  

2. Open a forex account with a reputable broker that offers several gold crosses and an adjustable position size.  

3. Devise a signal to short gold.  When the signal goes off, short gold in your forex account against a high-interest currency in the amount of your physical holding or less.  Put a tight stop on it.  Move the stop to a no-loss point as soon as possible. 

4. Collect the swaps.

5. Either take profit in the forex position, or let it expire at no loss, keeping the swaps.

Why the need for physical bullion?  Simple.  Gold is not to be shorted, and gold loses its most attractive qualities if not in bullion form.  This strategy is a cheap hedge, allowing to quickly go from full to no exposure at very low transaction costs, while maintaining possession of bullion.  Same result can be accomplished with other instruments, but a forex account is perhaps the most flexible way of hedging the downside of gold.

Books and websites teach you principles.  It is up to you to learn application.  All you need to know to begin trading can be read in an hour.  Another day of reading is not going to get you anywhere.    

Simulated trading in a forex demo account teaches you to use your forex platform.  It has little value beyond that, it’s just a computer game.  Once you know which buttons to push, you’re done.  Another day of playing computer games is not going to get you anywhere.

Trading in a real forex account teaches you to lose.  Books and games can not prepare you for the encounter with your own greed and your own fear.  Once you know that the market is smarter than you, and there are no shortcuts, you’re done.  Another day of losing is going to get you in trouble.

Time to read books again.  

This is the fastest way to make money on forex that I know.  Start today.