Courage Under Stressful Conditions When the Outcome is Uncertain
All the foreign exchange trading knowledge in the world is not going to help, unless you have the nerve to buy and sell currencies and put your money at risk. As with the lottery “You gotta be in it to win it”. Trust me when I say that the simple task of hitting the buy or sell key is extremely difficult to do when your own real money is put at risk.
You will feel anxiety, even fear. Here lies the moment of truth. Do you have the courage to be afraid and act anyway? When a fireman runs into a burning building I assume he is afraid but he does it anyway and achieves the desired result. Unless you can overcome or accept your fear and do it anyway, you will not be a successful trader.
However, once you learn to control your fear, it gets easier and easier and in time there is no fear. The opposite reaction can become an issue – you’re overconfident and not focused enough on the risk you’re taking.
Both the inability to initiate a trade, or close a losing trade can create serious psychological issues for a trader going forward. By calling attention to these potential stumbling blocks beforehand, you can properly prepare prior to your first real trade and develop good trading habits from day one.
Start by analyzing yourself. Are you the type of person that can control their emotions and flawlessly execute trades, oftentimes under extremely stressful conditions? Are you the type of person who’s overconfident and prone to take more risk than they should? Before your first real trade you need to look inside yourself and get the answers. We can correct any deficiencies before they result in paralysis (not pulling the trigger) or a huge loss (overconfidence). A huge loss can prematurely end your trading career, or prolong your success until you can raise additional capital.
The difficulty doesn’t end with “pulling the trigger”. In fact what comes next is equally or perhaps more difficult. Once you are in the trade the next hurdle is staying in the trade. When trading foreign exchange you exit the trade as soon as possible after entry when it is not working. Most people who have been successful in non-trading ventures find this concept difficult to implement.
For example, real estate tycoons make their fortune riding out the bad times and selling during the boom periods. The problem with trying to adapt a ‘hold on until it comes back’ strategy in foreign exchange is that most of the time the currencies are in long-term persistent, directional trends and your equity will be wiped out before the currency comes back.
The other side of the coin is staying in a trade that is working. The most common pitfall is closing out a winning position without a valid reason. Once again, fear is the culprit. Your subconscious demons will be scaring you non-stop with questions like “what if news comes out and you wind up with a loss”. The reality is if news comes out in a currency that is going up, the news has a higher probability of being positive than negative (more on why that is so in a later article).
So your fear is just a baseless annoyance. Don’t try and fight the fear. Accept it. Have a laugh about it and then move on to the task at hand, which is determining an exit strategy based on actual price movement. As Garth says in Waynesworld “Live in the now man”. Worrying about what could be is irrational. Studying your chart and determining an objective exit point is reality based and rational.
Another common pitfall is closing a winning position because you are bored with it; its not moving. In Football, after a star running back breaks free for a 50-yard gain, he comes out of the game temporarily for a breather. When he reenters the game he is a serious threat to gain more yards – this is indisputable. So when your position takes a breather after a winning move, the next likely event is further gains – so why close it?
If you can be courageous under fire and strategically patient, foreign exchange trading may be for you. If you’re a natural gunslinger and reckless you will need to tone your act down a notch or two and we can help you make the necessary adjustments. If putting your money at risk makes you a nervous wreck its because you lack the knowledge base to be confident in your decision making.
Patience to Gain Knowledge through Study and Focus
Many new traders believe all you need to profitably trade foreign currencies are charts, technical indicators and a small bankroll. Most of them blow up (lose all their money) within a few weeks or months; some are initially successful and it takes as long as a year before they blow up. A tiny minority with good money management skills, patience, and a market niche go on to be successful traders. Armed with charts, technical indicators, and a small bankroll, the chance of succeeding is probably 500 to 1.
To increase your chances of success to near certainty requires knowledge; acquiring knowledge takes hard work, study, dedication and focus. Compile your knowledge base without taking any shortcuts, thereby assuring a solid foundation to build upon.
Sunday, 2 May 2010
PIVOT LINES
Pivot Lines is what usually called as Pivot. In different post, I wrote Pivot Point as the other definition of Pivot. However, as I know, in common discussion Pivot term usually refers to Pivot Lines.
Pivot Lines are lines of support and resistance which are calculated from the High(H), Low(L) and Close (C) price of the previous bar on the timeframe you are using. The most common used is Daily Pivot (Daily Pivot Lines). There are some trader who trade using 1 hour or 4 Hour pivot. Well, the choice is up to you and really depend on your experience and skill.
If you use daily pivot, you calculate the present day’s pivot using HLC price of the previous day. If you use 1 hour pivot, you should use HLC price of the previous hour.
I personally never use pivot lines other than Daily Pivot. So, I use daily pivot as an example here. Below are formula to calculate present day’s pivot and the support and resistance lines:
The Pivot = P = (H+L+C) /3
1st Resistance Line = R1 = 2P- L
2nd Resistance Line = R2 = P+ (H-L) = P+(R1-S1)
3rd Resistance Line = R3 = 2P + (H-2L)
1st Support Line = S1 = 2P – H
2nd Support Line = S2 = P – (H-L) = P – (R1 – S1)
3rd Support Line = S3 = 2P – (2H – L)
Is it looks confusing? Come on, it is just an explanation of the basic theory. You dont have to manually calculating the pivot. I know there are mt4 expert advisors which draw the pivot automatically for you. I will try to search the expert advisors and post it here. Otherway, you can use my pivot-calculator.
How to trade using those lines? We use those lines as a reference lines of price motion. If price move above the Pivot (P), it usually will continue to move untill hitting R1. Price find it Resistance at R1, it can continue the upward move (breaking R1) or rebound to P. If price breaking the R1, it usually continue to move untill it meet the 2nd resistance line at R2. After price breaks R2, it usually move up to R3. And vice versa if the price move below the Pivot (P).
Above is the best case scenario. Sometime price stop just before reaching pivot lines and then reverse. In other occasion price go slightly past pivot line, allow a bit of leeway.
Defining previous day/candle OHLC (Open High Low Close) data
1. Open the chart on your chosen time frame. For this example purpose, we use daily timeframe
2. Point your cursor to previous candle close or open side and wait until a text box show up showing the candle OHLC data
3. That’s it.
See below picture for better figuring out
Pivot Lines are lines of support and resistance which are calculated from the High(H), Low(L) and Close (C) price of the previous bar on the timeframe you are using. The most common used is Daily Pivot (Daily Pivot Lines). There are some trader who trade using 1 hour or 4 Hour pivot. Well, the choice is up to you and really depend on your experience and skill.
If you use daily pivot, you calculate the present day’s pivot using HLC price of the previous day. If you use 1 hour pivot, you should use HLC price of the previous hour.
I personally never use pivot lines other than Daily Pivot. So, I use daily pivot as an example here. Below are formula to calculate present day’s pivot and the support and resistance lines:
The Pivot = P = (H+L+C) /3
1st Resistance Line = R1 = 2P- L
2nd Resistance Line = R2 = P+ (H-L) = P+(R1-S1)
3rd Resistance Line = R3 = 2P + (H-2L)
1st Support Line = S1 = 2P – H
2nd Support Line = S2 = P – (H-L) = P – (R1 – S1)
3rd Support Line = S3 = 2P – (2H – L)
Is it looks confusing? Come on, it is just an explanation of the basic theory. You dont have to manually calculating the pivot. I know there are mt4 expert advisors which draw the pivot automatically for you. I will try to search the expert advisors and post it here. Otherway, you can use my pivot-calculator.
How to trade using those lines? We use those lines as a reference lines of price motion. If price move above the Pivot (P), it usually will continue to move untill hitting R1. Price find it Resistance at R1, it can continue the upward move (breaking R1) or rebound to P. If price breaking the R1, it usually continue to move untill it meet the 2nd resistance line at R2. After price breaks R2, it usually move up to R3. And vice versa if the price move below the Pivot (P).
Above is the best case scenario. Sometime price stop just before reaching pivot lines and then reverse. In other occasion price go slightly past pivot line, allow a bit of leeway.
Defining previous day/candle OHLC (Open High Low Close) data
1. Open the chart on your chosen time frame. For this example purpose, we use daily timeframe
2. Point your cursor to previous candle close or open side and wait until a text box show up showing the candle OHLC data
3. That’s it.
See below picture for better figuring out
SUPPORT AND RESISTANCE LEVEL
Support and Resistance is a trading concept which interprete whether the market is currently in doubt and probably will have a direction change. A price level, at which this market situation occur, is called as Support or Resistance level. We expect or predict that on this level market will change its direction.
Traders have many different way to determine Support and Resistance level. To mention some of the most popular : using recent price motion, using pivot point formula and using fibonaci lines.
In this article I’m going to write only about the technique using recent price motion. I will write the Fibonacci technique on separate article. There are already 3 articles I wrote explaining pivot lines, pivot point and also pivot point calculator, a free forex tools to help you calculate pivot point.
Determining Support and Resistance Using Recent Price Motion
In this technique Support is determined as a price level at which market seems to having difficulty to go lower. In the contrary, Resistance is a price level at which market seems to having difficulty to go higher.
The difficulty to break certain level is indicated by several unsuccessful trials to go lower or higher than that level. Agressive trader probably use only 2 unsuccessful trials, while conservative traders use 3 or more unsuccessful before they notice a support or resistance level. Many traders believe that the more often price tests a level of support or resistance without breaking it, the stronger the area of resistance or support is.
If a level of support is broken, it usually become the next resistance. In the contrary, if a level of resistance is broken, it usually become the next support
Traders have many different way to determine Support and Resistance level. To mention some of the most popular : using recent price motion, using pivot point formula and using fibonaci lines.
In this article I’m going to write only about the technique using recent price motion. I will write the Fibonacci technique on separate article. There are already 3 articles I wrote explaining pivot lines, pivot point and also pivot point calculator, a free forex tools to help you calculate pivot point.
Determining Support and Resistance Using Recent Price Motion
In this technique Support is determined as a price level at which market seems to having difficulty to go lower. In the contrary, Resistance is a price level at which market seems to having difficulty to go higher.
The difficulty to break certain level is indicated by several unsuccessful trials to go lower or higher than that level. Agressive trader probably use only 2 unsuccessful trials, while conservative traders use 3 or more unsuccessful before they notice a support or resistance level. Many traders believe that the more often price tests a level of support or resistance without breaking it, the stronger the area of resistance or support is.
If a level of support is broken, it usually become the next resistance. In the contrary, if a level of resistance is broken, it usually become the next support
Wednesday, 28 April 2010
Why Have a Trading Plan?
Uh oh! You’ve learned so much and have come so far in your education, and yet you're still haven't graduated high school. No, you’re not dumb, BUT you didn’t have a trading plan.
Our point is that you can fill your mind with plenty of information, but without a good trading plan and the discipline to stick to it, you will NEVER be profitable.
Think of your trading plan as your map to success. It will be a constant reminder of how you will make money in this market. Of course it’s not required, and if you can make your living by trading without a plan, we will bow down and hail you as the Market Zeus of the Forex.
So you CAN trade without a plan if you want, but before you make that decision, let us give you a few reasons WHY you should have one.
Why Have a Trading Plan?
Reason 1: It keeps you in the right direction
Consistency is very important to have in your trading routine because it allows you to truly measure how successful you are as a trader. If you have a sound trading system but always break your rules, how can you ever really know how good your system really is? Your trading plan will keep you on target. Read it every day and stick to it.
Reason 2: Trading is a business and successful businesses ALWAYS have plans
I have never seen a successful business not start out with a plan. Do you honestly think Walmart was just created on a whim and then magically became successful? Or what about McDonalds? I’m sure almost anyone can make a better hamburger than McDonalds, but the difference between them and the individual is that they have a successful business plan that guides them to success.
In the same way, you can relate the McDonald’s story to your trading career. Whether it’s by luck or experience, everyone can make money in the forex. However, the difference between a losing trader and a successful trader is the PLAN. If you have a good trading plan and you are disciplined enough to stick to it, you will be successful!
Now you know why you should have a trading plan. Let's find out what makes up a trading plan...
Uh oh! You’ve learned so much and have come so far in your education, and yet you're still haven't graduated high school. No, you’re not dumb, BUT you didn’t have a trading plan.
Our point is that you can fill your mind with plenty of information, but without a good trading plan and the discipline to stick to it, you will NEVER be profitable.
Think of your trading plan as your map to success. It will be a constant reminder of how you will make money in this market. Of course it’s not required, and if you can make your living by trading without a plan, we will bow down and hail you as the Market Zeus of the Forex.
So you CAN trade without a plan if you want, but before you make that decision, let us give you a few reasons WHY you should have one.
Why Have a Trading Plan?
Reason 1: It keeps you in the right direction
Consistency is very important to have in your trading routine because it allows you to truly measure how successful you are as a trader. If you have a sound trading system but always break your rules, how can you ever really know how good your system really is? Your trading plan will keep you on target. Read it every day and stick to it.
Reason 2: Trading is a business and successful businesses ALWAYS have plans
I have never seen a successful business not start out with a plan. Do you honestly think Walmart was just created on a whim and then magically became successful? Or what about McDonalds? I’m sure almost anyone can make a better hamburger than McDonalds, but the difference between them and the individual is that they have a successful business plan that guides them to success.
In the same way, you can relate the McDonald’s story to your trading career. Whether it’s by luck or experience, everyone can make money in the forex. However, the difference between a losing trader and a successful trader is the PLAN. If you have a good trading plan and you are disciplined enough to stick to it, you will be successful!
Now you know why you should have a trading plan. Let's find out what makes up a trading plan...
CURRENCY TRADING
The Currency trading market is a multi trillion dollar market where world currencies are exchanged back and forth on a daily basis.
How is currency trading done?
Retail currency trading is typically done through brokers and market makers. Traders can place trades through their brokers who will in turn place a corresponding trade on the interbank market.
Why do currency values change?
Currency values can change for many reasons. Sometimes they react to political and economic news, sometimes they are driven by speculators, and sometimes they are driven by international business flows. If companies in the United States are importing large quantities of products made in Europe, they will need to exchange their US Dollars for Euros to pay for the products. When this is done in very large quantity over a short period of time, it raises the demand for Euros and the value of the Euro versus the US Dollar increases. This happens because dollars are being sold on the open market, while Euros are being bought.
Is currency trading risky?
Currency trading can be very risky. Currencies tend to be very volatile compared to other markets. The real key to success with currency trading is to use conservative risk management. There are many components to effective currency risk management, but the bottom line is to use caution and have a trading plan.
Who trades currencies?
Currencies are traded by individual retail investors, financial institutions, and corporations doing business. Retail investors and banks are trade to make profits and corporations usually trade in the normal course of the international business process.
How is currency trading done?
Retail currency trading is typically done through brokers and market makers. Traders can place trades through their brokers who will in turn place a corresponding trade on the interbank market.
Why do currency values change?
Currency values can change for many reasons. Sometimes they react to political and economic news, sometimes they are driven by speculators, and sometimes they are driven by international business flows. If companies in the United States are importing large quantities of products made in Europe, they will need to exchange their US Dollars for Euros to pay for the products. When this is done in very large quantity over a short period of time, it raises the demand for Euros and the value of the Euro versus the US Dollar increases. This happens because dollars are being sold on the open market, while Euros are being bought.
Is currency trading risky?
Currency trading can be very risky. Currencies tend to be very volatile compared to other markets. The real key to success with currency trading is to use conservative risk management. There are many components to effective currency risk management, but the bottom line is to use caution and have a trading plan.
Who trades currencies?
Currencies are traded by individual retail investors, financial institutions, and corporations doing business. Retail investors and banks are trade to make profits and corporations usually trade in the normal course of the international business process.
Tuesday, 27 April 2010
SIMPLE MOVING AVERAGE
Simple Moving Average (SMA)
A simple moving average is the simplest type of moving average (DUH!). Basically, a simple moving average is calculated by adding up the last “X” period’s closing prices and then dividing that number by X. Confused??? Allow me to clarify.
If you plotted a 5 period simple moving average on a 1 hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5. Voila! You have your simple moving average.
If you were to plot a 5 period simple moving average on a 10 minute chart, you would add up the closing prices of the last 50 minutes and then divide that number by 5.
If you were to plot a 5 period simple moving average on a 30 minute chart, you would add up the closing prices of the last 150 minutes and then divide that number by 5.
If you were to plot the 5 period simple moving average on the a 4 hr. chart………………..OK OK, I think you get the picture! Let’s move on.
Most charting packages will do all the calculations for you. The reason we just bored you (yawn!) with how to calculate a simple moving average is because it is important that you understand how the moving averages are calculated. If you understand how each moving average is calculated, you can make your own decision as to which type is better for you.
Just like any indicator out there, moving averages operate with a delay. Because you are taking the averages of the price, you are really only seeing a “forecast” of the future price and not a concrete view of the future. Disclaimer: Moving averages will not turn you into Ms. Cleo the psychic!
Here is an example of how moving averages smooth out the price action.
On the previous chart, you can see 3 different SMAs. As you can see, the longer the SMA period is, the more it lags behind the price. Notice how the 62 SMA is farther away from the current price than the 30 and 5 SMA. This is because with the 62 SMA, you are adding up the closing prices of the last 62 periods and dividing it by 62. The higher the number period you use, the slower it is to react to the price movement.
A simple moving average is the simplest type of moving average (DUH!). Basically, a simple moving average is calculated by adding up the last “X” period’s closing prices and then dividing that number by X. Confused??? Allow me to clarify.
If you plotted a 5 period simple moving average on a 1 hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5. Voila! You have your simple moving average.
If you were to plot a 5 period simple moving average on a 10 minute chart, you would add up the closing prices of the last 50 minutes and then divide that number by 5.
If you were to plot a 5 period simple moving average on a 30 minute chart, you would add up the closing prices of the last 150 minutes and then divide that number by 5.
If you were to plot the 5 period simple moving average on the a 4 hr. chart………………..OK OK, I think you get the picture! Let’s move on.
Most charting packages will do all the calculations for you. The reason we just bored you (yawn!) with how to calculate a simple moving average is because it is important that you understand how the moving averages are calculated. If you understand how each moving average is calculated, you can make your own decision as to which type is better for you.
Just like any indicator out there, moving averages operate with a delay. Because you are taking the averages of the price, you are really only seeing a “forecast” of the future price and not a concrete view of the future. Disclaimer: Moving averages will not turn you into Ms. Cleo the psychic!
Here is an example of how moving averages smooth out the price action.
On the previous chart, you can see 3 different SMAs. As you can see, the longer the SMA period is, the more it lags behind the price. Notice how the 62 SMA is farther away from the current price than the 30 and 5 SMA. This is because with the 62 SMA, you are adding up the closing prices of the last 62 periods and dividing it by 62. The higher the number period you use, the slower it is to react to the price movement.
INDICATORS
Leading vs. Lagging Indicators
We’ve covered a lot of tools that can help you analyze charts and identify trends. In fact, you may now have too much information to use effectively.
In this lesson, we’re going to look at streamlining your use of these chart indicators. We want you to fully understand the strengths and weaknesses of each tool, so you’ll be able to determine which ones work for you and your trading plan… and which ones don’t.
Leading versus Lagging Indicators
Let’s discuss some concepts first. There are two types of indicators: leading and lagging.
A leading indicator gives a buy signal before the new trend or reversal occurs.
A lagging indicator gives a signal after the trend has started and basically informs you “hey buddy, pay attention, the trend has started, you’re missing the boat.”
You’re probably thinking, “Ooooh, I’m going to get rich with leading indicators!” since you would be able to profit from a new trend right at the start. You’re right – you would “catch” the entire trend every single time, IF the leading indicator was correct every single time. But it’s not.
When you use leading indicators, you will experience a lot of fake-outs. Leading indicators are notorious for giving bogus signals which will “mislead” you. Get it? Leading indicators that "mislead" you? Ha-ha. Man we're so funny we even crack ourselves up.
The other option is to use lagging indicators, which aren’t as prone to bogus signals. Lagging indicators only give signals after the price change is clearly forming a trend. The downside is that you’d be a little late in entering a position. Often the biggest gains of a trend occur in the first few bars, so by using a lagging indicator you could potentially miss out on much of the profit. Which sucks.
Oscillators and Trend Following Indicators
For the purpose of this lesson, let’s broadly categorize all of our technical indicators into one of two categories:
1. Oscillators
2. Trend following or momentum indicators
Oscillators are leading indicators.
Momentum indicators are lagging indicators.
While the two can be supportive of each other, they're more likely to conflict with each other. We’re not saying that one or the other should be used exclusively, but you must understand the potential pitfalls of each.
We’ve covered a lot of tools that can help you analyze charts and identify trends. In fact, you may now have too much information to use effectively.
In this lesson, we’re going to look at streamlining your use of these chart indicators. We want you to fully understand the strengths and weaknesses of each tool, so you’ll be able to determine which ones work for you and your trading plan… and which ones don’t.
Leading versus Lagging Indicators
Let’s discuss some concepts first. There are two types of indicators: leading and lagging.
A leading indicator gives a buy signal before the new trend or reversal occurs.
A lagging indicator gives a signal after the trend has started and basically informs you “hey buddy, pay attention, the trend has started, you’re missing the boat.”
You’re probably thinking, “Ooooh, I’m going to get rich with leading indicators!” since you would be able to profit from a new trend right at the start. You’re right – you would “catch” the entire trend every single time, IF the leading indicator was correct every single time. But it’s not.
When you use leading indicators, you will experience a lot of fake-outs. Leading indicators are notorious for giving bogus signals which will “mislead” you. Get it? Leading indicators that "mislead" you? Ha-ha. Man we're so funny we even crack ourselves up.
The other option is to use lagging indicators, which aren’t as prone to bogus signals. Lagging indicators only give signals after the price change is clearly forming a trend. The downside is that you’d be a little late in entering a position. Often the biggest gains of a trend occur in the first few bars, so by using a lagging indicator you could potentially miss out on much of the profit. Which sucks.
Oscillators and Trend Following Indicators
For the purpose of this lesson, let’s broadly categorize all of our technical indicators into one of two categories:
1. Oscillators
2. Trend following or momentum indicators
Oscillators are leading indicators.
Momentum indicators are lagging indicators.
While the two can be supportive of each other, they're more likely to conflict with each other. We’re not saying that one or the other should be used exclusively, but you must understand the potential pitfalls of each.
Stochastics
Stochastics are another indicator that helps us determine where a trend might be ending. By definition, a stochastic is an oscillator that measures overbought and oversold conditions in the market. The 2 lines are similar to the MACD lines in the sense that one line is faster than the other.
How to Apply Stochastics
Like I said earlier, stochastics tells us when the market is overbought or oversold. Stochastics are scaled from 0 to 100. When the stochastic lines are above 80 (the red dotted line in the chart above), then it means the market is overbought. When the stochastic lines are below 20 (the blue dotted line), then it means that the market is oversold. As a rule of thumb, we buy when the market is oversold, and we sell when the market is overbought.
Looking at the chart above, you can see that the stochastics has been showing overbought conditions for quite some time. Based upon this information, can you guess where the price might go?
If you said the price would drop, then you are absolutely correct! Because the market was overbought for such a long period of time, a reversal was bound to happen.
That is the basics of stochastics. Many traders use stochastics in different ways, but the main purpose of the indicator is to show us where the market is overbought and oversold. Over time, you will learn to use stochastics to fit your own personal trading style. Okay, let's move on to RSI.
Stochastics are another indicator that helps us determine where a trend might be ending. By definition, a stochastic is an oscillator that measures overbought and oversold conditions in the market. The 2 lines are similar to the MACD lines in the sense that one line is faster than the other.
How to Apply Stochastics
Like I said earlier, stochastics tells us when the market is overbought or oversold. Stochastics are scaled from 0 to 100. When the stochastic lines are above 80 (the red dotted line in the chart above), then it means the market is overbought. When the stochastic lines are below 20 (the blue dotted line), then it means that the market is oversold. As a rule of thumb, we buy when the market is oversold, and we sell when the market is overbought.
Looking at the chart above, you can see that the stochastics has been showing overbought conditions for quite some time. Based upon this information, can you guess where the price might go?
If you said the price would drop, then you are absolutely correct! Because the market was overbought for such a long period of time, a reversal was bound to happen.
That is the basics of stochastics. Many traders use stochastics in different ways, but the main purpose of the indicator is to show us where the market is overbought and oversold. Over time, you will learn to use stochastics to fit your own personal trading style. Okay, let's move on to RSI.
Sunday, 25 April 2010
FIBONACCI
We will be using Fibonacci ratios a lot in our trading so you better learn it and love it like your mother. Fibonacci is a huge subject and there are many different studies of Fibonacci with weird names but we’re going to stick to two: retracement and extension.
Let me first start by introducing you to the Fib man himself…Leonard Fibonacci.
Leonard Fibonacci was a famous Italian mathematician, also called a super duper uber geek, who had an “aha!” moment and discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe
The ratios arise from the following number series: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 ……
This series of numbers is derived by starting with 1 followed by 2 and then adding 1 + 2 to get 3, the third number. Then, adding 2 + 3 to get 5, the fourth number, and so on.
After the first few numbers in the sequence, if you measure the ratio of any number to that of the next higher number you get .618. For example, 34 divided by 55 equals 0.618.
If you measure the ratio between alternate numbers you get .382. For example, 34 divided by 89 = 0.382 and that’s as far as into the explanation as we’ll go.
These ratios are called the “golden mean.” Okay that’s enough mumbo jumbo. Even I’m about to fall asleep with all these numbers. I'll just cut to the chase; these are the ratios you have to know:
Fibonacci Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.764
Fibonacci Extension Levels
0, 0.382, 0.618, 1.000, 1.382, 1.618
You won’t really need to know how to calculate all of this. Your charting software will do all the work for you. But it’s always good to be familiar with the basic theory behind the indicator so you’ll have knowledge to impress your date.
Traders use the Fibonacci retracement levels as support and resistance levels. Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels become a self-fulfilling expectation.
Traders use the Fibonacci extension levels as profit taking levels. Again, since so many traders are watching these levels and placing buy and sell orders to take profits, this tool usually works due self-fulfilling expectations.
Most charting software includes both Fibonacci retracement levels and extension level tools. In order to apply Fibonacci levels to your charts, you’ll need to identify Swing High and Swing Low points.
A Swing High is a candlestick with at least two lower highs on both the left and right of itself.
A Swing Low is a candlestick with at least two higher lows on both the left and right of itself.
Let's take a closer look at Fibonacci retracement levels...
Let me first start by introducing you to the Fib man himself…Leonard Fibonacci.
Leonard Fibonacci was a famous Italian mathematician, also called a super duper uber geek, who had an “aha!” moment and discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe
The ratios arise from the following number series: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 ……
This series of numbers is derived by starting with 1 followed by 2 and then adding 1 + 2 to get 3, the third number. Then, adding 2 + 3 to get 5, the fourth number, and so on.
After the first few numbers in the sequence, if you measure the ratio of any number to that of the next higher number you get .618. For example, 34 divided by 55 equals 0.618.
If you measure the ratio between alternate numbers you get .382. For example, 34 divided by 89 = 0.382 and that’s as far as into the explanation as we’ll go.
These ratios are called the “golden mean.” Okay that’s enough mumbo jumbo. Even I’m about to fall asleep with all these numbers. I'll just cut to the chase; these are the ratios you have to know:
Fibonacci Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.764
Fibonacci Extension Levels
0, 0.382, 0.618, 1.000, 1.382, 1.618
You won’t really need to know how to calculate all of this. Your charting software will do all the work for you. But it’s always good to be familiar with the basic theory behind the indicator so you’ll have knowledge to impress your date.
Traders use the Fibonacci retracement levels as support and resistance levels. Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels become a self-fulfilling expectation.
Traders use the Fibonacci extension levels as profit taking levels. Again, since so many traders are watching these levels and placing buy and sell orders to take profits, this tool usually works due self-fulfilling expectations.
Most charting software includes both Fibonacci retracement levels and extension level tools. In order to apply Fibonacci levels to your charts, you’ll need to identify Swing High and Swing Low points.
A Swing High is a candlestick with at least two lower highs on both the left and right of itself.
A Swing Low is a candlestick with at least two higher lows on both the left and right of itself.
Let's take a closer look at Fibonacci retracement levels...
FOREX STRATEGY
Best Forex Strategy
What is the best forex trading strategy? If you have been searching for currency trading strategies you might have come across various strategies. New traders are always jumping from one strategy to another looking for the best forex strategy online. You can visit online forex trading forums, attend forex training programs or read forex books, but you will soon notice that there are a number of forex trading strategies and each one of them claims that it is a winning forex strategy. So how do you know which is the best forex strategy? The truth is that there are many winning strategies and the best forex strategy will depend upon your currency trading system. Remember the old saying, there is more than one way to skin a cat!
For instance a forex strategy might work extremely well if you are trading with the aim of long term profits while the same strategy might not do good if you are more into day trading or looking for short term profits. If you use a automated forex trading software like Forex Megadroid or Forex Derivate you may have to use a different set forex strategies. Therefore there is no one particular currency trading strategy which will work for everyone.
Examples of Forex Strategies
* LMT Forex Formula:
Low Maintenance Trading forex strategy
* Forex Confidante:
Italian Banker Thomas reveals his secret forex strategy.
The key is to find a winning forex strategy and sticking to it. So, how do you find a profitable forex trading strategy which works best for you? Here is are some guidelines.
3 Golden Rules of Forex Trading Strategy
There are certain guidelines that any forex trading strategy should follow and these are true for everyone. These guidelines are called the golden rules of trading.
1. Trend is Your Friend
Always follow the trend. Majority of the forex trading strategies and systems concentrates on identifying trends and that is a right approach. Do not try to go against the trend and depending upon the rising or falling trend, choose to go long or short as appropriate. Resisting the trend will result in losing your money in most cases.
2. Goal Setting for Individual Trades
Before you enter a trade set a clear profit goal. This means you know when close the trade and exit. Sometimes people get greedy and try to stay in there with the hope of making more profits. New forex traders often commit this mistake. They might even get few high profit trades only to see that finally a huge drop in currency price destroying all their funds.
Similarly, if a trade goes against you, do not try to hold on in the hope that the market will turn back your way. In such a case your forex trading strategy should be to cut your losses and get out and when you set proper goal for each trade you know when to quit. You can also make use of stop losses to do this automatically.
3. Protect Your Funds
Forex trading is of course a risky business. However risking too much on one trade is a mistake you should avoid. Even experienced traders fall in this trap. You may have strong confidence on a particular trade, but never risk too much money on a single trade. You may feel that nothing will go wrong with that trade, but anything can go wrong in forex trading.
So how much risk is too much? The amount of risk depends on your funds and the forex trading strategy you use. I would say risking 2% of your fund per trade is a safer option though you could go up depending upon the trade. However never risk more than 5% of your balance for a single trade. Also remember that if you go with a fixed percentage, as your profits and funds increase the amount of money you risk in each trade will increase.
The above three golden rules will serve as a guideline when choosing the best one from the forex strategies or while developing your forex strategy.
What is the best forex trading strategy? If you have been searching for currency trading strategies you might have come across various strategies. New traders are always jumping from one strategy to another looking for the best forex strategy online. You can visit online forex trading forums, attend forex training programs or read forex books, but you will soon notice that there are a number of forex trading strategies and each one of them claims that it is a winning forex strategy. So how do you know which is the best forex strategy? The truth is that there are many winning strategies and the best forex strategy will depend upon your currency trading system. Remember the old saying, there is more than one way to skin a cat!
For instance a forex strategy might work extremely well if you are trading with the aim of long term profits while the same strategy might not do good if you are more into day trading or looking for short term profits. If you use a automated forex trading software like Forex Megadroid or Forex Derivate you may have to use a different set forex strategies. Therefore there is no one particular currency trading strategy which will work for everyone.
Examples of Forex Strategies
* LMT Forex Formula:
Low Maintenance Trading forex strategy
* Forex Confidante:
Italian Banker Thomas reveals his secret forex strategy.
The key is to find a winning forex strategy and sticking to it. So, how do you find a profitable forex trading strategy which works best for you? Here is are some guidelines.
3 Golden Rules of Forex Trading Strategy
There are certain guidelines that any forex trading strategy should follow and these are true for everyone. These guidelines are called the golden rules of trading.
1. Trend is Your Friend
Always follow the trend. Majority of the forex trading strategies and systems concentrates on identifying trends and that is a right approach. Do not try to go against the trend and depending upon the rising or falling trend, choose to go long or short as appropriate. Resisting the trend will result in losing your money in most cases.
2. Goal Setting for Individual Trades
Before you enter a trade set a clear profit goal. This means you know when close the trade and exit. Sometimes people get greedy and try to stay in there with the hope of making more profits. New forex traders often commit this mistake. They might even get few high profit trades only to see that finally a huge drop in currency price destroying all their funds.
Similarly, if a trade goes against you, do not try to hold on in the hope that the market will turn back your way. In such a case your forex trading strategy should be to cut your losses and get out and when you set proper goal for each trade you know when to quit. You can also make use of stop losses to do this automatically.
3. Protect Your Funds
Forex trading is of course a risky business. However risking too much on one trade is a mistake you should avoid. Even experienced traders fall in this trap. You may have strong confidence on a particular trade, but never risk too much money on a single trade. You may feel that nothing will go wrong with that trade, but anything can go wrong in forex trading.
So how much risk is too much? The amount of risk depends on your funds and the forex trading strategy you use. I would say risking 2% of your fund per trade is a safer option though you could go up depending upon the trade. However never risk more than 5% of your balance for a single trade. Also remember that if you go with a fixed percentage, as your profits and funds increase the amount of money you risk in each trade will increase.
The above three golden rules will serve as a guideline when choosing the best one from the forex strategies or while developing your forex strategy.
Friday, 23 April 2010
TYPES OF TRADING
Congratulations! You’ve gotten through the Pre-School and are ready to begin your first day of class. You did go through the Pre-School right? By now you’ve learned some history about the Forex, how it works, what affects the prices, blah blah blah.
We know what you’re thinking…BORING! SHOW ME HOW TO MAKE MONEY ALREADY!
Well, say no more my friend; because here is where your journey as a Forex trader begins…
This is your last chance to turn back… Take the red pill, and we take you back to where you were and you will forget all about this. You can go back to living your average life in your 9-5 job and work for someone else for the rest of your life.
OR
You can take the green pill (green for money! Yeah!) And learn how you can make money for yourself in the most active market in the world, simply by using a little brain power. Just remember, your education will never stop. Even after you graduate from BabyPips.com, you must constantly pursue as much knowledge as you can, so that you can become a true FOREX MASTER! Now pop that green pill in, wash it down with some chocolate milk, and grab your lunchbox…School of Pipsology is now in session!
Note: the green pill was made with a brainwashing serum. You will now obey everything that we tell you to do! Mwuahahaha! <--evil laugh
Two Types of Trading
There are 2 basic types of analysis you can take when approaching the forex:
1. Fundamental analysis
2. Technical analysis.
There has always been a constant debate as to which analysis is better, but to tell you the truth, you need to know a little bit of both. So let’s break each one down and then come back and put them together.
Fundamental Analysis
Fundamental analysis is a way of looking at the market through economic, social and political forces that affect supply and demand. (Yada yada yada.) In other words, you look at whose economy is doing well, and whose economy sucks. The idea behind this type of analysis is that if a country’s economy is doing well, their currency will also be doing well. This is because the better a country’s economy, the more trust other countries have in that currency.
For example, the U.S. dollar has been gaining strength because the U.S. economy is gaining strength. As the economy gets better, interest rates get higher to control inflation and as a result, the value of the dollar continues to increase. In a nutshell, that is basically what fundamental analysis is.
Later on in the course you will learn which specific news events drive currency prices the most. For now, just know that the fundamental analysis of the Forex is a way of analyzing a currency through the strength of that country’s economy.
Technical Analysis
Technical analysis is the study of price movement. In one word, technical analysis = charts. The idea is that a person can look at historical price movements, and, based on the price action, can determine at some level where the price will go. By looking at charts, you can identify trends and patterns which can help you find good trading opportunities.
The most IMPORTANT thing you will ever learn in technical analysis is the trend! Many, many, many, many, many, many people have a saying that goes, “The trend is your friend”. The reason for this is that you are much more likely to make money when you can find a trend and trade in the same direction. Technical analysis can help you identify these trends in its earliest stages and therefore provide you with very profitable trading opportunities.
Now I know you’re thinking to yourself, “Geez, these guys are smart. They use crazy words like "technical" and "fundamental" analysis. I can never learn this stuff!” Don't worry yourself too much. After you're done with the School of Pipsology, you too will be just as....uhmmm..."smart?" as us.
So which type of analysis is better?
Ahh, the million dollar question. Throughout your journey as an aspiring Forex trader you will find strong advocates for both fundamental and technical trading. You will have those who argue that it is the fundamentals alone that drive the market and that any patterns found on a chart are simply coincidence. On the other hand, there will be those who argue that it is the technicals that traders pay attention to and because traders pay attention to it, common market patterns can be found to help predict future price movements.
Do not be fooled by these one sided extremists! One is not better than the other...
In order to become a true Forex master you will need to know how to effectively use both types of analysis. Don't believe me? Let me give you an example of how focusing on only one type of analysis can turn into a disaster.
* Let’s say that you’re looking at your charts and you find a good trading opportunity. You get all excited thinking about the money that’s going to be raining down from the sky. You say to yourself, “Man, I’ve never seen a more perfect trading opportunity. I love my charts.”
* You then proceed to enter your trade with a big fat smile on your face (the kind where all your teeth are showing).
* But wait! All of a sudden the trade makes a 30 pip move in the OTHER DIRECTION! Little did you know that there was an interest rate decrease for your currency and now everyone is trading in the opposite direction.
* Your big fat smile turns into mush and you start getting angry at your charts. You throw your computer on the ground and begin to pulverize it. You just lost a bunch of money, and now your computer is broken. And it’s all because you completely ignored fundamental analysis.
(Note: This was not based on a real story. This did not happen to me. I was never this naive. I was always a smart trader.... From the overused sarcasm, I think you get the picture)
Ok, ok, so the story was a little over-dramatized, but you get the point.
The Forex is like a big flowing ball of energy, and within that ball is a balance between fundamental and technical factors that play a part in determining where the market will go.
Remember how your mother or father used to tell you as a kid that too much of anything is never good? Well you might've thought that was just hogwash back then but in the Forex, the same applies when deciding which type of analysis to use. Don't rely on just one. Instead, you must learn to balance the use of both of them, because it is only then that you can really get the most out of your trading.
We know what you’re thinking…BORING! SHOW ME HOW TO MAKE MONEY ALREADY!
Well, say no more my friend; because here is where your journey as a Forex trader begins…
This is your last chance to turn back… Take the red pill, and we take you back to where you were and you will forget all about this. You can go back to living your average life in your 9-5 job and work for someone else for the rest of your life.
OR
You can take the green pill (green for money! Yeah!) And learn how you can make money for yourself in the most active market in the world, simply by using a little brain power. Just remember, your education will never stop. Even after you graduate from BabyPips.com, you must constantly pursue as much knowledge as you can, so that you can become a true FOREX MASTER! Now pop that green pill in, wash it down with some chocolate milk, and grab your lunchbox…School of Pipsology is now in session!
Note: the green pill was made with a brainwashing serum. You will now obey everything that we tell you to do! Mwuahahaha! <--evil laugh
Two Types of Trading
There are 2 basic types of analysis you can take when approaching the forex:
1. Fundamental analysis
2. Technical analysis.
There has always been a constant debate as to which analysis is better, but to tell you the truth, you need to know a little bit of both. So let’s break each one down and then come back and put them together.
Fundamental Analysis
Fundamental analysis is a way of looking at the market through economic, social and political forces that affect supply and demand. (Yada yada yada.) In other words, you look at whose economy is doing well, and whose economy sucks. The idea behind this type of analysis is that if a country’s economy is doing well, their currency will also be doing well. This is because the better a country’s economy, the more trust other countries have in that currency.
For example, the U.S. dollar has been gaining strength because the U.S. economy is gaining strength. As the economy gets better, interest rates get higher to control inflation and as a result, the value of the dollar continues to increase. In a nutshell, that is basically what fundamental analysis is.
Later on in the course you will learn which specific news events drive currency prices the most. For now, just know that the fundamental analysis of the Forex is a way of analyzing a currency through the strength of that country’s economy.
Technical Analysis
Technical analysis is the study of price movement. In one word, technical analysis = charts. The idea is that a person can look at historical price movements, and, based on the price action, can determine at some level where the price will go. By looking at charts, you can identify trends and patterns which can help you find good trading opportunities.
The most IMPORTANT thing you will ever learn in technical analysis is the trend! Many, many, many, many, many, many people have a saying that goes, “The trend is your friend”. The reason for this is that you are much more likely to make money when you can find a trend and trade in the same direction. Technical analysis can help you identify these trends in its earliest stages and therefore provide you with very profitable trading opportunities.
Now I know you’re thinking to yourself, “Geez, these guys are smart. They use crazy words like "technical" and "fundamental" analysis. I can never learn this stuff!” Don't worry yourself too much. After you're done with the School of Pipsology, you too will be just as....uhmmm..."smart?" as us.
So which type of analysis is better?
Ahh, the million dollar question. Throughout your journey as an aspiring Forex trader you will find strong advocates for both fundamental and technical trading. You will have those who argue that it is the fundamentals alone that drive the market and that any patterns found on a chart are simply coincidence. On the other hand, there will be those who argue that it is the technicals that traders pay attention to and because traders pay attention to it, common market patterns can be found to help predict future price movements.
Do not be fooled by these one sided extremists! One is not better than the other...
In order to become a true Forex master you will need to know how to effectively use both types of analysis. Don't believe me? Let me give you an example of how focusing on only one type of analysis can turn into a disaster.
* Let’s say that you’re looking at your charts and you find a good trading opportunity. You get all excited thinking about the money that’s going to be raining down from the sky. You say to yourself, “Man, I’ve never seen a more perfect trading opportunity. I love my charts.”
* You then proceed to enter your trade with a big fat smile on your face (the kind where all your teeth are showing).
* But wait! All of a sudden the trade makes a 30 pip move in the OTHER DIRECTION! Little did you know that there was an interest rate decrease for your currency and now everyone is trading in the opposite direction.
* Your big fat smile turns into mush and you start getting angry at your charts. You throw your computer on the ground and begin to pulverize it. You just lost a bunch of money, and now your computer is broken. And it’s all because you completely ignored fundamental analysis.
(Note: This was not based on a real story. This did not happen to me. I was never this naive. I was always a smart trader.... From the overused sarcasm, I think you get the picture)
Ok, ok, so the story was a little over-dramatized, but you get the point.
The Forex is like a big flowing ball of energy, and within that ball is a balance between fundamental and technical factors that play a part in determining where the market will go.
Remember how your mother or father used to tell you as a kid that too much of anything is never good? Well you might've thought that was just hogwash back then but in the Forex, the same applies when deciding which type of analysis to use. Don't rely on just one. Instead, you must learn to balance the use of both of them, because it is only then that you can really get the most out of your trading.
JAPANESE CANDLESTICKS
What is a Japanese Candlestick?
While we briefly covered candlestick charting analysis in the previous lesson, we’ll now dig in a little and discuss them more in detail. First let’s do a quick review.
What is Candlestick Trading?
Back in the day when Godzilla was still a cute little lizard, the Japanese created their own old school version of technical analysis to trade rice. A westerner by the name of Steve Nison “discovered” this secret technique on how to read charts from a fellow Japanese broker and Japanese candlesticks lived happily ever after. Steve researched, studied, lived, breathed, ate candlesticks, began writing about it and slowly grew in popularity in 90s. To make a long story short, without Steve Nison, candle charts might have remained a buried secret. Steve Nison is Mr. Candlestick.
Okay so what the heck are forex candlesticks?
The best way to explain is by using a picture:
Candlesticks are formed using the open, high, low and close.
* If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
* If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
* The hollow or filled section of the candlestick is called the “real body” or body.
* The thin lines poking above and below the body display the high/low range and are called shadows.
* The top of the upper shadow is the “high”.
* The bottom of the lower shadow is the “low”.
Are you one of those who have heard about Forex trading but not sure what it really is? Or you would like to find forex trading tips on how it works and if you can make money out of it, but not sure whom to ask? Well, I can tell you are not alone in this situation. Many people think that they are familiar with Forex trading, but in reality, most of them think that forex trading has something to do with stocks or bonds.
Forex trading is different from stocks or bonds. It is a type of trading that involves trading of currency pairs. The currencies that are usually chosen for trading are considered above the rest because they are stable and have a greater value than other foreign currencies.
For all the newcomers to the forex market, the first piece of tips is to protect themselves from frauds. If you’re new in forex trading, it doesn’t hurt to take some advice from the ones who are already engaged in forex trading. In fact, you can make use of their tips for your own good, and even to your advantage.
People across the globe participate in forex trading and that’s why it is not surprising to see the kind of frauds that are able to infiltrate the financial market. To shield the legitimate traders from these frauds, they must be made aware of these growing facts, so that they can take suitable actions to protect their trading career.
The opportunities that forex trading provides for different individuals, firms, and organizations is growing rapidly every year. And accompanying this growth is the widespread growth of different scams related with forex trading. But you should not worry because there are a lot of legitimate companies or firms that can help you in forex trading.
The best thing to do is to find these legitimate companies to stay away from fraudulent ones. However, most new traders fall prey to these scammers because of their savory offers.
Don’t get fooled by the companies that advertise high profits for minimal risks. The fact is that, if you want to earn high profits, then you are likely subjected to high risks as well. Higher rate of profit means higher risk.
So, always stay on the safer side. If you’re looking for a forex trading broker, and since each broker is part of a certain company, make sure that you select a government registered company. In signing any contract with them, double check if they are registered or certified brokers. This is one basic precaution that will prevent any misfortune that you might encounter in the future.
The job of reducing the risk is entirely yours, not that of the broker; so if the company offers or promises little risks, guaranteed profits, and the like, that is a sure sign that they are there to make a fool out of you.
Even if you are not a professional trader, a little use of the common sense can help in long run.
Before actually participating in any forex trade, make sure you have done your homework. Do the research and jot down all the necessary details about the trading transaction that you wish to perform. Ever heard of inter-bank market? Stay away from companies which lure you into trading in the inter-bank market because the currency transactions are negotiated in a wobbly network of large companies and financial institutions.
Also, make sure to check the background or history of the trading company. If a certain company does not disclose information about their background, that should serve as a red flag. It means that you should continue doing transactions with them. Nor is it advisable to transfer/send cash through the mail or the internet. Practice caution in everything you do, and you’ll be more than sure that you are always safe.
Fraudulent companies often solicit services and advertise soaring pressure tactics to attract you in participating or joining their services. An offshore company which guarantees no risk and return of profit is a big NO. Always be skeptical and don’t give in to any instant offer that comes your way.
What forex trading tips would you like to know about? Check out the professional advice below
- Get the latest information on online forex trading brokers system
- Help on learning forex trading
- Recommended forex trading courses
- What you should know about forex trading software
- Advice on forex mobile trading software
- More about forex trading signal software
Take a carefully evaluated decision about your trading company or transaction. These pieces of advice are merely to guide you. Ultimately, it will entirely depend on you to identify and reject offers from fraud companies. One wrong decision could seriously jeopardize you trading career, so act wisely.
The success of Forex trading, like any other trading, lies in your ability to buy for less and sell for more. You can trade in Forex market successfully if you keep patience and a little diligence. You can also safeguard yourself from Forex trading frauds if you stay alert and skeptical.
Forex trading is different from stocks or bonds. It is a type of trading that involves trading of currency pairs. The currencies that are usually chosen for trading are considered above the rest because they are stable and have a greater value than other foreign currencies.
For all the newcomers to the forex market, the first piece of tips is to protect themselves from frauds. If you’re new in forex trading, it doesn’t hurt to take some advice from the ones who are already engaged in forex trading. In fact, you can make use of their tips for your own good, and even to your advantage.
People across the globe participate in forex trading and that’s why it is not surprising to see the kind of frauds that are able to infiltrate the financial market. To shield the legitimate traders from these frauds, they must be made aware of these growing facts, so that they can take suitable actions to protect their trading career.
The opportunities that forex trading provides for different individuals, firms, and organizations is growing rapidly every year. And accompanying this growth is the widespread growth of different scams related with forex trading. But you should not worry because there are a lot of legitimate companies or firms that can help you in forex trading.
The best thing to do is to find these legitimate companies to stay away from fraudulent ones. However, most new traders fall prey to these scammers because of their savory offers.
Don’t get fooled by the companies that advertise high profits for minimal risks. The fact is that, if you want to earn high profits, then you are likely subjected to high risks as well. Higher rate of profit means higher risk.
So, always stay on the safer side. If you’re looking for a forex trading broker, and since each broker is part of a certain company, make sure that you select a government registered company. In signing any contract with them, double check if they are registered or certified brokers. This is one basic precaution that will prevent any misfortune that you might encounter in the future.
The job of reducing the risk is entirely yours, not that of the broker; so if the company offers or promises little risks, guaranteed profits, and the like, that is a sure sign that they are there to make a fool out of you.
Even if you are not a professional trader, a little use of the common sense can help in long run.
Before actually participating in any forex trade, make sure you have done your homework. Do the research and jot down all the necessary details about the trading transaction that you wish to perform. Ever heard of inter-bank market? Stay away from companies which lure you into trading in the inter-bank market because the currency transactions are negotiated in a wobbly network of large companies and financial institutions.
Also, make sure to check the background or history of the trading company. If a certain company does not disclose information about their background, that should serve as a red flag. It means that you should continue doing transactions with them. Nor is it advisable to transfer/send cash through the mail or the internet. Practice caution in everything you do, and you’ll be more than sure that you are always safe.
Fraudulent companies often solicit services and advertise soaring pressure tactics to attract you in participating or joining their services. An offshore company which guarantees no risk and return of profit is a big NO. Always be skeptical and don’t give in to any instant offer that comes your way.
What forex trading tips would you like to know about? Check out the professional advice below
- Get the latest information on online forex trading brokers system
- Help on learning forex trading
- Recommended forex trading courses
- What you should know about forex trading software
- Advice on forex mobile trading software
- More about forex trading signal software
Take a carefully evaluated decision about your trading company or transaction. These pieces of advice are merely to guide you. Ultimately, it will entirely depend on you to identify and reject offers from fraud companies. One wrong decision could seriously jeopardize you trading career, so act wisely.
The success of Forex trading, like any other trading, lies in your ability to buy for less and sell for more. You can trade in Forex market successfully if you keep patience and a little diligence. You can also safeguard yourself from Forex trading frauds if you stay alert and skeptical.
Thursday, 22 April 2010
Have you been spending thousands of Dollars in eBooks, courses, seminars and still struggling to break even? HIFINDIA.com offer excellent educative services, but most of the people don't really take advantage from them because of two main reason: they overlook the basics and they lack a self-study discipline. |
Have you ever tested your knowledge when it comes to trading the markets? Most people prefer to test themselves under real market conditions with real money, but that is the expensive and hard way to do it. Poor results are a sign that your trading approach is lacking the required consistency, but do you know exactly where you are failing? Becoming aware of your weaknesses is the first step to change. |
Do you feel overloaded with too much theory and don't know where to start or continue? You may probably overlook the basics. When trading the Forex market, there are a few aspects that have been constantly reliable for several decades, however most traders don't profit from them. Instead, they start an endless journey in the search for the holy grail. Make something that only few people do! Get to the basics and assess your knowledge. You can do this by answering to more than 250 questions related to the contents given in the unit. Besides of a final evaluation to know exactly where you are failing, you will find tips to review the aspects you still haven't integrated very well. This is a useful way to apply the concepts and techniques you have learned and make sure you can really use them. You will be asked to resolve real case scenarios by means of graphical examples and in most cases the right answer will be amplified with additional knowledge. |
Tuesday, 20 April 2010
*******FOREX*******
FAQ FAQ FAQ FAQ FAQ
What is Foreign Exchange Trading; what do I need to know?
What is Forex?
What is Over The Counter (OTC) trading?
What are Forex Instruments?
What is Day Trading at Easy-Forex®?
What is a Forward deal?
What is a Limit Order?
How do I know which currency will go up or down?
Why has the price of the deals I am interested in changed since the last time I checked?
What currencies can I trade with Easy-Forex®?
Is the Forex market regulated?
Is Forex risky?
What should I look for in an online trading platform?
What type of account is suitable for me?
What is Sharia or Islamic Law Accounts and do you offer them?
How do I use the Easy-Forex® website?
Can I log onto the site with my existing Username and Password?
What does the Easy-Forex® website contain?
How do I deposit money with Easy-Forex®?
What Identification Documents do I have to supply and why?
How do I withdraw money?
What hours can I trade?
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Q: What is Foreign Exchange Trading; what do I need to know?
A: Discover Forex trading in our learning section. This is where you will find a series of articles that explain currency trading and the foreign exchange market.
A: Discover Forex trading in our learning section. This is where you will find a series of articles that explain currency trading and the foreign exchange market.
Q: What is Forex?
A: Forex and ‘FX’ are shortened terms used for ‘foreign exchange’. Foreign exchange or ‘currency trading’ is the exchange of money from different countries. The value of one country’s currency is constantly changing against the value of another country’s currency. Forex traders make money through buying and selling currencies on the foreign exchange market.
A: Forex and ‘FX’ are shortened terms used for ‘foreign exchange’. Foreign exchange or ‘currency trading’ is the exchange of money from different countries. The value of one country’s currency is constantly changing against the value of another country’s currency. Forex traders make money through buying and selling currencies on the foreign exchange market.
Q: What is Over The Counter (OTC) trading?
A: A market conducted directly between dealers and principals via a telephone and computer network rather than a regulated exchange trading floor. OTC trading with Easy-Forex® means that you trade currencies with the aim to earn a profit, though you can lose as well. You don’t actually take delivery of these currencies.
A: A market conducted directly between dealers and principals via a telephone and computer network rather than a regulated exchange trading floor. OTC trading with Easy-Forex® means that you trade currencies with the aim to earn a profit, though you can lose as well. You don’t actually take delivery of these currencies.
Q: What are Forex Instruments?
A: Forex Instruments are the products or ways of trading in foreign exchange. Easy-Forex® offers Day Trading and Limit Orders.
A: Forex Instruments are the products or ways of trading in foreign exchange. Easy-Forex® offers Day Trading and Limit Orders.
Q: What is Day Trading at Easy-Forex®?
A: Day Trading deals are usually opened and closed on the same day. It is possible for a day trading deal to last longer than one day. When this happens, the deal is automatically renewed at 22:00 GMT each night until the deal closes. Day trading is becoming more popular now that more people use the Internet. As long as the deal is open you will be charged a renewal fee every night at 22:00 GMT for all deals that are still open. If you have insufficient funds in your account your credit card may be charged or the deal closed - refer to section 22 in the Terms and Conditions regarding this issue.
A: Day Trading deals are usually opened and closed on the same day. It is possible for a day trading deal to last longer than one day. When this happens, the deal is automatically renewed at 22:00 GMT each night until the deal closes. Day trading is becoming more popular now that more people use the Internet. As long as the deal is open you will be charged a renewal fee every night at 22:00 GMT for all deals that are still open. If you have insufficient funds in your account your credit card may be charged or the deal closed - refer to section 22 in the Terms and Conditions regarding this issue.
Q: What is a Forward deal?
A: A forward deal is a contract where the buyer and seller agree to buy or sell an asset or currency at a spot rate for a specified date in the future (usually up to 60 days). Forward contracts are conducted as a way to cover (hedge) future movements in exchange rates. Margin spreads are higher than in Day Trading but no renewal fees are charged.
A: A forward deal is a contract where the buyer and seller agree to buy or sell an asset or currency at a spot rate for a specified date in the future (usually up to 60 days). Forward contracts are conducted as a way to cover (hedge) future movements in exchange rates. Margin spreads are higher than in Day Trading but no renewal fees are charged.
Q: What is a Limit Order?
A: A limit order is where you nominate a rate at which you want to open a deal. When and if this rate occurs in the market, your ‘reserved’ deal is automatically opened. Once the deal is opened it is treated like a Day Trade with the details appearing in My Account. Easy-Forex® does not charge for this service. This saves you watching the market every minute to see whether the rate you want happens.
A: A limit order is where you nominate a rate at which you want to open a deal. When and if this rate occurs in the market, your ‘reserved’ deal is automatically opened. Once the deal is opened it is treated like a Day Trade with the details appearing in My Account. Easy-Forex® does not charge for this service. This saves you watching the market every minute to see whether the rate you want happens.
Q: How do I know which currency will go up or down?
A: International currency prices are highly volatile and very difficult to predict. Due to such volatility, there is no system that can assure you that transactions on the foreign currency market should result in great benefits to you, nor is it possible to guarantee that your transactions would yield favorable results.
A: International currency prices are highly volatile and very difficult to predict. Due to such volatility, there is no system that can assure you that transactions on the foreign currency market should result in great benefits to you, nor is it possible to guarantee that your transactions would yield favorable results.
Q: Why has the price of the deals I am interested in changed since the last time I checked?
A: Easy-Forex® deals are dependent on the FX market, which is dynamic and changes all the time. The fluctuations in the market, in currency rates, and in other parameters, affect our fully automated pricing engine. This is why rates and premiums may change all the time. For your convenience, we developed the currency rates table which displays market data in real time and can give you an indication as to whether the rates are going up or down. When the rates in the bar are green it means they went up since the last update, when they are red it means they went down since the last update.
A: Easy-Forex® deals are dependent on the FX market, which is dynamic and changes all the time. The fluctuations in the market, in currency rates, and in other parameters, affect our fully automated pricing engine. This is why rates and premiums may change all the time. For your convenience, we developed the currency rates table which displays market data in real time and can give you an indication as to whether the rates are going up or down. When the rates in the bar are green it means they went up since the last update, when they are red it means they went down since the last update.
Q: What currencies can I trade with Easy-Forex®?
A: Easy-Forex® offers all major currency pairs for trading, including exotic currencies.
A: Easy-Forex® offers all major currency pairs for trading, including exotic currencies.
Q: Is Forex risky?
A: Yes, we advise all our clients that foreign exchange trading does involve substantial amount of risk. With Easy-Forex® you cannot lose more than your ‘margin’, the money you are prepared to risk plus the daily rolling fee if you have entered a Day Trade transaction. Profits are unlimited but you can never lose more than what you initially risked. However, risk only what you can afford.
A: Yes, we advise all our clients that foreign exchange trading does involve substantial amount of risk. With Easy-Forex® you cannot lose more than your ‘margin’, the money you are prepared to risk plus the daily rolling fee if you have entered a Day Trade transaction. Profits are unlimited but you can never lose more than what you initially risked. However, risk only what you can afford.
Wednesday, 14 April 2010
Foreign Currencies
Pound sterling
The pound sterling (symbol: £; ISO code: GBP), commonly simply called the pound, is the currency of the United Kingdom, its Crown dependencies (the Isle of Man and the Channel Islands) and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha.It is subdivided into 100 pence (singular: penny).
The Channel Islands and the Isle of Man produce their own local issues of sterling; see Manx pound, Jersey pound, and Guernsey pound. The pound sterling is also used in Gibraltar (alongside the Gibraltar pound), the Falkland Islands (alongside the Falkland Islands pound) and Saint Helena and Ascension(alongside the Saint Helena pound). The Gibraltar, Falkland Islands and Saint Helena pounds are separate currencies, pegged at parity to the pound sterling.
Sterling is the third-largest reserve currency, after the US dollar and the euro.The pound sterling is also the fourth-most-traded currency in the foreign exchange market after the US dollar, the euro, and the Japanese yen.
Subdivisions and other units
Decimal
Since decimalisation in 1971, the pound has been divided into 100 pence (until 1981 described on the coinage as "new pence"). The symbol for the penny is "p"; hence an amount such as 50p (£0.50) properly pronounced "fifty pence" is more colloquially, quite often, pronounced "fifty pee". This also helped to distinguish between new and old pence amounts during the changeover to the decimal system.
Pre-decimal
Prior to decimalisation, the pound was divided into 20 shillings and each shilling into 12 pence, making 240 pence to the pound. The symbol for the shilling was "s" — not from the first letter of the word, but from the Latin solidus. The symbol for the penny was "d", from the French denier, from the Latin denarius (the solidus and denarius were Roman coins). A mixed sum of shillings and pence such as 3 shillings and 6 pence was written as "3/6" or "3s 6d" and spoken as "three and six". 5 shillings was written as "5s" or, more commonly, "5/-". The stroke, /, indicating shillings, was originally an adaptation of the long s.
Various coin denominations had, and in some cases continue to have, special names — such as crown, farthing, sovereign and guinea. See Coins of the pound sterling and List of British coins and banknotes for details.
By the 1950s coins of George III, George IV and William IV had disappeared from circulation, but coins (at least the penny) bearing the heads of any British king or queen from Queen Victoria onwards could be found in circulation. Silver coins were replaced by those in cupro-nickel in 1947 and by the 1960s the silver coins were rarely seen. Silver /cupro-nickel shillings (from any period after 1816) and florins (2 shillings) remained as legal tender after decimilisation (as 5p and 10p respectively) and the sixpences of 1816 and after remained legal tender under 1980 (as two and a half new pence).
History
Establishment of modern currency
The Bank of England was formed in 1694, followed by the Bank of Scotland a year later. Both began to issue paper money.
Currency of the United Kingdom
The pound scots had begun equal to sterling but had suffered far higher devaluation until being pegged to sterling at a value of 12 pounds scots = 1 pound sterling. In 1707, the Kingdom of England and the Kingdom of Scotland merged to form the United Kingdom of Great Britain. In accordance with the Treaty of Union, the currency of the 'united kingdom' was sterling with the pound scots being replaced by sterling at the pegged value.
Gold standard
During the Revolutionary and Napoleonic wars, Bank of England notes were legal tender and their value floated relative to gold. The Bank also issued silver tokens to alleviate the shortage of silver coins. In 1816, the gold standard was adopted officially, with the silver standard reduced to 66 shillings (66/-, 2.3 pounds), rendering silver coins a "token" issue (i.e., not containing their value in precious metal). In 1817, the sovereign was introduced. Struck in 22-carat gold, it contained 113 grains (7.3 g) of gold and replaced the guinea as the standard British gold coin without changing the gold standard. In 1825, the Irish pound, which had been pegged to sterling since 1801 at a rate of 13 Irish pounds = 12 pounds sterling, was replaced, at the same rate, with sterling.
During the late 19th and early 20th centuries, many other countries adopted the gold standard. As a consequence, conversion rates between different currencies could be determined simply from the respective gold standards. The pound sterling was equal to 4.85 U.S. dollars, 4.89 Canadian dollars, 25.22 French francs (or equivalent currencies in the Latin Monetary Union), 20.43 German Marks or 24.02 Austro-Hungarian Krones. Discussions took place following the 1865 International Monetary Conference in Paris concerning the possibility of the UK joining the Latin Monetary Union and a Royal Commission on International Coinage examined the issues, resulting in a decision against joining monetary union.
The gold standard was suspended at the outbreak of the war in 1914, with Bank of England and Treasury notes becoming legal tender. Prior to World War I, the United Kingdom had one of the world's strongest economies, holding 40% of the world's overseas investments. However, by the end of the war the country owed £850 million (£30.7 billion as of 2010), mostly to the United States, with interest costing the country some 40% of all government spending. In an attempt to resume stability, a variation on the gold standard was reintroduced in 1925, under which the currency was fixed to gold at its pre-war peg, although people were only able to exchange their currency for gold bullion, rather than for coins. This was abandoned on 21 September 1931, during the Great Depression, and sterling suffered an initial devaluation of some 25%.
Use in the Empire
Sterling circulated in much of the British Empire. In some parts, it was used alongside local currencies. For example, the gold sovereign was legal tender in Canada despite the use of the Canadian dollar. Several colonies and dominions adopted the pound as their own currency. These included Australia, Barbados, British West Africa, Cyprus, Fiji, Irish Free State, Jamaica, New Zealand, South Africa and Southern Rhodesia. Some of these retained parity with sterling throughout their existence (e.g. the South African pound), whilst others deviated from parity after the end of the gold standard (e.g. the Australian pound). These currencies and others tied to sterling constituted the Sterling Area.
Bretton Woods
In 1940, an agreement with the U.S.A. pegged the pound to the U.S. dollar at a rate of £1 = $4.03. This rate was maintained through the Second World War and became part of the Bretton Woods system which governed post-war exchange rates. Under continuing economic pressure, and despite months of denials that it would do so, on 19 September 1949 the government devalued the pound by 30.5% to $2.80. The move prompted several other currencies to be devalued against the dollar.
In the mid-1960s, the pound came under renewed pressure since the exchange rate against the dollar was considered too high. In the summer of 1966, with the value of the pound falling in the currency markets, exchange controls were tightened by the Wilson government. Among the measures, tourists were banned from taking more than £50 out of the country, until the restriction was lifted in 1979. The pound was eventually devalued by 14.3% to $2.40 on 18 November 1967.
Decimalisation
On 15 February 1971, the UK decimalised, replacing the shilling and penny with a single subdivision, the new penny. The word "new" was omitted from coins after 1981.
Free-floating pound
With the breakdown of the Bretton Woods system — the pound floated from August 1971 onwards. It at first appreciated a little, rising to almost $2.65 in March 1972, from 2.42 when it had been fixed. The Sterling Area effectively ended at this time when the majority of its members also chose to float freely against the pound and the dollar.
The 1976 sterling crisis
James Callaghan came to power in 1976. He was immediately told the economy was facing huge problems, according to documents released in 2006 by the National Archives.Financial markets were losing confidence in sterling. The UK treasury could not balance its books, while Labour's strategy emphasised high public spending. Callaghan was told there were three possible outcomes: a disastrous free fall in Sterling, an internationally unacceptable siege economy or a deal with key allies to prop up the pound while painful economic reforms were put in place.
1979-1989
The Conservatives arrived in power in 1979, on a programme of fiscal austerity. The pound rocketed, moving above the $2.40 level, as interest rates rose in response to the monetarist policy of targeting money supply. The high exchange rate was widely blamed for the deep recession of 1981. Sterling fell sharply after 1980 At its lowest, the pound stood at just $1.03 in March 1985, before returning to the US$1.70 level in December 1989.
Following the Deutsche Mark
In 1988, Margaret Thatcher's Chancellor of the Exchequer Nigel Lawson decided that the pound should "shadow" the West German Deutsche Mark, with the unintended result of a rapid rise in inflation as the economy boomed due to inappropriately low interest rates. (For ideological reasons, the Conservative Government declined to use alternative mechanisms to control the explosion of credit. For this reason, former Prime Minister Edward Heath referred to Lawson as a "one club golfer").
Following the European Currency Unit
On 8 October 1990 the Conservative government decided to join the European Exchange Rate Mechanism (ERM), with the pound set at DM2.95. However, the country was forced to withdraw from the system on “Black Wednesday” (16 September 1992) as Britain’s economic performance made the exchange rate unsustainable. Speculator George Soros famously made approximately US$1 billion from shorting the pound.
'Black Wednesday' saw interest rates jump from 10% to 15% in an unsuccessful attempt to stop the pound from falling below the ERM limits. The exchange rate fell to DM2.20. Proponents of a lower GBP/DM exchange rate were vindicated as the cheaper pound encouraged exports and contributed to the economic prosperity of the 1990s.
Following inflation targets
In 1997, the newly-elected Labour government handed over day-to-day control of interest rates to the Bank of England (a policy that had originally been advocated by the Liberal Democrats). The Bank is now responsible for setting its base rate of interest so as to keep inflation in the Consumer Price Index (CPI) very close to 2%. Should CPI inflation be more than one percentage point above or below the target, the governor of the Bank of England is required to write an open letter to the Chancellor of the Exchequer explaining the reasons for this and the measures which will be taken to bring this measure of inflation back in line with the 2% target. On 17 April 2007, CPI inflation was reported at 3.1% (inflation of the Retail Prices Index was 4.8%). Accordingly, and for the first time, the Governor had to write publicly to the government explaining why inflation was more than one percentage point higher than its target.
Euro
As a member of the European Union, the United Kingdom could adopt the euro as its currency. However, the subject remains politically controversial. Gordon Brown, when Chancellor of the Exchequer, ruled out membership for the foreseeable future, saying that the decision not to join had been right for Britain and for Europe.
The government of former Prime Minister Tony Blair had pledged to hold a public referendum to decide on membership should "five economic tests" be met, to ensure that adoption of the euro would be in the national interest. In addition to these internal (national) criteria, the UK would have to meet the EU's economic convergence criteria (Maastricht criteria), before being allowed to adopt the euro. Currently, the UK's annual government deficit, as a percentage of the GDP, is above the defined threshold. In February 2005, 55% of British citizens were against adopting the currency, with 30% in favour. The idea of replacing the pound with the euro has been controversial with the British public, partly because of the pound's identity as a symbol of British sovereignty and because it would, according to critics, lead to suboptimal interest rates, harming the British economy. In December 2008 the results of a BBC poll of 1000 people suggested that 71% would vote no, 23% would vote yes to joining the European single currency, while 6% said they were unsure.The pound did not join the Second European Exchange Rate Mechanism (ERM II) after the euro was created. Denmark and the UK have opt-outs from entry to the euro. Technically, every other EU nation must eventually sign up.
The Scottish Conservative Party claims that there is an issue for Scotland in that the adoption of the euro would mean the end of regionally distinctive banknotes, as the euro banknotes do not have national designs.The Scottish National Party claims an independent Scotland would have nationally distinctive coins, and its party policy includes entry into the single currency.
On 1 January 2008 the British sovereign bases on Cyprus (Akrotiri and Dhekelia) began using the euro (along with the rest of the Republic of Cyprus).
Current exchange value
The pound and euro fluctuate in value against one another, although there may be correlation between movements in their respective exchange rates with other currencies such as the US dollar. Inflation concerns in the UK led the Bank of England to raise interest rates in late 2006 and 2007. This caused the pound to appreciate against other major currencies, and with the US dollar depreciating at the same time, the pound hit a 15-year high against the US dollar on 18 April 2007, having reached US$2 for the first time since 1992 the day before.The pound and many other currencies continued to appreciate against the dollar, and sterling hit a 26-year high of $2.1161 on 7 November 2007 as the dollar fell worldwide. From mid-2003 to mid 2007, the pound/euro rate remained rangebound (within ± 5%) of €1.45. However, following the global financial crisis in late 2008, the pound has since depreciated at one of the fastest rates in history, reaching a 24-year low of $1.35 per £1 on 23 January 2009 and falling below €1.25 against the euro in April 2008.A further decline was seen during the remainder of 2008; most dramatically in December when its euro rate hit an all-time low at €1.0219 (29th).The pound appreciated in early 2009 reaching a peak in mid-July of €1.17. The following months saw a steady decline, with the pound's current (Feb '10) value at €1.14 and USD$1.56.
On 5 March 2009, the Bank of England announced that they would pump £75 billion of new capital into the British economy, through a process known as quantitative easing. This is the first time in the United Kingdom's history that this measure has been used, although the Bank's Governor Mervyn King suggested it was not an experiment.
The process sees the Bank of England creating new money for itself, which it then uses to purchase assets such as government bonds, bank loans, or mortgages.Despite the misconception that quantitative easing involves printing money, the Bank of England is unlikely to do this and instead money is created electronically and thus does not actually enter the cash circulation system.The initial amount stated to be created through this method was £75 billion, although Chancellor of the Exchequer Alistair Darling had given permission for up to £150 billion to be created if necessary.It is thought the process is likely to occur over a period of three months with results only likely in the long term. By 5 November 2009, some £175 billion had been injected using quantitative easing and the effectiveness of the process remains questionable.
The Bank of England has stated that the decision has been taken to prevent the rate of inflation falling below the two percent target rate.Mervyn King, the Governor of the Bank of England, also suggested there were no other monetary options left as interest rates have already been cut to their lowest level ever of 0.5% and it was unlikely they would be cut further.
Coins
Pre-decimal
The silver penny (plural:pence) was the principal and often sole coin in circulation from the 8th century until 13th century. Although some fractions of the penny were struck (see farthing and halfpenny), it was more common to find pennies cut into halves and quarters to provide smaller change. Very few gold coins were struck, with the gold penny (worth 20 silver pence) a rare example. However, in 1279, the groat, worth 4d was introduced, with the half groat following in 1344. 1344 also saw the establishment of a gold coinage with the introduction (after the failed gold florin) of the noble worth six shillings and eight pennce ('6/8') (ie 3 to the pound), together with the half and quarter noble. Reforms in 1464 saw a reduction in value of the coinage in both silver and gold, with the noble renamed the ryal and worth 10/- (ie 2 to the pound) and the angel introduced at the noble's old value of 6/8.
The reign of Henry VII saw the introduction of two important coins, the shilling (abbr,: 's') (known as the testoon) in 1487 and the pound (known as the sovereign, abbr.: '£' or 'L') in 1489. In 1526, several new denominations of gold coins were added, including the crown and half crown worth five shillings ('5/-'), and two shillings and six pence ('2/6', 'two and six') respectively. Henry VIII's reign (1509–1547) saw a high level of debasement which continued into the reign of Edward VI (1547–1553). However, this debasement was halted in 1552 and a new silver coinage was introduced, including coins for 1d, 2d, 3d, 4d and 6d, 1/-, 2/6 and 5/-. The reign of Elizabeth I (1558–1603) saw the addition of silver ¾d and 1½d coins, although these denominations did not last. Gold coins included the half crown, crown, angel, half sovereign and sovereign. Elizabeth's reign also saw the introduction of the horse-drawn screw press to produce the first "milled" coins.
Following the succession of the Scottish King James VI to the English throne, a new gold coinage was introduced, including the spur ryal (15/-), the unite (20/-) and the rose ryal (30/-). The laurel, worth 20/-, followed in 1619. The first base metal coins were also introduced, tin and copper farthings. Copper halfpenny coins followed in the reign of Charles I. During the English Civil War, a number of siege coinages were produced, often in unusual denominations.
Following the restoration of the monarchy in 1660, the coinage was reformed, with the ending of production of hammered coins in 1662. The guinea was introduced in 1663, soon followed by the ½, 2 and 5 guinea coins. The silver coinage consisted of denominations of 1d, 2d, 3d, 4d and 6d, 1/-, 2/6 and 5/-. Due to the widespread export of silver in the 18th century, the production of silver coins gradually came to a halt, with the half crown and crown not issued after the 1750s, the 6d pence and 1/- stopping production in the 1780s. One response was the introduction of the copper 1d and 2d coins and the gold ? guinea (7/-) in 1797. The copper penny was the only one of these coins to survive long.
To alleviate the shortage of silver coins, between 1797 and 1804, the Bank of England counterstamped Spanish dollars (8 reales) and other Spanish and Spanish colonial coins for circulation. A small counterstamp of the King's head was used. Until 1800, these circulated at a rate of 4/9 for 8 reales. After 1800, a rate of 5/- for 8 reales was used. The Bank then issued silver tokens for 5/- (struck over Spanish dollars) in 1804, followed by tokens for 1/6 and 3/- between 1811 and 1816.
In 1816, a new silver coinage was introduced in denominations of 6d, 1/-, 2/6 and 5/-. The crown was only issued intermittently until 1900. It was followed by a new gold coinage in 1817 consisting of 10/- and £1 coins, known as the half sovereign and sovereign. The silver 4d coin was reintroduced in 1836, followed by the 3d ("thruppence") in 1838, with the 4d coin issued only for colonial use after 1855. In 1848, the 2/- florin was introduced, followed by the short-lived double florin in 1887. In 1860, copper was replaced by bronze in the farthing (quarter penny, 1/4d), halfpenny and penny.
During the First World War, production of the half sovereign and sovereign was suspended and, although the gold standard was restored, the coins saw little circulation again. In 1920, the silver standard, maintained at .925 since 1552, was reduced to .500. In 1937, a nickel-brass 3d coin was introduced, with the last silver 3d coins issued seven years later. In 1947, the remaining silver coins were replaced with cupro-nickel. Inflation caused the farthing to cease production in 1956 and be demonetised in 1960. In the run-up to decimalisation, the halfpenny and half-crown were demonetised in 1969.
Decimal
British coinage timeline:
At present, the oldest circulating coins in the U.K. are the 1p and 2p copper coins introduced in 1971. Before decimalisation, change could contain coins aged one hundred years or more, with any of five monarchs' heads on the obverse.
In April 2008 an extensive redesign of the coinage was unveiled. The new designs were issued gradually into circulation, starting in summer 2008. The new reverses of the 1p, 2p, 5p, 10p, 20p and 50p coins feature parts of the Royal Shield, and the new pound coin depicts the whole shield. The coins are of the same specifications as those with the old designs (which will continue to circulate).
Banknotes
The first sterling notes were issued by the Bank of England shortly after its foundation in 1694. Denominations were initially written on the notes at the time of issue. From 1745, the notes were printed in denominations between £20 and £1000, with any odd shillings added in hand. £10 notes were added in 1759, followed by £5 in 1793 and £1 and £2 in 1797. The lowest two denominations were withdrawn following the end of the Napoleonic wars. In 1855, the notes were converted to being entirely printed, with denominations of £5, £10, £20, £50, £100, £200, £300, £500 and £1000 issued.
The Bank of Scotland began issuing notes in 1695. Although the pound scots was still the currency of Scotland, these notes were denominated in sterling in values up to £100. From 1727, the Royal Bank of Scotland also issued notes. Both banks issued some notes denominated in guineas as well as pounds. In the 19th century, regulations limited the smallest note issued by Scottish banks to be the £1 denomination, a note not permitted in England.
With the extension of sterling to Ireland in 1825, the Bank of Ireland began issuing sterling notes, later followed by other Irish banks. These notes included the unusual denominations of 30/- and £3. The highest denomination issued by the Irish banks was £100.
In 1826, banks at least 65 miles (105 km) from London were given permission to issue their own paper money. From 1844, new banks were excluded from issuing notes in England and Wales but not in Scotland and Ireland. Consequently, the number of private banknotes dwindled in England and Wales but proliferated in Scotland and Ireland. The last English private banknotes were issued in 1921.
In 1914, the Treasury introduced notes for 10/- and £1 to replace gold coins. These circulated until 1928, when they were replaced by Bank of England notes. Irish independence reduced the number of Irish banks issuing sterling notes to five operating in Northern Ireland. The Second World War had a drastic effect on the note production of the Bank of England. Fearful of mass forgery by the Nazis (see Operation Bernhard), all notes for £10 and above ceased production, leaving the bank to issue only 10/-, £1 and £5 notes. Scottish and Northern Irish issues were unaffected, with issues in denominations of £1, £5, £10, £20, £50 and £100.
The Bank of England reintroduced £10 notes in 1964. In 1969, the 10/- note was replaced by the 50p coin as part of the preparation for decimalisation. £20 Bank of England notes were reintroduced in 1970, followed by £50 in 1982. Following the introduction of the £1 coin in 1983, Bank of England £1 notes were withdrawn in 1988. Scottish and Northern Irish banks followed, with only the Royal Bank of Scotland continuing to issue this denomination.
The £5 polymer banknote, issued by Northern Bank in 2000, is the only polymer note currently in circulation, although Northern Bank also produces paper-based £10, £20 and £50 notes.
Legal tender and regional issues
Legal tender in the UK means (according to the Royal Mint) "that a debtor cannot successfully be sued for non-payment if he pays into court in legal tender." It does not mean that any ordinary transaction has to take place in legal tender or only within the amount denominated by the legislation. Both parties are free to agree to accept any form of payment whether legal tender or otherwise according to their wishes. In order to comply with the very strict rules governing an actual legal tender it is necessary, for example, actually to offer the exact amount due because no change can be demanded.
Throughout the U.K., £1 and £2 coins are legal tender for any amount, with the other coins being legal tender only for limited amounts. In England and Wales, Bank of England notes are also legal tender for any amount. In Scotland and Northern Ireland, no banknotes are currently legal tender, although Bank of England 10/- and £1 notes were legal tender, as were Scottish banknotes, during World War II (Currency (Defence) Act 1939; this status was withdrawn on 1 January 1946). However, the banks made deposits with the Bank of England to cover the bulk of their note issues. In the Channel Islands and Isle of Man, the local variations on the banknotes are legal tender in their respective jurisdictions.
Scottish, Northern Irish, Channel Islands and Manx notes are sometimes rejected by shops when used in England and Wales. (Conversely, English bank notes are very rarely rejected in other British countries.) British shopkeepers can choose to reject any payment, even if it would be legal tender in that jurisdiction, because no debt exists when the offer of payment is made at the same time as the offer of goods or services. When settling a restaurant bill after consuming the meal, or settling another debt, the laws of legal tender do apply, but usually any reasonable method of settling the debt (such as by credit card) will be accepted.
Commemorative £5 and 25p (crown) coins, rarely seen in circulation, are legal tender, as are the bullion coins issued by the Mint.
Further, any coin or bank note ceases to be legal tender if it is 00x the amount of the debt (for example, offering a £20 note to settle a 20p debt).
In 2006 the House of Commons Library published a document which included an index of the value of the pound for each year between 1750 and 2005, where the value in 1974 was indexed at 100. (This was an update of earlier documents published in 1998 and 2003.)
Regarding the period 1750–1914 the document states: "Although there was considerable year on year fluctuation in price levels prior to 1914 (reflecting the quality of the harvest, wars, etc.) there was not the long-term steady increase in prices associated with the period since 1945". It goes on to say that "Since 1945 prices have risen in every year with an aggregate rise of over 27 times."
The value of the index in 1751 was 5.1, increasing to a peak of 16.3 in 1813 before declining very soon after the end of the Napoleonic Wars to around 10.0 and remaining in the range 8.5–10.0 at the end of the nineteenth century. The index was 9.8 in 1914 and peaked at 25.3 in 1920, before declining to 15.8 in 1933 and 1934—prices were only about three times as high as they had been 180 years earlier.
Inflation had a dramatic effect during and after World War II—the index was 20.2 in 1940, 33.0 in 1950, 49.1 in 1960, 73.1 in 1970, 263.7 in 1980, 497.5 in 1990, 671.8 in 2000 and 757.3 in 2005.
Exchange rate
The pound is freely bought and sold on the foreign exchange markets around the world, and its value relative to other currencies therefore fluctuates. It has been among the highest-valued currency units in the world. As of 22 November 2009, £1 was worth US$1.648 or €1.109.
Reserve
Sterling is used as a reserve currency around the world and as at ranked third in value held as reserves.
The pound sterling (symbol: £; ISO code: GBP), commonly simply called the pound, is the currency of the United Kingdom, its Crown dependencies (the Isle of Man and the Channel Islands) and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha.It is subdivided into 100 pence (singular: penny).
The Channel Islands and the Isle of Man produce their own local issues of sterling; see Manx pound, Jersey pound, and Guernsey pound. The pound sterling is also used in Gibraltar (alongside the Gibraltar pound), the Falkland Islands (alongside the Falkland Islands pound) and Saint Helena and Ascension(alongside the Saint Helena pound). The Gibraltar, Falkland Islands and Saint Helena pounds are separate currencies, pegged at parity to the pound sterling.
Sterling is the third-largest reserve currency, after the US dollar and the euro.The pound sterling is also the fourth-most-traded currency in the foreign exchange market after the US dollar, the euro, and the Japanese yen.
Subdivisions and other units
Decimal
Since decimalisation in 1971, the pound has been divided into 100 pence (until 1981 described on the coinage as "new pence"). The symbol for the penny is "p"; hence an amount such as 50p (£0.50) properly pronounced "fifty pence" is more colloquially, quite often, pronounced "fifty pee". This also helped to distinguish between new and old pence amounts during the changeover to the decimal system.
Pre-decimal
Prior to decimalisation, the pound was divided into 20 shillings and each shilling into 12 pence, making 240 pence to the pound. The symbol for the shilling was "s" — not from the first letter of the word, but from the Latin solidus. The symbol for the penny was "d", from the French denier, from the Latin denarius (the solidus and denarius were Roman coins). A mixed sum of shillings and pence such as 3 shillings and 6 pence was written as "3/6" or "3s 6d" and spoken as "three and six". 5 shillings was written as "5s" or, more commonly, "5/-". The stroke, /, indicating shillings, was originally an adaptation of the long s.
Various coin denominations had, and in some cases continue to have, special names — such as crown, farthing, sovereign and guinea. See Coins of the pound sterling and List of British coins and banknotes for details.
By the 1950s coins of George III, George IV and William IV had disappeared from circulation, but coins (at least the penny) bearing the heads of any British king or queen from Queen Victoria onwards could be found in circulation. Silver coins were replaced by those in cupro-nickel in 1947 and by the 1960s the silver coins were rarely seen. Silver /cupro-nickel shillings (from any period after 1816) and florins (2 shillings) remained as legal tender after decimilisation (as 5p and 10p respectively) and the sixpences of 1816 and after remained legal tender under 1980 (as two and a half new pence).
History
Establishment of modern currency
The Bank of England was formed in 1694, followed by the Bank of Scotland a year later. Both began to issue paper money.
Currency of the United Kingdom
The pound scots had begun equal to sterling but had suffered far higher devaluation until being pegged to sterling at a value of 12 pounds scots = 1 pound sterling. In 1707, the Kingdom of England and the Kingdom of Scotland merged to form the United Kingdom of Great Britain. In accordance with the Treaty of Union, the currency of the 'united kingdom' was sterling with the pound scots being replaced by sterling at the pegged value.
Gold standard
During the Revolutionary and Napoleonic wars, Bank of England notes were legal tender and their value floated relative to gold. The Bank also issued silver tokens to alleviate the shortage of silver coins. In 1816, the gold standard was adopted officially, with the silver standard reduced to 66 shillings (66/-, 2.3 pounds), rendering silver coins a "token" issue (i.e., not containing their value in precious metal). In 1817, the sovereign was introduced. Struck in 22-carat gold, it contained 113 grains (7.3 g) of gold and replaced the guinea as the standard British gold coin without changing the gold standard. In 1825, the Irish pound, which had been pegged to sterling since 1801 at a rate of 13 Irish pounds = 12 pounds sterling, was replaced, at the same rate, with sterling.
During the late 19th and early 20th centuries, many other countries adopted the gold standard. As a consequence, conversion rates between different currencies could be determined simply from the respective gold standards. The pound sterling was equal to 4.85 U.S. dollars, 4.89 Canadian dollars, 25.22 French francs (or equivalent currencies in the Latin Monetary Union), 20.43 German Marks or 24.02 Austro-Hungarian Krones. Discussions took place following the 1865 International Monetary Conference in Paris concerning the possibility of the UK joining the Latin Monetary Union and a Royal Commission on International Coinage examined the issues, resulting in a decision against joining monetary union.
The gold standard was suspended at the outbreak of the war in 1914, with Bank of England and Treasury notes becoming legal tender. Prior to World War I, the United Kingdom had one of the world's strongest economies, holding 40% of the world's overseas investments. However, by the end of the war the country owed £850 million (£30.7 billion as of 2010), mostly to the United States, with interest costing the country some 40% of all government spending. In an attempt to resume stability, a variation on the gold standard was reintroduced in 1925, under which the currency was fixed to gold at its pre-war peg, although people were only able to exchange their currency for gold bullion, rather than for coins. This was abandoned on 21 September 1931, during the Great Depression, and sterling suffered an initial devaluation of some 25%.
Use in the Empire
Sterling circulated in much of the British Empire. In some parts, it was used alongside local currencies. For example, the gold sovereign was legal tender in Canada despite the use of the Canadian dollar. Several colonies and dominions adopted the pound as their own currency. These included Australia, Barbados, British West Africa, Cyprus, Fiji, Irish Free State, Jamaica, New Zealand, South Africa and Southern Rhodesia. Some of these retained parity with sterling throughout their existence (e.g. the South African pound), whilst others deviated from parity after the end of the gold standard (e.g. the Australian pound). These currencies and others tied to sterling constituted the Sterling Area.
Bretton Woods
In 1940, an agreement with the U.S.A. pegged the pound to the U.S. dollar at a rate of £1 = $4.03. This rate was maintained through the Second World War and became part of the Bretton Woods system which governed post-war exchange rates. Under continuing economic pressure, and despite months of denials that it would do so, on 19 September 1949 the government devalued the pound by 30.5% to $2.80. The move prompted several other currencies to be devalued against the dollar.
In the mid-1960s, the pound came under renewed pressure since the exchange rate against the dollar was considered too high. In the summer of 1966, with the value of the pound falling in the currency markets, exchange controls were tightened by the Wilson government. Among the measures, tourists were banned from taking more than £50 out of the country, until the restriction was lifted in 1979. The pound was eventually devalued by 14.3% to $2.40 on 18 November 1967.
Decimalisation
On 15 February 1971, the UK decimalised, replacing the shilling and penny with a single subdivision, the new penny. The word "new" was omitted from coins after 1981.
Free-floating pound
With the breakdown of the Bretton Woods system — the pound floated from August 1971 onwards. It at first appreciated a little, rising to almost $2.65 in March 1972, from 2.42 when it had been fixed. The Sterling Area effectively ended at this time when the majority of its members also chose to float freely against the pound and the dollar.
The 1976 sterling crisis
James Callaghan came to power in 1976. He was immediately told the economy was facing huge problems, according to documents released in 2006 by the National Archives.Financial markets were losing confidence in sterling. The UK treasury could not balance its books, while Labour's strategy emphasised high public spending. Callaghan was told there were three possible outcomes: a disastrous free fall in Sterling, an internationally unacceptable siege economy or a deal with key allies to prop up the pound while painful economic reforms were put in place.
1979-1989
The Conservatives arrived in power in 1979, on a programme of fiscal austerity. The pound rocketed, moving above the $2.40 level, as interest rates rose in response to the monetarist policy of targeting money supply. The high exchange rate was widely blamed for the deep recession of 1981. Sterling fell sharply after 1980 At its lowest, the pound stood at just $1.03 in March 1985, before returning to the US$1.70 level in December 1989.
Following the Deutsche Mark
In 1988, Margaret Thatcher's Chancellor of the Exchequer Nigel Lawson decided that the pound should "shadow" the West German Deutsche Mark, with the unintended result of a rapid rise in inflation as the economy boomed due to inappropriately low interest rates. (For ideological reasons, the Conservative Government declined to use alternative mechanisms to control the explosion of credit. For this reason, former Prime Minister Edward Heath referred to Lawson as a "one club golfer").
Following the European Currency Unit
On 8 October 1990 the Conservative government decided to join the European Exchange Rate Mechanism (ERM), with the pound set at DM2.95. However, the country was forced to withdraw from the system on “Black Wednesday” (16 September 1992) as Britain’s economic performance made the exchange rate unsustainable. Speculator George Soros famously made approximately US$1 billion from shorting the pound.
'Black Wednesday' saw interest rates jump from 10% to 15% in an unsuccessful attempt to stop the pound from falling below the ERM limits. The exchange rate fell to DM2.20. Proponents of a lower GBP/DM exchange rate were vindicated as the cheaper pound encouraged exports and contributed to the economic prosperity of the 1990s.
Following inflation targets
In 1997, the newly-elected Labour government handed over day-to-day control of interest rates to the Bank of England (a policy that had originally been advocated by the Liberal Democrats). The Bank is now responsible for setting its base rate of interest so as to keep inflation in the Consumer Price Index (CPI) very close to 2%. Should CPI inflation be more than one percentage point above or below the target, the governor of the Bank of England is required to write an open letter to the Chancellor of the Exchequer explaining the reasons for this and the measures which will be taken to bring this measure of inflation back in line with the 2% target. On 17 April 2007, CPI inflation was reported at 3.1% (inflation of the Retail Prices Index was 4.8%). Accordingly, and for the first time, the Governor had to write publicly to the government explaining why inflation was more than one percentage point higher than its target.
Euro
As a member of the European Union, the United Kingdom could adopt the euro as its currency. However, the subject remains politically controversial. Gordon Brown, when Chancellor of the Exchequer, ruled out membership for the foreseeable future, saying that the decision not to join had been right for Britain and for Europe.
The government of former Prime Minister Tony Blair had pledged to hold a public referendum to decide on membership should "five economic tests" be met, to ensure that adoption of the euro would be in the national interest. In addition to these internal (national) criteria, the UK would have to meet the EU's economic convergence criteria (Maastricht criteria), before being allowed to adopt the euro. Currently, the UK's annual government deficit, as a percentage of the GDP, is above the defined threshold. In February 2005, 55% of British citizens were against adopting the currency, with 30% in favour. The idea of replacing the pound with the euro has been controversial with the British public, partly because of the pound's identity as a symbol of British sovereignty and because it would, according to critics, lead to suboptimal interest rates, harming the British economy. In December 2008 the results of a BBC poll of 1000 people suggested that 71% would vote no, 23% would vote yes to joining the European single currency, while 6% said they were unsure.The pound did not join the Second European Exchange Rate Mechanism (ERM II) after the euro was created. Denmark and the UK have opt-outs from entry to the euro. Technically, every other EU nation must eventually sign up.
The Scottish Conservative Party claims that there is an issue for Scotland in that the adoption of the euro would mean the end of regionally distinctive banknotes, as the euro banknotes do not have national designs.The Scottish National Party claims an independent Scotland would have nationally distinctive coins, and its party policy includes entry into the single currency.
On 1 January 2008 the British sovereign bases on Cyprus (Akrotiri and Dhekelia) began using the euro (along with the rest of the Republic of Cyprus).
Current exchange value
The pound and euro fluctuate in value against one another, although there may be correlation between movements in their respective exchange rates with other currencies such as the US dollar. Inflation concerns in the UK led the Bank of England to raise interest rates in late 2006 and 2007. This caused the pound to appreciate against other major currencies, and with the US dollar depreciating at the same time, the pound hit a 15-year high against the US dollar on 18 April 2007, having reached US$2 for the first time since 1992 the day before.The pound and many other currencies continued to appreciate against the dollar, and sterling hit a 26-year high of $2.1161 on 7 November 2007 as the dollar fell worldwide. From mid-2003 to mid 2007, the pound/euro rate remained rangebound (within ± 5%) of €1.45. However, following the global financial crisis in late 2008, the pound has since depreciated at one of the fastest rates in history, reaching a 24-year low of $1.35 per £1 on 23 January 2009 and falling below €1.25 against the euro in April 2008.A further decline was seen during the remainder of 2008; most dramatically in December when its euro rate hit an all-time low at €1.0219 (29th).The pound appreciated in early 2009 reaching a peak in mid-July of €1.17. The following months saw a steady decline, with the pound's current (Feb '10) value at €1.14 and USD$1.56.
On 5 March 2009, the Bank of England announced that they would pump £75 billion of new capital into the British economy, through a process known as quantitative easing. This is the first time in the United Kingdom's history that this measure has been used, although the Bank's Governor Mervyn King suggested it was not an experiment.
The process sees the Bank of England creating new money for itself, which it then uses to purchase assets such as government bonds, bank loans, or mortgages.Despite the misconception that quantitative easing involves printing money, the Bank of England is unlikely to do this and instead money is created electronically and thus does not actually enter the cash circulation system.The initial amount stated to be created through this method was £75 billion, although Chancellor of the Exchequer Alistair Darling had given permission for up to £150 billion to be created if necessary.It is thought the process is likely to occur over a period of three months with results only likely in the long term. By 5 November 2009, some £175 billion had been injected using quantitative easing and the effectiveness of the process remains questionable.
The Bank of England has stated that the decision has been taken to prevent the rate of inflation falling below the two percent target rate.Mervyn King, the Governor of the Bank of England, also suggested there were no other monetary options left as interest rates have already been cut to their lowest level ever of 0.5% and it was unlikely they would be cut further.
Coins
Pre-decimal
The silver penny (plural:pence) was the principal and often sole coin in circulation from the 8th century until 13th century. Although some fractions of the penny were struck (see farthing and halfpenny), it was more common to find pennies cut into halves and quarters to provide smaller change. Very few gold coins were struck, with the gold penny (worth 20 silver pence) a rare example. However, in 1279, the groat, worth 4d was introduced, with the half groat following in 1344. 1344 also saw the establishment of a gold coinage with the introduction (after the failed gold florin) of the noble worth six shillings and eight pennce ('6/8') (ie 3 to the pound), together with the half and quarter noble. Reforms in 1464 saw a reduction in value of the coinage in both silver and gold, with the noble renamed the ryal and worth 10/- (ie 2 to the pound) and the angel introduced at the noble's old value of 6/8.
The reign of Henry VII saw the introduction of two important coins, the shilling (abbr,: 's') (known as the testoon) in 1487 and the pound (known as the sovereign, abbr.: '£' or 'L') in 1489. In 1526, several new denominations of gold coins were added, including the crown and half crown worth five shillings ('5/-'), and two shillings and six pence ('2/6', 'two and six') respectively. Henry VIII's reign (1509–1547) saw a high level of debasement which continued into the reign of Edward VI (1547–1553). However, this debasement was halted in 1552 and a new silver coinage was introduced, including coins for 1d, 2d, 3d, 4d and 6d, 1/-, 2/6 and 5/-. The reign of Elizabeth I (1558–1603) saw the addition of silver ¾d and 1½d coins, although these denominations did not last. Gold coins included the half crown, crown, angel, half sovereign and sovereign. Elizabeth's reign also saw the introduction of the horse-drawn screw press to produce the first "milled" coins.
Following the succession of the Scottish King James VI to the English throne, a new gold coinage was introduced, including the spur ryal (15/-), the unite (20/-) and the rose ryal (30/-). The laurel, worth 20/-, followed in 1619. The first base metal coins were also introduced, tin and copper farthings. Copper halfpenny coins followed in the reign of Charles I. During the English Civil War, a number of siege coinages were produced, often in unusual denominations.
Following the restoration of the monarchy in 1660, the coinage was reformed, with the ending of production of hammered coins in 1662. The guinea was introduced in 1663, soon followed by the ½, 2 and 5 guinea coins. The silver coinage consisted of denominations of 1d, 2d, 3d, 4d and 6d, 1/-, 2/6 and 5/-. Due to the widespread export of silver in the 18th century, the production of silver coins gradually came to a halt, with the half crown and crown not issued after the 1750s, the 6d pence and 1/- stopping production in the 1780s. One response was the introduction of the copper 1d and 2d coins and the gold ? guinea (7/-) in 1797. The copper penny was the only one of these coins to survive long.
To alleviate the shortage of silver coins, between 1797 and 1804, the Bank of England counterstamped Spanish dollars (8 reales) and other Spanish and Spanish colonial coins for circulation. A small counterstamp of the King's head was used. Until 1800, these circulated at a rate of 4/9 for 8 reales. After 1800, a rate of 5/- for 8 reales was used. The Bank then issued silver tokens for 5/- (struck over Spanish dollars) in 1804, followed by tokens for 1/6 and 3/- between 1811 and 1816.
In 1816, a new silver coinage was introduced in denominations of 6d, 1/-, 2/6 and 5/-. The crown was only issued intermittently until 1900. It was followed by a new gold coinage in 1817 consisting of 10/- and £1 coins, known as the half sovereign and sovereign. The silver 4d coin was reintroduced in 1836, followed by the 3d ("thruppence") in 1838, with the 4d coin issued only for colonial use after 1855. In 1848, the 2/- florin was introduced, followed by the short-lived double florin in 1887. In 1860, copper was replaced by bronze in the farthing (quarter penny, 1/4d), halfpenny and penny.
During the First World War, production of the half sovereign and sovereign was suspended and, although the gold standard was restored, the coins saw little circulation again. In 1920, the silver standard, maintained at .925 since 1552, was reduced to .500. In 1937, a nickel-brass 3d coin was introduced, with the last silver 3d coins issued seven years later. In 1947, the remaining silver coins were replaced with cupro-nickel. Inflation caused the farthing to cease production in 1956 and be demonetised in 1960. In the run-up to decimalisation, the halfpenny and half-crown were demonetised in 1969.
Decimal
British coinage timeline:
- 1968: The first decimal coins were introduced. These were cupro-nickel 5p and 10p coins which were equivalent to and circulated alongside the 1/- and 2/- coins.
- 1969: The curved equilateral heptagonal cupro-nickel 50p coin replaced the 10/- note.
- 1971: The decimal coinage was completed when decimalisation came into effect in 1971 with the introduction of the bronze ½p, 1p and 2p coins and the withdrawal of the 1d and 3d coins.
- 1980: Withdrawal of 6d coins, which had circulated at a value of 2½p.
- 1982: The word "new" was dropped from the coinage and a 20p coin was introduced.
- 1983: A £1 coin was introduced.
- 1983: The ½p coin was last produced.
- 1990s: The 5p, 10p and 50p coins became smaller.
- 1991: The old 1/- coins, which had continued to circulate with a value of 5p, were demonetised in 1991 after the 5p coin became smaller.
- 1992: Bronze was replaced with copper-plated steel
- 1993: The 2/- coins were similarly demonetised.
- 1998: The bi-metallic £2 coin was introduced.
- 2007: By now the value of copper in the pre-1992 1p/2p coins (which are 97% copper) exceeded the value to such an extent that melting down the coins by entrepreneurs was becoming worthwhile (with a premium of up to 11%, with smelting costs reducing this to around 4%) – although this is illegal, and the market value of copper has subsequently fallen dramatically from these earlier peaks.
At present, the oldest circulating coins in the U.K. are the 1p and 2p copper coins introduced in 1971. Before decimalisation, change could contain coins aged one hundred years or more, with any of five monarchs' heads on the obverse.
In April 2008 an extensive redesign of the coinage was unveiled. The new designs were issued gradually into circulation, starting in summer 2008. The new reverses of the 1p, 2p, 5p, 10p, 20p and 50p coins feature parts of the Royal Shield, and the new pound coin depicts the whole shield. The coins are of the same specifications as those with the old designs (which will continue to circulate).
Banknotes
The first sterling notes were issued by the Bank of England shortly after its foundation in 1694. Denominations were initially written on the notes at the time of issue. From 1745, the notes were printed in denominations between £20 and £1000, with any odd shillings added in hand. £10 notes were added in 1759, followed by £5 in 1793 and £1 and £2 in 1797. The lowest two denominations were withdrawn following the end of the Napoleonic wars. In 1855, the notes were converted to being entirely printed, with denominations of £5, £10, £20, £50, £100, £200, £300, £500 and £1000 issued.
The Bank of Scotland began issuing notes in 1695. Although the pound scots was still the currency of Scotland, these notes were denominated in sterling in values up to £100. From 1727, the Royal Bank of Scotland also issued notes. Both banks issued some notes denominated in guineas as well as pounds. In the 19th century, regulations limited the smallest note issued by Scottish banks to be the £1 denomination, a note not permitted in England.
With the extension of sterling to Ireland in 1825, the Bank of Ireland began issuing sterling notes, later followed by other Irish banks. These notes included the unusual denominations of 30/- and £3. The highest denomination issued by the Irish banks was £100.
In 1826, banks at least 65 miles (105 km) from London were given permission to issue their own paper money. From 1844, new banks were excluded from issuing notes in England and Wales but not in Scotland and Ireland. Consequently, the number of private banknotes dwindled in England and Wales but proliferated in Scotland and Ireland. The last English private banknotes were issued in 1921.
In 1914, the Treasury introduced notes for 10/- and £1 to replace gold coins. These circulated until 1928, when they were replaced by Bank of England notes. Irish independence reduced the number of Irish banks issuing sterling notes to five operating in Northern Ireland. The Second World War had a drastic effect on the note production of the Bank of England. Fearful of mass forgery by the Nazis (see Operation Bernhard), all notes for £10 and above ceased production, leaving the bank to issue only 10/-, £1 and £5 notes. Scottish and Northern Irish issues were unaffected, with issues in denominations of £1, £5, £10, £20, £50 and £100.
The Bank of England reintroduced £10 notes in 1964. In 1969, the 10/- note was replaced by the 50p coin as part of the preparation for decimalisation. £20 Bank of England notes were reintroduced in 1970, followed by £50 in 1982. Following the introduction of the £1 coin in 1983, Bank of England £1 notes were withdrawn in 1988. Scottish and Northern Irish banks followed, with only the Royal Bank of Scotland continuing to issue this denomination.
The £5 polymer banknote, issued by Northern Bank in 2000, is the only polymer note currently in circulation, although Northern Bank also produces paper-based £10, £20 and £50 notes.
Legal tender and regional issues
Legal tender in the UK means (according to the Royal Mint) "that a debtor cannot successfully be sued for non-payment if he pays into court in legal tender." It does not mean that any ordinary transaction has to take place in legal tender or only within the amount denominated by the legislation. Both parties are free to agree to accept any form of payment whether legal tender or otherwise according to their wishes. In order to comply with the very strict rules governing an actual legal tender it is necessary, for example, actually to offer the exact amount due because no change can be demanded.
Throughout the U.K., £1 and £2 coins are legal tender for any amount, with the other coins being legal tender only for limited amounts. In England and Wales, Bank of England notes are also legal tender for any amount. In Scotland and Northern Ireland, no banknotes are currently legal tender, although Bank of England 10/- and £1 notes were legal tender, as were Scottish banknotes, during World War II (Currency (Defence) Act 1939; this status was withdrawn on 1 January 1946). However, the banks made deposits with the Bank of England to cover the bulk of their note issues. In the Channel Islands and Isle of Man, the local variations on the banknotes are legal tender in their respective jurisdictions.
Scottish, Northern Irish, Channel Islands and Manx notes are sometimes rejected by shops when used in England and Wales. (Conversely, English bank notes are very rarely rejected in other British countries.) British shopkeepers can choose to reject any payment, even if it would be legal tender in that jurisdiction, because no debt exists when the offer of payment is made at the same time as the offer of goods or services. When settling a restaurant bill after consuming the meal, or settling another debt, the laws of legal tender do apply, but usually any reasonable method of settling the debt (such as by credit card) will be accepted.
Commemorative £5 and 25p (crown) coins, rarely seen in circulation, are legal tender, as are the bullion coins issued by the Mint.
| Coin | Maximum usable as legal tender |
|---|---|
| 5 (post-1990 crown) | unlimited |
| £2 | unlimited /td> |
| £1 | unlimited |
| 50p | £10 |
| 25p (pre-1990 crown) | £10 |
| 20p | £10 |
| 10p | £5 |
| 5p | £5 |
| 2p | 20p |
| 1p | 20p |
In 2006 the House of Commons Library published a document which included an index of the value of the pound for each year between 1750 and 2005, where the value in 1974 was indexed at 100. (This was an update of earlier documents published in 1998 and 2003.)
Regarding the period 1750–1914 the document states: "Although there was considerable year on year fluctuation in price levels prior to 1914 (reflecting the quality of the harvest, wars, etc.) there was not the long-term steady increase in prices associated with the period since 1945". It goes on to say that "Since 1945 prices have risen in every year with an aggregate rise of over 27 times."
The value of the index in 1751 was 5.1, increasing to a peak of 16.3 in 1813 before declining very soon after the end of the Napoleonic Wars to around 10.0 and remaining in the range 8.5–10.0 at the end of the nineteenth century. The index was 9.8 in 1914 and peaked at 25.3 in 1920, before declining to 15.8 in 1933 and 1934—prices were only about three times as high as they had been 180 years earlier.
Inflation had a dramatic effect during and after World War II—the index was 20.2 in 1940, 33.0 in 1950, 49.1 in 1960, 73.1 in 1970, 263.7 in 1980, 497.5 in 1990, 671.8 in 2000 and 757.3 in 2005.
Exchange rate
The pound is freely bought and sold on the foreign exchange markets around the world, and its value relative to other currencies therefore fluctuates. It has been among the highest-valued currency units in the world. As of 22 November 2009, £1 was worth US$1.648 or €1.109.
Reserve
Sterling is used as a reserve currency around the world and as at ranked third in value held as reserves.
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