FinancialPlannerWorld

It looks like the Republicans and Democrats will be at it again debating tax increases and spending cuts. President Obama is drawing the line on the United States debt with tax increases as his solution. He is calling for the wealthiest Americans and largest corporations to carry their share of the load.

President Obama took his stand with this statement. “If Congress refuses to give the United States the ability to pay its bills on time, the consequences for the entire global economy could be catastrophic….The wealthiest individuals and the biggest corporations shouldn’t be able to take advantage of loopholes and deductions that aren’t available to most Americans” (Lowrey, Annie.  “Obama and Republicans Gear Up for Next Fiscal Fight.” The New York Times January 2013).

On the other hand, Republicans are calling for spending cuts as their solution to America’s debt, particularly to entitlement programs like Social Security and Medicare. They are pushing Congress to “live within its means” rather than blindly continuing to fund programs for which it has no more money.

Congress has already agreed to raise taxes on America’s wealthiest as well as delay for two months significant cuts to the discretionary budget. This deal is known as “the fiscal cliff.” This will indeed cut $650 billion off the nation’s deficit over ten years. However, with America still facing trillions in debt, it is a much smaller reduction than negotiators were hoping.

Although just slightly into the new year, Congress has some major decisions to make. For example, it must decide whether to raise the debt ceiling and whether to defuse some of the mandated discretionary-spending cuts. These decisions will direct the fiscal outcomes of 2013.

If the start-up isn’t a tech company, it may have a hard time finding investors. In fact, unless a consumer products company has surpassed $10 million in sales, it doesn’t even begin to attract private equity investors. As a result, these food, agriculture, retail and other consumer oriented businesses have a difficult time breaking into the market.

However, the Securities and Exchange Commission has been leery about fully endorsing crowdfunding. Crowdfunding was a part of the Jump-Start Our Business Start-Ups Act which President Barack Obama signed last April. Without the help of crowdfunding, many smaller entrepreneurs are forced to max out their credit cards in hopes of getting their company off the ground.

A company called CircleUp was launched, aiming to connect up-and-coming consumer products companies with investors. CircleUp takes applications from companies with $1 million to $10 million in revenue. “Companies whose applications are accepted make their pitches to investors behind a firewall on the CircleUp Web site, offering equity stakes in return for capital” (Cortese, Amy.” The Crowdfunding Crowd is Anxious.” New York Times January 2013).  CircleUp does take a small cut of the money.

Despite certain reservations that seem to be arising, it is important to keep in mind that consumer goods businesses make-up a large part of America’s businesses. It is worth creating new methods and structures like crowdfunding to ensure these start-ups get the funding they need to keep America’s economy going strong.

CircleUp gives entrepreneurs a way to raise money while providing investors with opportunities they may not otherwise hear about. In seven weeks, one of the seven companies CircleUp has assisted called Little Duck Organics raised nearly $900,000 from about a dozen investors on the site.

Every manufacturing firm, retail store, service company and governmental agency should have an operating budget. In essence, an operating budget is the quantification of a company’s business plan. In order to create a functional and realistic operating budget, it is crucial to use marketing planning, product planning, capital planning and financial planning in the budgeting process.

An operating budget includes a company’s income and cost objectives for a certain period in time. Commonly, an operating budget sums up a year divided out by months. If a company isn’t meeting its projected budget goals, this is the beginning of some warning signs that troubled areas exist. In this way, the operating budget serves as a control device as well.

Budgeting Red Flags

The following are indicators of a budget’s ineffectiveness.

• Lack of participation by all levels of management

When the budgeting responsibilities are dictated from upper management alone, a lack of ownership ensues among lower management. In addition, those with their feet in the trenches aren’t given opportunity to offer their valuable input in regards to the practicality and feasibility of an operating budget.

• Management’s neglect of a budget review
  

It is only the first step to develop an operating budget. In order for all levels of a company to benefit from one, the budget must be regularly reviewed and evaluated.

• Uncorrected variances

Even regularly reviewing and evaluating the budget isn’t enough. When variances between planned performance and budget objectives are detected, they must also be corrected. If large variances exist, they may be due to poor budget estimates, poor feedback, lack of timely, corrective action, or ineffective policies for budget maintenance.

Remarkably, the Euro currency still remains afloat despite the many doomsday predictions of 2012. Although European leaders continue to quarrel over economic issues, they’ve managed to agree on some things. Their perspective of the struggling Euro has shifted from blame to recovery.

Now, instead of predicting the Euro’s end, discussion circulates around how long the European economy will take to recover and what changes must be made in the future to sustain a stronger economy. The immediate crisis may have settled temporarily but its underlying causes still have yet to be thoroughly identified and resolved.

The economic output in nine of the seventeen countries using the Euro continues to decrease. European banks remain weak. Businesses in Spain and Italy struggle to obtain credit which impedes the speed of those nations’ own economic recovery. In addition, upcoming elections in Germany this fall and Italy next winter will certainly take their eyes off the European Union to focus more on national affairs.

“In 2012, the euro area leaders finally got the diagnosis right,” said Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. “It wasn’t about Greek debt or Irish banks. It was about some very fundamental design flaws that needed to be fixed. That’s what markets were looking for.” (Ewing, Jack. “In Europe, Focus Begins to Shift to the Speed of a Nascent Recovery.” The New York Times December 30, 2012.)

As a result, the European Central Bank has promised to buy the bonds of countries like Spain, if needed, to control their borrowing costs. European officials also began looking at the structure needed to help the Euro thrive, including a permanent fund for rescuing stricken member countries and a unified system for overseeing banks.

Because traders enter the forex market to make a profit, the ultimate risk they seek to avoid is losing money. There are multiple routes a trader might take to reach this unfortunate destination. There are also a variety of safety nets a trader can put in place to avoid experiencing too much loss.

How to Reduce Risk in Currency Trading

• Use Stop-Loss Orders

Using stop-loss orders with every trade is the best tool to have for limiting risk. A good rule of thumb: only move the stop-loss order to protect profits. Analysis and risk calculations should be done before the trader opens position. Set the stop-loss order and stick with it.

• Track the Market

Staying on top of the changes in the market helps a trader avoid too many unexpected events. It is important to have thoroughly researched the currency pair being traded and to know the data and events scheduled in the days or weeks to come.

• Take a Break

This may sound like peculiar advice. However, taking a brief break from trading can offer a trader fresh perspective. During the break, take advantage of the free time to fine tune charting and fundamental analysis.

• Keep Positions to a Minimum

The larger the position, the greater the potential risk. High leverage ratios can be tempting. Instead, request low leverage ratios from forex brokers to systemically limit leverage utilization.

• Carefully Select Currency Pairs

The trader should be aware of the currency pair’s uniqueness because risk varies from one currency pair to the next. Every currency pair carry either a higher or lower margin utilization and pip value. Develop a plan reflective of the currency pair’s  unique characteristics.

The following mistakes can happen to anyone, beginners and veterans alike. Even if someone has been trading a longtime, it isn’t unusual for a lapse in trading discipline to occur from time to time. Most importantly, a trader should recognize early on if this is occurring and take a step back from the market.

Trading Mistakes to Avoid

• Holding on Too Long & Taking Profit Too Early: In order to avoid losing too much profit, a trader can limit losses by setting a stop-loss order and remaining committed to it. Small losses are part of everyday trading. It is important to accept this principle and get out of a trading position when things are going sour.

• Having No Trading Plan: Without a plan it is all too easy to fall prey to the emotions of the market changes. A well-thought out plan keeps a trader committed to a direction.

• Trading Without a Stop Loss: Traders must make stop-loss orders based on research and analysis. This will help a trader avoid a small loss from becoming a wipe-out of trading capital.

• Overtrading: Trading too often and too many positions in the market at once is a big mistake. Instead, traders should look for key opportunities.

• Not Adapting to a Changing Market: As much as having a well-developed plan is essential, a trader must still remain flexible with his overall trading strategy.

There are some fundamental habits that make for successful currency traders in the forex market. These don’t come naturally but must be developed through discipline and intentionality. But if a trader focuses on these basic principles, he is bound to experience a satisfying degree of success.

Keys to Successful Currency Trading

• Have a Game Plan: Successful traders enter every position with a specific plan for position size, entry point, stop-loss exit, and take-profit exit. Although a plan is in place, traders must remain flexible with their take-profits.

• Anticipate Future Events: Looking ahead at how the market might respond to future events is key for successful trading. It is recommended to develop trading strategies based on the possible outcomes.

• Remain Flexible: It is fundamental for traders to not become emotional about their trades. They must be adaptable to incoming news and information. They must remain committed to making money rather than trying to defend their position in terms of being right or wrong.

• Consider Technical-Based Trading Strategies: Even if this isn’t a trader’s main strategies, staying abreast of Fibonacci retracement levels, where various moving averages are, important short-and long-term trend lines and major recent highs and lows will assist any trader’s overall strategy.

• Concentrate on a Few Pairs: Focusing on one or two currency pairs allows the trader to specialize in terms of price levels and price behavior. This means there is less information to monitor and evaluate. This is not only a great place to start when a beginner but it is also a wise move for those who are still getting to know the forex market.

It’s important to approach each trading opportunity individually, with a fresh perspective of the market and refined trading approach. When a trade is complete, a prudent trader will assess what he did right and what he did wrong. This type of evaluation should occur regardless of whether the trade was a success or not. The purpose is to realize a trader’s strengths and weakness. A trader should utilize these to customize his approach in the forex market.

How to Evaluate a Trade

There are three areas to gauge when reviewing trade history.

1. How was the trade opportunity identified?

What approach was used to select the trade? Was the trade based on technical analysis or a fundamental approach? Review which approach tends to lead to more successful trades. The identified approach may be a trader’s strength and more time should be spent developing it for future winning trades.

2. How well did the trade plan work?

Evaluate all aspects of the trading plan. As a result, future position sizes, entry levels and order placements may alter depending on the trader’s success. Taking time to do so helps eliminate the same mistakes from happening twice.

3. How was the trade managed after it was opened?

During the trade, was the trader able to monitor the action of the market? Did the trader carry through his original plan or did he adjust it along the way? Answering these types of questions honestly will reveal possible trade weaknesses. An alteration of trading plans may be due to a trader getting too emotional about the trade. If the market wasn’t adequately monitored, this indicates the trader’s lack of dedication or availability to follow up with a trade.

Market trading either ends with a profit or a loss. Occasionally, trades will end flat, meaning they are without a gain or a loss because a traders exits at the same price at which he entered. It is difficult to foresee when the right time is to exit a trade. A trader can experience remorse if he gets out of a trade too soon and watches the market continue to move in the direction of his trade.

However, a well-thought out plan will help any trader avoid drastic exits or entrances based on the excitement of the moment. Staying with a plan will assist a trader avoid too much risk. It is fulfilling to take a profit based on the trade plan. It is tempting to get greedy. But no trader ever captures one hundred percent of any price movement.

Once a trade has been exited, the market may lure one back in. It is vital to treat each trade independently, without the emotions or regrets of the past. A trader must continue to assess the market objectively in hopes of making each trade profitable.

There are times when a trade is cut short with a stop-loss order. This is always a frustrating yet necessary part of trading in the forex market. If the market doesn’t move as anticipated, the trader must determine where to exit a trade. Stop-losses, although never ideal, are a valuable tool for a trader. They will hinder trading losses from developing into devastating ones.

In the forex market, it always pays to enter a trade with a well-developed plan. However, the market is a rapid, fluid entity keeping any trader on his toes. Remaining committed to one’s plan and yet maintaining flexibility when the market is moving in one’s favor is the proper balance to strike in currency trading.

A  take-profit target is the net gain one is aiming for at the close of an existing position. If a trader adjusts his take-profit target, he must also adjust his stop-loss order in the same direction. For example, if the trade is long, the trader raises his take-profit while at the same time raising his stop loss too. If the trade is short, the trader lowers his take profit while at the same time lowering his stop-loss order as well.

Reasons to Extend Take-Profit Targets

• The Currency Pair: If the currency pair being traded is volatile, a drastic trading shift may be necessary. The following currency pairs tend to be temperamental: GBP, CHF, and JPY among the majors and AUD, CAD, NZD, and ZAR among the commodity currencies.

• Major New Information: Unexpected information from the top levels of decision-making such as interest rate changes or policy shifts are key pieces which may merit an extension in take-profit targets.

• Thin Liquidity: Reduced liquidity often transpires during national or seasonal holidays. Price movements may be more extensive at these times because there are fewer people trading to absorb the price shocks.

• Technical Level Breaks: Fibonacci retracement levels of major recent directional moves, trend lines dating back several months or years, and recent extreme highs and lows can cause major price movements.