A Brief Guide to Trading the EUR/USD – Chapter 4: Forex Quotes

This is chapter number 4 out of 7. Read the rest:

Read A Brief Guide to Trading the EUR/USD – Chapter 1: An introduction to Forex
Read A Brief Guide to Trading the EUR/USD – Chapter 2: The EUR/USD currency pair
Read A Brief Guide to Trading the EUR/USD – Chapter 3: Reasons for trading in Forex

As mentioned previously, all Forex exchange rates are quoted in terms of currency pairs. Although it might look confusing initially, it is relatively easy to understand. Each currency pair is denoted in the format XXX/YYY as specified by ISO 4217 international three-letter code of the currency . XXX is the “Base Currency” and YYY is the price of one unit of XXX currency.

For example with regards to the pairs EUR/USD; GBP/AUD and USD/JPY, the base currency in those pairs are Euro, British Pound and US dollars respectively. The base currency will always have a numerical value of 1. Thus, GBP/AUD will indicate many units of Australian dollar is required to purchase 1 unit of British pound.

Ask / Bid & Spread:

Bid Price:

This is the rate which the market is willing to purchase the currency pair at. You will also be disposing the “base currency” at this rate. The bid price is displayed on the left of the quotation. For example for the rate of EUR/USD 1.4550/ 55, this denotes that the bid price is 1.4550. Therefore you will sell the Euro at 1.4550 US dollars.

Ask Price:

This is the reverse of the bid price. The market will be willing to sell you the currency pair at this “Ask” price. In short, you will be buying the base currency at this rate. This is the price which is shown on the right of the quotation. In our example of the EUR/USD 1.4550/55, the Ask price is 1.4555. Therefore, you will be buying Euro at 1.4555 US dollars. Also remember that the Ask price is sometimes referred to as the Offer price

Spread:

There is no commission payable in Forex trading. Instead, there is “Spread” payable. The “Spread” is the difference the “Bid price” and “Ask price”. In short, this is the “spread” between what the market sells and buys from a trader. As opposed to commission charges in the stock market, you will only pay this “spread” when you buy. You will not have to pay this “spread” when selling the related currency pair. In short, the spread is a round turn cost. In our example, the spread is 5 pips with the EUR/USD rate at 1.4550/55.

The Pip:

The pip is the smallest denomination of the Forex rate. Usually, currencies pairs are traded at fraction of one cent or one euro or one yen. Almost all currency pairs are denoted in terms of 5 numbers with a decimal after the first number. For example, EUR/USD = 1.4550. Therefore, the pip is the smallest change at the 4th decimal place, like 0.0001. Thus if the quote is in USD, then one pip is equal to 1/100 cent. A particular exception is the USD/JPY pair which is denoted up to 2 decimal points. Here, one pip is equal to $0.01.

Read A Brief Guide to Trading the EUR/USD – Chapter 5: Fundamental Analysis for Trading EUR/USD
Read A Brief Guide to Trading the EUR/USD – Chapter 6: Technical Analysis for Trading Forex
Read A Brief Guide to Trading the EUR/USD – Chapter 7: Conclusion

A Brief Guide to Trading the EUR/USD – Chapter 3: Reasons for trading in Forex

This is chapter number 3 out of 7. Read the rest:

Read A Brief Guide to Trading the EUR/USD – Chapter 1: An introduction to Forex
Read A Brief Guide to Trading the EUR/USD – Chapter 2: The EUR/USD currency pair

When compared to trading in other financial instruments such as equities, trading in Forex has some distinct advantages. They include:

  • The Forex market is the largest financial market and thus no single person or entity has the ability to corner or dominate the market.
  • The Forex market has an average of $3.2 trillion dollars per day. With such a large volume, no one can hope to control the market for an extended period of time.
  • Taking charge of your own finances. You will be able to harvest better returns than those of mutual funds or hedge funds.
  • The initial capital outlay is low when compared to equity trading.
  • The Forex markets moves in patterns. Thus with technical analysis, one can actually predict the trends in the Forex market.
  • There is a high level of leverage to utilize when it comes to Forex trading unlike the equity market.
  • With 24 hours trading and its high trading volume, the Forex market is regarded as one of the most liquid market among all the financial market. You can always close or open a market position at a reasonable price.
  • Again with the 24 hours trading in the Forex market, you only have to trade a few hours per day or per week to earn some money with your computer.
  • With a free demo account, you are actually able to gain experience with the simulation exercises. Thus, you do not have to risk your money to gain the valuable experiences needed.
  • Although there are over 40,000 stocks that one can choose from to invest in from the equity market, this also means that it is hard to specialize. Whereas in Forex trading, you have the chance to just focus on one or two currency pairs.
  • Equal opportunity to profit from both falling and rising market. As compared to the equity market, there is no restriction on the Forex market on short trading. This allows you to also make money from a falling market. Furthermore, as currencies are traded in pairs, regardless of a fall or rise in the exchange rate of one currency, its corresponding pair will always move opposite it.
  • As mentioned earlier, one big advantage which the Forex market has over the rest of the financial market is the high leverage margin offered by the brokerage firms. You can trade at 50 to 1; 100 to 1; 200 to 1 or even up to 500 to 1 ratio.
  • As the Forex market is operating at 24 hours per day, this allows you to respond to the market faster than other financial market which is restricted in operating time to its centralized location.
  • Freedom of working hours and location. As long as you have internet access, you are able to trade in the Forex market virtually from anywhere in the world. 

 

Read A Brief Guide to Trading the EUR/USD – Chapter 4: Forex Quotes
Read A Brief Guide to Trading the EUR/USD – Chapter 5: Fundamental Analysis for Trading EUR/USD
Read A Brief Guide to Trading the EUR/USD – Chapter 6: Technical Analysis for Trading Forex
Read A Brief Guide to Trading the EUR/USD – Chapter 7: Conclusion

A Brief Guide to Trading the EUR/USD – Chapter 2: The EUR/USD currency pair

This is chapter number 2 out of 7. Read the rest:

Read A Brief Guide to Trading the EUR/USD – Chapter 1: An introduction to Forex

The Euro, nicknamed the Fiber, is the official currency of the European Union (EU). This union actually comprises of 15 European countries and their monetary policies are controlled by the European Central Bank (ECB). Thus the Euro is the legal tender that is used by the entire population 320 million people in these 15 countries. This means that the Euro has the highest aggregate value of cash that is in circulation, surpassing even that of the US dollar. The US dollar, the “Buck” or “Greenback” is the global reserves currency used by nations all over the world as the medium of payment for international trade. Here, the sign “EUR/USD” means that the Euro is crossed or paired with the US dollar. As mentioned earlier, currencies are paired off because any Forex transaction will ALWAYS involve buying one currency and selling another currency at the SAME time. 

A Brief Guide to Trading the EUR/USD - Chapter 2: The EUR/USD currency pair
A Brief Guide to Trading the EUR/USD - Chapter 2: The EUR/USD currency pair

Below is an illustrated example of how the exchange rate of the EUR/USD is denoted:

EUR/USD = 1.4084

The currency that is listed on the left side is known as the “Base” currency. In our example, this is the Euro. The currency that is listed of the right side is known as the Counter/Quote currency. In our example, it is the US dollar.

The exchange rate denotes how much we have to pay for one unit of the base currency (EUR) in terms of the quote currency (USD). Thus, our example shows an exchange rate of 1.4084. This means one unit of Euro will cost 1.4084 of US dollar.

Likewise, the exchange rate will also denote how much we will get in terms of the quote currency when we decided to sell one unit of Euro. Thus with reference to our illustrated exchange rate, we will receive 1.4084 of US Dollars when we sell one Euro. 

The diagram above is a snapshot of the figures for the currency pair EUR/USD at June 10 2009.

  • Last” denotes the current value of the exchange rate.
  • Change” denotes the percentage change of the value of the exchange rate from the close of market the previous day at 5pm ET. In our example, it has increased by 0.114%.
  • Low” indicates the lowest value of the exchange rate since the close of the market the previous day.
  • High” indicates the highest value that is reached by the exchange rate since the close of the market the previous day.
  • The arrow indicates the direction of the exchange rate since the previous day, that is, an upward trend. 

 

The chart above indicates the fluctuation of the EUR/USD currency pair throughout the trading day of June 10.  The X- axis indicates the time scale while the Y- axis of the chart indicates the exchange rate.

If your expectation is that theUSeconomy is going to be weaker still, this would mean that the US dollar will drop in value. As such, you will take a long position in the EUR/USD currency pair. You are buying the Euro in anticipation that the Euro will increase in value against the US dollar.

Conversely, if you are of the opinion that theUSeconomy is going strong and thus the dollar will rise in value, you will hold short position in the EUR/USD currency pair. Here, you are selling Euros in anticipation that they will fall against the US dollar.

Although Forex traders are unable to advise you on what currency pairs to invest in, they will be able to provide you with all the tools that you need to help you analyze the market trends.

Read A Brief Guide to Trading the EUR/USD – Chapter 3: Reasons for trading in Forex
Read A Brief Guide to Trading the EUR/USD – Chapter 4: Forex Quotes
Read A Brief Guide to Trading the EUR/USD – Chapter 5: Fundamental Analysis for Trading EUR/USD
Read A Brief Guide to Trading the EUR/USD – Chapter 6: Technical Analysis for Trading Forex
Read A Brief Guide to Trading the EUR/USD – Chapter 7: Conclusion

A Brief Guide to Trading the EUR/USD – Chapter 1: An introduction to Forex

The purpose of this guide is to give you an overview on how to trade the Forex market with a special focus on the EUR/USD currency pair.

Forex or FX refers to the simultaneous buying and selling of currencies. It is an Over the Counter Market (OTC) operating 24 hours per day, 5 days per week.  The Forex market is the largest of all financial market with a trading volume amounting to roughly 3 trillion dollars per day. Trading operation runs from all the major financial centers throughout the world. Thus, the trading operations overlap into all the different time zones around the world.

In other words, Forex means the exchanging of one currency for another currency at the market exchange rate. These currencies are always bought and sold in pairs. For example, if you buy Japanese yen, you will always be selling US dollars for it. Thus, Forex currencies are always quoted in pairs like EUR/JPY; EUR/USD or GBP/USD. Not all currencies are equal in demand. Some currencies are traded more than others and those that are frequently traded are known as “Major currencies”.

These usually refer to currencies like the U.S. Dollar; Australian Dollar; British Pound; Japanese Yen and Swiss Franc. The lesser traded currencies are known as “Minor currencies”. The currencies of smaller or developing countries around the world are regarded as “Exotic currencies”.

Currencies that are normally traded as investment vehicles are normally confined to four major currency pairs. They are denoted by the sign EUR/USD; USD/JPY; GBP/USD and USD/CHF.

Previously, Forex trading was conducted only by the major commercial banks, hedge funds, central banks and multinational companies dealing with currencies for the purpose of facilitating trade. Today, with the advent of the internet and several market innovations, the small time retail trader is also able to participate in this market. Forex brokerage firms also offer several types of accounts to enable the retail trader to be able to trade in smaller lots than 100,000 units per lot.

Despite its fast development, the Forex market is largely unregulated. The rules regarding Forex trading are not clearly defined as trading crosses over international borders. Furthermore, those with huge risk capital like the banks and hedge funds can actually influence the market with their capital leverage. Therefore, anyone who is inexperienced in Forex trading will be wading in unchartered and often risky territories. Although the risk is high in Forex, those who take the trouble to educate themselves can easily find themselves making a fortune within a few weeks. And for those decide to jump into trading without educating themselves can find disaster looming over the horizon.

With regards to Forex Trading, traders are normally offered margin accounts with a high level of leveraging by the brokerage firms. The level of leverage can run up to as high as 300 to 1 and in some cases even up to 500 to 1. This implies that for every one dollar invested into trading, a trader can purchase between $300 to $500 worth of currencies. Therefore, if you decided to invest $1000 into Forex trading, you can trade up to $300,000 to $500,000 worth of currencies in the Forex market. This presents a huge opportunity for any experienced trader who knows how to utilize this facility. Nevertheless, one must never forget that leverage is a double edge sword. Your losses can also be multiplied many fold and you could end up losing more than your initial capital outlay. 

This is chapter number 1 out of 7. Read the rest:

Read A Brief Guide to Trading the EUR/USD – Chapter 2: The EUR/USD currency pair
Read A Brief Guide to Trading the EUR/USD – Chapter 3: Reasons for trading in Forex
Read A Brief Guide to Trading the EUR/USD – Chapter 4: Forex Quotes
Read A Brief Guide to Trading the EUR/USD – Chapter 5: Fundamental Analysis for Trading EUR/USD
Read A Brief Guide to Trading the EUR/USD – Chapter 6: Technical Analysis for Trading Forex
Read A Brief Guide to Trading the EUR/USD – Chapter 7: Conclusion

Buying Oil Investments – Chapter 12: Conclusion

This is chapter number 12 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction
Read Buying Oil Investments – Chapter 2: Getting started in oil investments
Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil
Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil
Read Buying Oil Investments – Chapter 11: Peak Oil

As we are consuming a non renewable source of energy, the date for peak oil will definitely arrive. When that day does arrive, investors will be presented with an array of other viable opportunities to capitalize on. Regardless of the kind of vehicle which the investor will choose, we must never forget that our way of life will never be the same when that day comes. Thus, in order to survive in a changing scenario, be it economic or environmental, we must learn to adapt. We must always remember that fossil fuel once depleted can never be placed.

Therefore, a more permanent solution for our insatiable appetite for cheap energy must come from a renewable source of energy. We will need to look for ways other than oil to harness for our energy source. As the date for peak oil is predicted to be decades away, this implies that we still have time to develop the necessary technologies to harness alternative sources of energy. Sources being looked at now include solar energy, geothermal energy, hydro energy and wind energy. Another attractive and viable alternative which our current society is exploring and learning to adapt to is the area of biofuel.

Biofuels are fuels which are derived from biological matter. As they are biological in nature, they are a renewable source of energy. The most common of these types of biofuels are bioethanol and biodiesel. Bioethanol is derived from the fermentation of sugar or starch. Biodiesel is created from mixing alcohol with vegetable oil. Currently the processes of extracting energy from these bio sources are not efficient or cost effective thus they are still in the development stage. But as our society becomes more advanced technologically, it is likely that these biofuels will take the place of fossil fuels as the source of our energy needs. Not only are the sources of these biofuel renewable, they are also cleaner. This is in line with our changing awareness of the need to protect our precious environment for our future generations.  

More money is being spent now in the research and development of new and renewable energy sources, while more and more people are opting for the hybrid and lower energy vehicles showing a change of attitude. Investing in oil while still a good investment option for the short term, won’t always be that way.

Buying Oil Investments – Chapter 11: Peak Oil

This is chapter number 11 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction
Read Buying Oil Investments – Chapter 2: Getting started in oil investments
Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil
Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil

The idea of peak oil is that it is a theoretical date at which time the world’s production of oil will have peaked. Any production of oil after this date will be in a state of continuous decline facing an ever decreasing oil reserve. In short, the world’s output of oil can never be increased after this stage. We are all aware that fossil fuels resources are finite and that we might be decades away from peak oil.

Nevertheless, the idea of peak oil has served to spur on developments in other areas of the energy sector hoping that when the date for peak oil arrives we will already have a viable alternative source of fuel in place of oil.

The Implications of Peak Oil:

For the last 100 hundred years or so, the demand for oil has steadily been rising. When the date of peak oil arrives, basic economic theory stipulates that the price of oil will rise due to the decline of supply. We are already aware how much impact that will have in our lives as oil is such a critical commodity driving the engine of our economic growth. The immediate result will be that this will result in a more aggressive search for more supplies. Old fields previously considered not economically viable will be exploited for every drop possible. Such is the case in Canadanow where oil sands are being tapped for oil using Steam Assisted Gravity Drainage technology (SAGD).

Alternatives to Explore:

Even if peak oil is going to arrive in the near future, this does not necessarily spell doom for us. Human resourcefulness has always made us more resilient in the face of adversity. In fact, when such a scenario does arrive, the street-smart investor will recognize there are also numerous other opportunities which will present themselves for the investor to reap. Such investment opportunities worth looking into include:

Oil Producers:

As the world’s oil reserves begin to decline after peak oil, this will naturally prompt for the search of more oil reserves to replace existing diminishing stocks. Once the oil producers begin to increase their exploration budgets, the industry auxiliary services will stand to be a direct beneficiary of this increase in investment in this area.

Oil Industry Giants:

More direct investments into the established players in the Oil & Gas industry will be a good move regardless of peak oil or not. As prices of oil increases, so will the profitability of these oil giants. This will result in higher share prices in these companies.

Other Sources of Oil:

As prices of oil continue to rise over the long term, this will make what was once uneconomical to exploit to become a profitable venture. Exploitation of unconventional sources will definitely be the first of the list for alternative sources of oil. A good example is the extraction of bitumen from oil sands in Canada and Venezuela.

Other viable alternative sources of oil can be from oil shale if the price of oil has exceeded the $70 per barrel mark. The oil shale containing kerogyn have the potential to be made into synthetic petroleum. Another possible source can be the conversion of coal to synthetic oil. Nevertheless, all these alternatives are to be regarded as temporary measures as we are still dealing with fossil fuels in the end which is non renewable.

Investments that should be Avoided during Peak Oil:

All the above investments as alternative investment when peak oil arrives entails that the primary input component into that industry is oil. For those investments whose primary cost is oil, they should be avoided. For instance, the shipping, haulage and airlines sector should be avoided as they will be frontline companies who will be hurt most when the price of oil increases as fuel cost is a major component of their operating cost. 

Read Buying Oil Investments – Chapter 12: Conclusion

Buying Oil Investments – Chapter 10: Investments in Gold versus Oil

This is chapter number 10 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction
Read Buying Oil Investments – Chapter 2: Getting started in oil investments
Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil
Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry

During the last three years, commodities prices have been on the upswing. This upward trend is led by increased demand in oil and gold. The oil price began the uptrend initially ahead of gold price during the mid 2008 but now the price rally is being led by gold. Currently, this situation has given analysts cause for worry. 

This is because analysts look to the ratio of gold prices in relation to oil prices as an indication of the health of the economy. If gold prices begin to outperform oil prices, the ratio will increase. An increase of this ratio will indicate that a recession in underway. The converse will indicate a strong economy and possible inflationary pressures. According to a strategist at brokerage firm CMC Markets, this ratio had a monthly average of 13 for the last 37 years. This means that the price of gold is 13 times more than oil.

This ratio dropped to 5.8 in July 2008 when oil prices rose to a peak of nearly $150 per barrel. Since then, the ratio rebounded to 10.44 when oil prices began declining while gold prices rose to $912.30 per troy ounce. This was followed by a recession, interest rate cuts by the Federal Reserve and the decline in the value of the dollar.

Oil prices dropped like a stone then, due to the profit taking moves by the hedge funds and others investors in the Futures market. This indicates that there is a direct correlation between this ratio and the performance of the overall economy. Thus if the price of gold continues to outperform oil prices, the economy might be in for more downturns.

Read Buying Oil Investments – Chapter 11: Peak Oil
Read Buying Oil Investments – Chapter 12: Conclusion

Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry

This is chapter number 9 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction
Read Buying Oil Investments – Chapter 2: Getting started in oil investments
Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil
Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry

Investments in the Oil & Gas industry have always been regarded as a high return industry. The typically projected earnings from any investments in this industry normally runs from 5 to 10 times the initial amount invested. Though the risks are high, investments into this market continue to pour in mainly because of the alluring high returns of this sector. There are also several other advantages of investing in this market which makes the Oil & Gas industry an attractive area to invest in. 

Tax Benefits:

Based on Newsweek, oil drilling has one of the best tax incentives around in the US. Investors are able to write off as much as 65% to 80% in the first year for certain classes of investments. In some cases, 100% tax deduction is permitted.

High Profitability:

With oil & gas investments, you are able to earn profits with a ratio as high as ten to one within a year. This translate to a higher than 50% annual rate of return.

Calculated Risks:

Although the risks of investments in the Oil & Gas industry is high for certain type of investments, most investments undertaken in this sector are calculated risks. Technology has also help to the guesswork out of many aspects of oil explorations. In most cases, the project has a success rate of 90%.

Lower Drilling Cost & Choice Of Drilling Prospects:

Compared to before, there is a wide diversity of small-scale drilling prospects for an investor to choose from. In addition, drilling costs have dropped to an all time low due to decreased rig activity.  

Increasing Demand:

As the world’s economy becomes more developed and affluent, this has “fuelled” an increasing demand for energy and thus crude oil. As no viable substitute is in sight yet, the demand of oil is forecasted to increase further still.

Traditional Sources of Funding Unavailable:

 As it has become increasingly more difficult to secure funding from traditional sources, capital investments from private investors are being highly sought after. In return for the precious capital required to jump start a project, investors are being offered higher returns than ever.

Government Support:

The importance of oil has not gone unnoticed by Governments of many countries. Eager to boost the economy of their country, many governments are offering attractive tax incentives to encourage investment in this sector. 

Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil
Read Buying Oil Investments – Chapter 11: Peak Oil
Read Buying Oil Investments – Chapter 12: Conclusion

Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry

This is chapter number 8 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction
Read Buying Oil Investments – Chapter 2: Getting started in oil investments
Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil
Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds

Price & Supply Uncertainties:

The Oil & Gas industry have some risks which are associated with its supply. There are several grades of oil which are supplied to the oil market like the West Texas Intermediate, North Sea Brent Crude, Sweet crude and Sour crude. Due to the fact that sour crude is harder to refine and process, sweet crude is more in demand. The main problem lies in the fact that the market faces a shortage of high quality sweet crude needed to meet the stringent US environmental requirements. As such, the US needs to import most of this type of oil from Angola and Nigeria than from the Middle East. With supplies for such a critical commodity dependent on a political unstable region, prices uncertainties are bound to be an ongoing concern.

Risk of a “Dry Hole”:

While prospecting for new oil reserves is a very lucrative endeavor, investors risk losing 100% of their investments if they come up with a dry hole.

Volatility Prices:

The returns on investments in the Oil & Gas industry are dependent upon the market price of crude oil and natural gas. As there are many factors which can affect the price of oil and its derivatives, this makes the price of oil susceptible to price fluctuations. When such a case occurs, this reduces the profitability of an Oil & Gas project.

Scams & Bad Management:

Since investments in the Oil & Gas industry requires a large amount of capital and a high level of technical expertise, it not uncommon for scams to perpetuate in this industry. Thus it is important that investors fully comprehend what they are going to invest in.

Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil
Read Buying Oil Investments – Chapter 11: Peak Oil
Read Buying Oil Investments – Chapter 12: Conclusion

Buying Oil Investments – Chapter 7: Exchange Traded Funds

This is chapter number 7 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction
Read Buying Oil Investments – Chapter 2: Getting started in oil investments
Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil
Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options

Exchange Traded Funds (ETFs) are a class of investment vehicle which traded on the exchange much like the way stocks are traded. Through ETFs, investors can have a more direct exposure to oil prices. This is due to the fact that oil prices are not directly related to the stock market or the Forex market. Therefore, ETFs allow for better correlation to the oil prices than energy stocks themselves.  

Of late, ETFs are becoming more popular as they allow easier access to ownership of the energy sector commodities. For instance, an investor can purchase one share of U.S. Oil Fund ETF (USO) which gives him a market exposure equivalent to approximately one barrel of oil. Thus if the oil price were to rise by 10%, your ETFs investment ought to rise by 10% as well. With ETFs, you are able to own the oil with the incidental cost of storing the physical oil. You are only liable for a small management fee plus the brokerage fees associated with the sale and purchase of the ETFs. Some of the popular oil ETFs are as listed below:

  • Goldman Sachs Crude Oil Total Return ETN (OIL)
  • iShares Dow Jones US Oil & Gas Ex Index (IEO)
  • iShares Dow Jones US Oil Equipment Index (IEZ)
  • Oil Services HOLDRs (OIH)
  • PowerShares DB Oil (DBO)
  • PowerShares Dynamic Oil & Gas Services (PXJ)
  • ProShares UltraShort Oil & Gas (DUG)
  • SPDR S&P Oil & Gas Equipment & Services (XES)
  • SPDR S&P Oil & Gas Exploration & Prod (XOP)
  • United StatesOil (USO)

 

Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil
Read Buying Oil Investments – Chapter 11: Peak Oil
Read Buying Oil Investments – Chapter 12: Conclusion

Buying Oil Investments – Chapter 6: Investment Options

This is chapter number 6 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction
Read Buying Oil Investments – Chapter 2: Getting started in oil investments
Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil
Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)

As mentioned earlier, there are different ways with which an investor can foray into the Oil & Gas industry. They can be classified into the categories listed below:

  • Leases
  • Mineral Rights
  • Mutual Funds
  • Oil Futures Contracts & Options
  • Partnership; Buying production
  • Partnership; Working Interest
  • Royalty Interests
  • Stocks

 

Leases:

They grant the holder of these leases the “right” to drill wells on the property specified on the lease. The owner of these properties will then be paid a royalty for the amount of mineral which have been extracted from the properties. Normally, the terms of the lease include the number of wells that can be drilled within a specific time frame. This is to ensure that the holder of these leases will maximize the duration of the lease for maximum potential returns. In turn the owner of the properties will benefit from the maximum amount of royalties payable. Leases also have the ability to appreciate in value if the property in question proves to be endowed with rich deposits. Nevertheless, as they have an expiration term, they could also expire without any well being drilled. Thus in this manner, leases can be risky.

Mutual Funds:

Mutual funds are funds pooled together as an investment vehicle for specific markets. They are professional managed and usually have detailed forecast about their projected returns. They also represent the investment option with the least risk.

The advantages of mutual funds are that they give the small time investors access to a wide diversity of equities and other financial securities professional expertise with just a small investment into the fund. They are typically sold as units or shares. These units or shares can be bought or sold to redeem their net asset value (NAV).

Oil Futures & Oil Futures Options:

A method of directly owning the crude oil is to purchase oil Futures contracts or oil Futures Options. They are also known as commodity trading as described in chapter 2 of this guide. Trading is this market is highly speculative and thus highly volatile. However, they can also be extremely lucrative if the investor knows what he is doing.

For example, when you compare the annualized returns from 1983 to 2004 between spot trading and Futures trading, Futures trading achieved an average of 15.16% returns whereas spot trading only managed a return of 2.75%. Nevertheless, before deciding to invest in this market, ensure that you do the necessary groundwork studies to evaluate the risks involved.

Partnership; Buying production:

Buying production refers to the concept of purchasing an active interest in a well which has been successfully sunk. Thus the investor will not face any of the risk of investing in a “dry well”. The investors still enjoy the benefit on income generated by the production of oil & gas.

Partnership; Working Interest:

Working interest refers to an ownership stake in the operation of the well. Beside of having production income benefits, investors in this category also have significant tax benefits for the risk of drilling exploratory wells. Other types of investment do not enjoy this tax benefit.

Royalty Interest:

These refer to income received by the mineral rights owner on the property where the oil & gas well have been sunk. In the US, the minerals in the ground belong to the landowner and not the Government. Thus landowners are able to enjoy the benefits of royalty for minerals extracted from their land. Royaltys are normally calculated based on the quantity of the minerals harvested.

Stocks:

This refers to buying shares of a public listed company on the equity market. Investors can select to invest in major established companies or in independent oil service companies.

Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil
Read Buying Oil Investments – Chapter 11: Peak Oil
Read Buying Oil Investments – Chapter 12: Conclusion

Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)

This is chapter number 5 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction
Read Buying Oil Investments – Chapter 2: Getting started in oil investments
Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil
Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices

As mentioned earlier, there are two main factors which affect the prices of oil. These are the supply & demand for oil itself and the market sentiment surrounding the oil market. The market sentiment of the oil market is largely manifested and shaped in the oil Futures market. If we recall back to an earlier chapter, an oil Futures contract is an agreement between two parties to take delivery of a fixed quantity of oil at a date set for the future at a specific price. This allows use of the commodity to hedge the price to ensure the supply of the commodity at a fixed and certain price.

Thus future contracts traders are also know as “Hedgers” as they hedge the risk of price uncertainties with the futures contracts. On the opposite end of the trading spectrum is another class or traders known as the “Speculators”. They actually represent around 97% of the volume traded on the commodities exchange.

Speculators are in the trading of futures contracts purely to make above average profits. They assume the risks which hedgers are trying to rid themselves off and they thrive on price uncertainties. If a speculator holds the belief that the oil price is going to rise, they will then purchase the oil futures and wait for the price to rise. They stake out a “long” position in the market. Once the price has risen high enough, they will then sell the Futures contract at the higher price and realize their profits from the price movements. The opposite is true in a bearish market. They will instead take a short market position.

The main reason why speculators are able to “move” the price of commodity based on mere market sentiment is because of the sheer volume which they trade in. with margin trading, they are able to leverage their trades many time over.  Thus, when enough speculators participate in  a trade based on the same belief, the market will begin to move in the direction of the market position that they staked out at.

The spike in oil prices in 2008 was actually a result of speculative demand. In reality, out of 27 barrels of oil that are traded in the commodities exchange, only one barrel is for consumption in the USA. This indicates that the rest of the oil traded is just speculative demand. It is for this reason that on 22 Sept 2008, the price of oil jumped by $25 within a single day. There was no news on that particular day which reported a disruption in the supply of oil. Thus, the only viable explanation which could have caused such a big jump in price was pure speculative demand.

Bearing this incident in mind, we can conclude that oil prices are not purely affected by the laws of supply & demand. The current market sentiment also plays a huge role in determining what the price of oil is going to be.

Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil
Read Buying Oil Investments – Chapter 11: Peak Oil
Read Buying Oil Investments – Chapter 12: Conclusion

Buying Oil Investments – Chapter 4: The determinants of Oil Prices

This is chapter number 4 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction
Read Buying Oil Investments – Chapter 2: Getting started in oil investments
Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil

The very fact that crude oil is a primary commodity required in the major economies of the world make its influences on our lives undeniable. Any fluctuations in its price will definitely work its way into our lives directly or indirectly regardless of whether we like it or not. Thus, it is important for all of us who wish to get involved with this market to know what can cause its price to fluctuate. The two main factors which determine the price of oil are:

  1. Its Supply & Demand
  2. The Market Sentiment for oil

 

The Supply & Demand of Oil:

The laws of supply and demand are based on the economic concept that when prices fall, demand will rise and supply will decrease. On the contrary, when prices rise, demand will fall and supply will increase.

Demand of oil:

It has been estimated by the Organization of Petroleum Exporting Countries (OPEC) and IEA that the 2008 global daily consumptions are between 86 million to 87 million barrels per day. In the US, demand will decrease when the overall price of oil increases. Nevertheless, the emerging economies of the world have a different set of expectations as opposed to the US. These countries are facing positive economic development and as such their demand for oil is not price elastic.

In fact, some of these emerging economies have fuel subsidies for retail consumers. An estimated one quarter of the 2008 global demand for oil comes from countries which have such kind of fuel subsidies. Although such fuel subsidies may ease the burden of the consumers in times of price spikes, they may not be beneficial for the country economically as they will artificially boost demand. If such subsidies are removed, they will help boost the country’s production and also help ease any shortages which might have resulted from the artificial demand. Refineries then will have additional incentive as a result of the higher priced petroleum derivatives.

Supply of Oil:

With regards to supply, it is estimated that 85 million to 87 million barrels of oil are produced daily. New discoveries are constantly being discovered although on a lesser scale than before. On top of this, the reserves in the North Sea andMexicoare also declining. Most OPEC members also lack the operating capacity to pump more oil out of the ground exceptSaudi Arabiawhich has a spare capacity of an estimated 1.5 million barrels per day.

At the same time,Nigeriawhich is a major oil producing country is plagued by political instability and its production infrastructures are prone to sabotage by terrorists. As such, the country is not able to operate at its full capacity of 2.5 million barrels per day but instead only pumps out 1.5 million barrels per day.

Buying Oil Investments - Chapter 4: The determinants of Oil Prices
Buying Oil Investments - Chapter 4: The determinants of Oil Prices

Sources: OPEC

Sources: OPEC

Based on present estimates, 78% of the world’s proven oil reserves are located in OPEC countries, with theMiddle Eastmaking up the majority of this group. Additions to OPEC reserves are also being added as new fields are being discovered and new technology improving the yields of current fields. To date, OPEC’s available proven reserves stands at over 900 billion barrels. 

Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil
Read Buying Oil Investments – Chapter 11: Peak Oil
Read Buying Oil Investments – Chapter 12: Conclusion

Buying Oil Investments – Chapter 3: Factors which affect the price of oil

This is chapter number 3 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction
Read Buying Oil Investments – Chapter 2: Getting started in oil investments

The prices of petroleum and its derivatives as well as natural gas Futures are continuously fluctuating reflecting its reaction to new information which affects expectation regarding its availability. Market sentiments play a huge role in affecting the price of this commodity and its derivatives due to our heavy reliance on oil to fuel the development of our standard of living. Any unexpected news is bound to cause the price of oil to spike. A notable example of this is the oil embargo imposed by OPEC in 1973 which cause the price of oil per barrel to rise from $3 to $12.

Buying Oil Investments - Chapter 3: Factors which affect the price of oil
Buying Oil Investments - Chapter 3: Factors which affect the price of oil

Periodically, new information is also released into the market about the oil industry. The effects of these reports on the price of petroleum vary and can range from being hardly conspicuous to severe. Although these reports are expected periodically, their contents might not be in synchronization with the market sentiments. This is especially true when market analysts analyse the periodic data concerning the inventories of petroleum and its derivatives as well as that of natural gas. Below is a list of sources where this data can come from:

Energy Information Administration:

The Energy Information Administration (EIA) is a sub agency of the US department of Energy. It publishes weekly data concerning the supply of oil and natural gas. Its main function is to accumulate, interpret and analyze all data relating to the energy sector objectively which serves to guide the policy making decisions of the Department of Energy.

The weekly reports concerning the US inventories of petroleum and its derivatives are published each Wednesday in two reports:

  1. The Weekly Petroleum Status Report – released mid Wednesday morning and details the raw inventory data as well as the recent prices of commodities in the energy sector, products spot prices and the Futures contracts prices.
  2. This Week In Petroleum – is issued on Wednesday afternoon. This report contains extensive data points and commentary from the EIA about the data published.
 

The weekly reports concerning the US inventories of natural gas are published each Thursday in two reports as well.

  1. The Weekly Natural Gas Storage Report – is released on mid Thursday morning and is similar to the Weekly Petroleum Status Report in content.
  2. The Natural Gas Weekly Update – is published on Thursday afternoon and contains data points and detailed analysis of the data published in the morning report.
 
 

These weekly reports are distributed free of charge and can be obtained by email when you sign up for them at the EIA’s website.

International Energy Agency:

The International Energy Agency (IEA) is the energy policy advisor to Organization of Economic and Cooperative Development (OECD). It also accumulates, interprets and analyzes all data relating to the energy sector objectively. The main difference between the EIA and the IEA is that the IEA deals with data concerning global supplies. Its analysis and findings is published monthly in the Oil Market Report. To receive the report, you will need to pay a subscription fee.

Crude Oil Inventories:

For any oil refineries, it main raw material input will be crude oil. Thus, its available inventory level will have a cascading effect on the inventories of all its derivatives. Therefore not only are the prices of oil futures contracts affected by crude oil inventory levels, the prices of the petroleum derivatives’ Futures contracts are likewise affected. Data concerning the oil inventory reflect both domestically produced inventories as well as imported inventories. 

Petroleum Product Inventory:

The petroleum product inventory data refers to the inventory levels of all petroleum derivatives like gasoline, jet fuel, distillate fuel oil, kerosene etc. as with crude oil inventory data, petroleum product inventory data can also identify the domestically produced inventories as well as imported inventories.

The reason why the data includes imported inventories is because of the sensitivity of these commodities prices to external factors besides from those found in the domestic economy. How great the influences will be depends on how big the imported inventories are.

Natural Gas Inventory Data:

This data concerns the storage of natural gas in more than 400 locations in 48 states in the US. It details the volume of natural gas available for consumption in the US. This data only represents domestically produced Gas as the physical nature of natural gas prevents it from being shipped over large distances. The data showcases absolute levels as well as reporting on current inventories as well as those of the past.

How these reports affect Oil and Natural Gas Futures Prices:

This data represents information about the circumstances which will form the current market sentiment about these commodities. When the contents of these do not match with the expectation of the market, this will prompt a process of reconciliation between the prices of these commodities and past expectations. The price adjustment will also ready the expectation of the market for future reports. The extent of departure of expectation from that of reported inventories will determine how far the price adjustment will be. 

Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil
Read Buying Oil Investments – Chapter 11: Peak Oil
Read Buying Oil Investments – Chapter 12: Conclusion

Buying Oil Investments – Chapter 2: Getting started in oil investments

This is chapter number 2 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction

One of the highest risk investments in the Oil & Gas industry is on the exploration side. Investment in this sector help to fund the exploration of new oil and gas deposits to help shore up our depleting fossil fuels reserves. The downside to investing in an exploration company is that the company might end up not finding anything at all or even if it did, the amount may not be commercially viable. However, if the company does strike it lucky, the return of your investment will be extremely high.

Less risky would be to invest in the oil & gas companies themselves such as a refinery rather than in the exploration companies. You have the option to invest in large corporations or smaller companies. These companies are more likely to make money for you as they are more established and have enough oil to turn a profit.

Another option besides investing directly into an oil and gas company is to purchase stocks of these companies. They are even less risky options than the two options mentioned above. Then again, the level of returns that you will make will always be commensurate with the amount of risk that you choose to undertake.

There are two ways with which you can invest in an Oil & Gas company’s stock. One way is by purchasing the stock of the company directly. The other way is through mutual funds. In either case, before you undertake such a move, you ought to understand what you are trying to achieve with your investment objectives. All forms of investment carry some form of risk and if you do not understand the level of risks that are involved, your first step should be self-education. In addition, you should also consult your broker or financial adviser before making a move into investing in the Oil & Gas industry. You can find brokers which have a proven success rate in the oil and gas investment industries on our Oil Brokers page. The following are some of the ways you can get involved with investing in Oil and Gas:

Mutual Funds:

The easiest way to begin investment into the Oil & Gas industry is to invest by way of Mutual funds. There are mutual funds which specialize specifically in this sector of the market. These have their own focus which range from oil exploration companies to those more established companies with ongoing oil production capability.

What is attractive about mutual funds is that all the necessary research about the Oil companies has been completed by the in house professionals who check out these companies which have been earmarked by the mutual funds. In short, due diligence has been performed. You will also be able to get more details about projected returns of these mutual funds based on the trading strategy adopted by these Funds.

Individuals Stocks:

It had been said that the Oil & Gas industry is a “sunset industry” as evidenced by the dwindling number of oil companies in the industry. Most of these companies in fact have been brought over by the oil giants that are still in existence. An example of this can be seen in the merger between British Petroleum (BP) with what was formerly the Standard Oil of Indiana to become BPAmoco. (Today, it has renamed itself to BP again with the tagline “Beyond Petroleum,”)

It is a natural reaction to expect that if the Oil & Gas industry is going through a major restructuring process, one ought to avoid investing in this industry. However, the fact is, oil companies are making more money than ever. For instance, Exxon Mobil Corp reported revenues in 2005 of $340 billion, an increase of over 25% from 2004. Reported revenue in 2007 was $404.56 billion. Since April 2008, the company has been placed in all the top ten slots for Top Corporate Quarterly Earnings.

In addition, the combined 2006 earnings of BP (BP), Chevron (CVX ), ConocoPhillips (COP ), ExxonMobil (XOM ),Royal Dutch Shell (RDS.A) and Total (TOT ) is larger than the Gross Domestic Product  of the Czech Republic (2006 GDP: US$141.7 billion). In addition, the overall demand of oil is not declining. Even if the production levels fall, oil companies will just increase their prices. This is because the demand for oil is not very price elastic. Almost the entire economic machineries of the major developed countries have an extremely heavy reliance on this commodity.

Commodities Trading:

Another method of investing in the Oil industry is to participate in the commodities market. The Oil Futures market is a highly speculative and liquid market. It is also regarded as one of the most risky financial instruments to invest in.

A Futures contract is an agreement between two parties to take delivery of a specific quantity of oil at a specific price at a specific future date. This enables the users of the commodity to lock in the price of the commodity to protect themselves from adverse price movements. For example, fuel cost is a major expenditure for airlines. Thus to prevent any adverse price increase from affecting their operational budgets, airlines can use Futures contracts to hedge their fuel costs.

Nevertheless, the large initial capital layout will represent a barrier to enter this market for any small time investors. The majority of commodity brokers will require an initial deposit of $5000 or more before you can open a trading account with them. In contrast, nowadays with just $500 deposit, one can already open a trading account online and begin trading in the equity market. Having said that, for those who have “risk capital”, the futures market is an attractive market to invest in due to its high returns probability. 

Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil
Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil
Read Buying Oil Investments – Chapter 11: Peak Oil
Read Buying Oil Investments – Chapter 12: Conclusion

Buying Oil Investments – Chapter 1: Introduction

In today’s globalized economy, our lives are in many ways touched by the oil industry. Without this “black gold” life today would not be as we currently know it. Everything around us, one way or another has a direct or indirect connection with this “massive energy complex”. This industry encompasses not just the crude oil itself but also its by-product, natural gas. Because of the importance of the oil & gas industry in any developed or developing economies, it is hardly surprising that the financial markets pays close attention to the television screen when any natural major hurricane hits the coastlines of theUS.

Such was the case when hurricane Katrina bombarded the southern coast of the US. The oil market went into a trading frenzy. The oil market is not only affected by what is going on in the backyard of theUSbut is also susceptible to news happening thousands of miles away. News of pipeline bombings inNigeriaand political stability inIranare also able to “rattle the cage:” of the oil market. With so many uncontrollable and unforeseeable factors being able to affect the stability of the oil market, it is not surprising that many are questioning the wisdom of investing in this sector. Yet despite all the skepticism and the doubts mentioned above, many investors are still flocking to invest in this market sector.

In fact, the ways with which one can invest in the Oil & Gas industry is bewildering reflecting the penetrating influences which this industry can have on our economy. These investments are able to yield astounding returns for those who are brave enough to wade their feet into the Oil & Gas industry. Yet, this is not to say that rewards are never without risks. It is always in direct proportion to the level of risk which one is willing to undertake. The higher the risk that one is willing to shoulder, the higher also will be the level of reward. Investing in the Oil & Gas industries also work along the same risk/reward investment principle.

This chapter is number 1 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 2: Getting started in oil investments
Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil
Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil
Read Buying Oil Investments – Chapter 11: Peak Oil
Read Buying Oil Investments – Chapter 12: Conclusion

How Does Price Move and Where Does It Go?

The first thing a trader needs to know and understand in the fx market is the way in which prices move. Knowing this will determine what you do when trading currencies. You have to be able to understand what’s going on in the market in order to make smart decisions. You should be able to look at the price charts of the assets you are trading and know what is happening with them. Prices move in two directions. That is simple up and down… rarely sideways, but sometimes.

Price can move up, which means it is rallying or a bull market or it can move down which means it’s consolidating or a bear market. Price can also move sideways. This is often referred to as the price being stuck or on a plateau. You usually do not want to be trading a when the price is doing this. Based on the prices moving up down or sideways, will determine how you will make the trade.

If you fail to understand these principles, you will lose all of your money. In an effort to make it up, you will lose more money. This is why it is so important for you to know this information.

One of things you should do is to practice reading online forex charts you need to be familiar with basic charts so that your eyes are accustomed to them and your mind can quickly digest the information. Remember when you started to drive and you had to stop and think about everything you were going to do and you had to worry about people and cars and traffic and parking… Eventually it became familiar and your mind was able to grasp the situations quickly and you did not have to think about it much anymore so it was no longer occupying your mind, this allows you to see farther and evaluate other actions. This is true with charts and graphs after a while you mind will grasp the data quickly and you will begin to notice patterns and movements.

Get a whole bunch of different price charts and drill whether or not the price is going up, going down or moving sideways. This should be one of the first things you need to learn how to do. In summary, the prices in the Forex market move up, down or sideways. Make sure that you know exactly what is happening or you will lose all of your money. The best thing to do is to practice reading the charts. If you do this, youwill be well on your way to being a great success at trading the foreign exchange market.

To be successful you need to be well educated and well equipped and familiar… familiarity will make you comfortable and you will see soon you will start to trust your judgment.

I’m a Pip, You’re a Pip, and everybody is a Pip… so what is a Pip?

“Percentage-In-Point” is known as a PIP and is used to define a currency rate to a very small amount well below whole numbers. Different currencies are traded around the world and using this system helps equalize each currency against the other for much more accurate measurement. Ok, now you have an explanation that doesn’t really tell you much, so let’s look at a PIP.

In trading the U.S. Dollar, the pip is the smallest amount by which it may be traded against another currency, in this case $.0001! Other currencies using other types of units but using this system of pips helps to bring about nearly exact exchange rates by considering both currencies to a very small unit of measurement. Currency on the whole only fluctuates a very little amount, but when you multiple that amount by the volume traded, it is a great deal of profit and loss. When the USD moves just one PIP and you are trading 100,000usd, you could have profited or lost 10.00dollars, now just think that if the currency moved 5 PIP, that is 50.00 for doing nothing. There is over 2 trillion dollars traded daily on the Forex Exchange. That is 2,000,000,000.00 now if we multiply that by 1 PIP, we have a whole lot of money going up and down.

When trading Forex Currency, the trader is leveraging their account, in other words, they may be buying 100,000USD but they are only using 100.00 of their money. (This is a hypothetical example; leveraging and margins are governed by the exchanges and set by your broker). The smallest amount that can be traded is a contract for 100,000usd, so every little PIP counts.

Traders look to make a profit by betting that a currency’s value will either appreciate or depreciate against another currency. Trading down to such a small unit or pips helps protect investors from huge losses by allowing specific places for trades to occur. Instead of waiting for a whole number such as 1, or even 5 dollars, for instance, when the market reaches a specific small unit, trades may occur. If a trader can trade the dollar down to 1.0001, it is easy to see that large volumes of dollars trading at 1.0001 instead of at the next whole number, $2.0 can mean vast amounts of money are at stake.

Trading one whole unit of one currency may result in a lot of whole units of another currency. Since one US dollar may represent hundreds, thousands, or even more of another currency, using pip increments helps match the currencies together and maximize the attempt to equal one to the other exactly.

Once we identify the two currencies this is known as a “pair” and use pips to match up the values of each to such an exact degree, it becomes a small step to use the system itself to identify and quantify a trade between currencies! This is how you make money trading the Forex Market.

Forex Fear Factor

Most investors can easily understand the stock market, even though they do not understand the complete explanation of how a stock is priced or how brokers and traders, value a stock. Earnings Ratio and P/E are not that important to a beginning investor. He knows he owns a piece of a company something tangible and real.

A beginning investor also knows that his losses though not protected are limited if he only puts his money in big well known companies. So he buys Apple or IBM and he hopes he is buying when they are low and they will go up, but he also knows in time these shares will appreciate it and when they do he will sell. He owns them and he can sit on them for as long as he likes. He can borrow against them or sell them if he needs cash. He knows what is happening because he watches the internet and checks with his broker now and then. His stocks don’t move radically and he sleeps comfortably at night.

Slowly this new stock market investor decides to reach out a bit more, he gambles a bit and buys a 100 shares of a small company that he has read about, their shares are only a few dollars so his total investment is under 1000.00 even if the company goes broke his loss is at a minimum. He watches closely, reads more and slowly learns about the market.

This same investor who slowly waded out into the stock market pool and stayed on the shallow side until he could swim is scared to death to jump into the forex market.

He is scared of intangible items, assets that he cannot hold and values that he does not understand. If I explain to him that the euro is worth $1.30 he doesn’t understand. If I try and explain that that computer that costs $1000 in the US would only cost 630euros in Europe this doesn’t calculate because it doesn’t hold true and European product have VAT tax included also so it just complicates things. If I explain, that a man who has 630 euros in his pocket and is in the US and wants to buy that computer can go to the bank and exchange his money and get 1000.00 and buy that computer, this he understands, but then he asks, how did the bank know what that the euro was worth 1000.00usd and I reply that is today’s currency rate. Again we are back to a difficult and complex explanation.

So this man decides ok, I might put my toe in the forex pool and sit on the side, but tell me why is it so big, if I swim out there how will I ever find my way back. That is what he is thinking when I explain that he has to buy 100,000 worth of euros to make a trade, even though he only has to have a small amount in his account. Know he gets up and runs for his life; he has Forex Fear in his eyes.

The only way to get past this fear is knowledge, understanding and education. You can’t just start the engine and take off. You will crash and burn. You can make money trading currencies but you need education and support. That is one of the reasons most forex companies offer account managers and training.

Understanding What Influences Currency Prices

Forex prices are currency prices. Currencies are issued and controlled by governments. Currency does not have a set price or a suggested retail price or a manufactures price. You cannot break down the components of a currency to find its value and sell of parts of it.

Currency used to be on a gold standard, meaning that some coins were actually made from gold so they had a marketable known value around the world. Most currencies were backed by gold and were assigned value of gold and each country maintained gold reserves to equal the value of their currency.

As global trade markets grew the central banks needed a way to track and calculate the value of one currency against another and to allow international business to move funds from one country to the next, for example to purchase inventory or pay employees in another country.  In the latter half of the 20th century an international agreement was reached to allow currencies to go off the gold standard and to apply values to currencies and allow them to be traded on the open market.

This was the birth of the Forex market. Originally designed to allow central banks, governments and business to move currency more easily, today only 20% of the transactions are for actual use, 80% of the currency exchange is for investment purposes.

Once the countries and currencies were openly and easily traded a global exchange was open. The value of currency is based on the demand for a currency by the market, as it is no longer tied to any real asset value. Currency rates move freely.

There are all sorts of investors in the forex market, day traders, speculators, long term traders, investor’s pension funds and institutional as well as banks. Everyone is looking for profit. Each investor is hoping that the markets move in their favor, in this market, there is a loser for every winner. Each currency trade is matched with a counterpart. If you purchase 100usd there needs to be someone willing to sell you 100usd and at what value.

In order to make a successful trade you need to be able to predict market movement as well as determine entry and exit points and value. This is done by what is known as analysis, and there are two main types of analysis, these are fundamental and technical. Fundamental is based on news, information, facts, reports, and data. This information comes from many sources and the better the sources, the better your analysis. Most of the information comes from government economic data and reports and comments by acceptable sources such as the Director of the Federal Reserve, and then there are new sources, which affect the markets. If you knew the news from Libya, before it made the airwaves and internet sets, you could have bought oil before it moved up due to the shortage created a reduced production due to the war in Libya. There are government reports such as Jobs Report, Unemployment reports, Consumer Price Index and Consumer Confidence. Lately a lot of press coverage has been on GDP and debt.

Technical analysis is based on charts, graphs, historic information about price and movement. Technical analysis use charts and graph and apply formulas or rules to determine their results. These include Fibonacci Numbers, Pivot Points, MACD, Stochastic and Resistance/Support.

There are traders who only use Fundamental Analysis and there are traders who only use Technical Analysis. Good traders use both but rely heavily on one style or the other, but they know and understand each.