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The Fed’s unexpected move, last Thursday, to raise the discount rate by 0.25% to 0.75%, sent shockwaves around the forex market – resulting in the US dollar to spiking to an eight month high against its major currency counterparts.

Though it has ended some emergency lending, the Fed is being very cautious with its actions for fear of spooking investors and thwarting the rebound in the housing market and the overall economy. Fed policy makers insist that “these changes are intended as a further normalization of the Federal Reserve’s lending facilities.” And that “the moves do not signal any change in the outlook for the economy or for monetary policy.”

Nonetheless, a hike in the discount rate sends a clear message that the Fed is anxious to withdraw some of the massive stimulus efforts rolled out throughout the recession. Some analysts even believe that if the economic recovery continues on its current path, then later this year, the Fed may begin to raise the broader federal funds rate- which do have a directly affect mortgage rates.

However, to fully understand the significance of last week’s increase in the Fed’s discount rate; one must review its context in recent history. By definition, the discount rate is the rate at which member banks may borrow short term funds directly from a Federal Reserve Bank. Almost three years ago, in August 2007, the central bank began to lower the discount rate as the credit crunch took hold with the collapsing subprime-mortgage market. In order to encourage cash-strapped banks to borrow funds –funds needed to carry them through the credit crunch, the Federal Reserve began to cut the discount rate to historically low levels. The Fed’s first policy action during the mounting financial crisis in the fall of 2007 was a mere 0.5% point reduction in its discount rate from 6.25% to 5.75% percent. While this action surprised most observers who had grown accustomed to focusing only on the Fed’s target Federal Funds rate, the decision made sense as the discount window and the discount rate were the best tool available to the Fed to deal with the upcoming financial crisis.

Historically it has been against the rules for banks to engage in arbitrage by borrowing at the discount rate and lending in the Fed Funds market at a higher rate. Having the discount rate higher meant that, in normal times, borrowing in the Federal Funds market would be less expensive than borrowing from the Fed. However, during unusual periods of reserve shortages in the banking system, the Federal Funds rate would be bid up above the discount rate and trigger borrowing from the Fed.

Borrowing from other banks in the Fed Funds market does not create new reserves for the banking system- instead it just transfers existing reserves among banks. While on the other hand, borrowing at the discount window, does create new reserves for the banking system and does increases the system’s capacity for expansion.

Back in September 2007, when the Fed deliberately choose to reduce the discount rate, but at the same time keep the Federal Funds rate unchanged, it was purposely increasing the probability that banks would shift their borrowing to the Fed and trigger reserve and monetary expansion. By reducing the discount rate, the Fed intentionally abandoned the traditional 1% differential in order to deal with the crisis. But this reduction was never intended to be permanent. As time went by, the Fed routinely kept cutting the discount rate, to its previous record low level of 0.5%.

The background described above suggests that yesterday’s action should not be taken as a tightening of monetary policy so much as the beginning of a return to the preferred relationship between the Fed’s two policy rates. The willingness of policymakers to raise the discount rate can be viewed as the latest sign that the economy is regaining its footing after tumbling into the worst financial catastrophe the world has seen since the Great Depression. The Fed is implying that conditions are beginning to return to normal, and therefore the next step is to push to banks to boost lending. While a raise in the discount of 25bps is far from real a significant number, the Fed is trying to send a none-too-subtle message that the U.S government can no longer continue to do business for virtual nothing. This first step towards “the beginning of the end of bailouts”.

Tomorrow investors will be better able to gain a better understand, both of psychology and the timing behind the unanticipated rate hike, as the U.S Federal Reserve Chairman Ben Bernanke will begin his two day annual Humphrey-Hawkins testimony on monetary policy before Congress. Investors around the globe are eager to hear more about the thinking, and logic behind the surprise timing of the move to raise the discount rate, after three years, especially as the Fed’s current easy monetary policy has been crucial to the economic recovery of the US.

If Bernanke’s statements “discourage an early monetary tightening policy” the dollar will likely fall against its major currency counterparts, and be forced to forfeit some of last week’s heavy gains. Already yesterday and this morning, the dollar fell against 12 of its 16 major counterparts on speculation that Bernanke will tell Congress that last week’s increase in the discount rate intent is not to drive up borrowing costs.

Trading currencies on the Forex is chock full of benefits for beginners, be it those experienced in other forms of trading like stocks or bonds, or those who literally are “newbies”. To start with, the Forex market is a unique venue where the promise of enormous payouts is actually feasible – alternatively though, it can also be a place where in the blink of an eye it can decimate all the equity in an account.  Historically, to be more specific in the years leading up to global consumer access to Forex trading, 90% of investors who were not banks or institutions would lose money trading currencies.  However, modern technology and the expansion of the FX market to a 3 trillion dollar a day entity has lowered that statistic considerably.  If you are careful, if you follow some simple guideline, you might not make a mint overnight – but you will see a steady flow of tangible results.

With that said: Below are a few tips at how to maintain a positive result in trading currencies.

1. Strategy
It is important that before you actually make a trade, you know what the end game for that trade is – up or down. The Forex is highly competitive market known for volatility and “unconventional” swings – think the internet bubble of the late 90’s although every single day.  If you trade without a strategy that will define your target gains and acceptable losses, you will lose out. A proper trading strategy will make sure that you trade using logic – a system of sorts – keeping your personal and emotional feelings out of it.  The most successful traders can get out of a position that has lost them money in the same demeanor as they do when it has made them money.  As well, a successful trader will never hold onto a winning position once it has reached their target – being able to get out of a position with a smaller profit, knowing that if you hold on a bit longer you could have a bigger profit is the mark of a truly disciplined and most probably successful trader.

2. Account management
The ability to regulate your account is vital.  Never “bet it all” but rather be conservative with the amount you trade.  If your trading company gives you 1:400 leverage, us 1:100 or 1:150 to preserve your equity and allow for more trades.  It is harder than it seems to actually do.  People tend to “go for broke” to try and reap the great reward all in one shot – this is called gambling.  Trading is a discipline and needs to be managed as such.  Disconnect yourself from the Ferrari’s and Yachts you dream of and think of this venture as a means to supplement your income.  I guarantee that in the end it will become your primary income – but you need to manage your account wisely and not recklessly in order to get there.

3. Familiarity
The best way to trade successfully is to trade what you know.  There are many who branch off into the “exotic” pairs of currency, like the Mexican Peso or Chinese Renminbi as the yields – that is the rate of return – tends to be higher, meaning you make more for less.  But if you are no familiar with the underlying fundamentals of the currencies you choose – you might be in for a short trip.  Trading involves a lot of technical elements, however as you are dealing with the national monetary instrument of a sovereign country, the fundamentals are just as, if not more important.  Think about what could happen to your position, say the US Dollar against the Mexican Peso, should a drug cartel assassinate the Mexican head of state.  Even though the charts and graphs might indicate that the Peso is set to soar against the Dollar, an event like that can make all the technical analysis moot – and send the Peso falling faster than you can click the sell button.

4. Read, Read, Read
Always read the data and the news, both political and financial. The key to make winning decisions is to keep current on market data, currency movements, and economic developments. Read national and global news that can make an impact on currencies. Forex currency trading is more about research. You should spend quality time studying market data and trends so you can make the right decisions.

5. Expect losses, they will happen
Not every trade is going to make you money.  There will be losses, sometimes the losses can come in waves – this is normal and will serve to test your strategy, your resolve, your discipline. Everyone who trades, no matter if it is currency, stocks, commodities or even used cars, experience losses – it is part of the game.  Being able to manage the risk and weather the losses with a disciplined approach as mentioned above will ensure that when the storm settles, you are still left on top.

There is no doubt that Forex is a highly profitable market. You can easily double your investment in a day but that should NEVER be a goal – because if it is, chances are you are more likely to lose it all in a day.  Currency trading is a risky proposition and takes a stomach of steel, mental toughness and, as I said before, a disconnect from the fact that YOUR money is on the line with each trade.

In the Forex trading world there are more traders who are losing money than who are making money. The reason for this could be because there is a lack of education in the Forex market.

There also might be issues with discipline in following through on their strategies. There are lots of reasons why Forex traders fail; there is only one reason for their success.

If you want to venture into successful Forex trading, the only thing that would propel you to success is by developing a Forex trading strategy that would suit your Forex trading activities as well as your lifestyle coupled with the right attitude that a Forex trader should have, that is, having the self-discipline needed in order to make good Forex trading calls.

A great way to be able to develop your own Forex trading strategy is through checking out different Forex trading tips and doing trial and error with a dummy account. Some of the best Forex trading tips are the following:

1. Be sure to be equipped with the right type of Forex education in order for you to have the right foundation. A Forex education will enable you to have the right start when you venture into the Forex trading industry.

2. You should trade not currencies, but pairs. You should be able to know the characteristics of the currency pair that you are going to trade. Making sure that you know what their impacts are on each other will help you determine and make rough calculations on your gains or losses, therefore, helping you make the right call.

3. Do not be too cautious or too tentative in trading. Although trading this way can make you earn small profits, in the long run, you will just be losing since you would have a higher risk in not being profitable.

4. If you haven’t developed a Forex trading strategy yet, make sure that you practice with a dummy account. Be sure, though, that the dummy account that you will be practicing with is close to the real thing to be able to give you the feel of what it would be like to trade in reality.

5. You should be independent in trading at all times. Seek advice from reputable sources, of course, however, you should also be able to analyze the trends and the signals and interpret them to your advantage.

6. Develop confidence in trading. The only way you can do this is to know everything you need to know about the industry and be able to apply them successfully.

The Forex trading world is a relatively easy thing to understand and to succeed in, eventually. Do not take shortcuts. Use these Forex trading tips to your advantage.

A Forex investment club starts with a desire to learn and a drive to become a great trader. Learning automated Forex trading software takes dedication and a good teacher. But once you learn how to trade and do so successfully your life will change and you have options and financial resources you never had before.