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What is Forex (Foreign Exchange)?
FOREX (FOReign EXchange
market) is an international foreign exchange
market, where money is sold and bought
freely. In its present condition FOREX was
launched in the 1970s, when free exchange
rates were introduced, and only the
participants of the market determine the
price of one currency against the other
proceeding from supply and demand.
As far as the freedom from any external
control and free competition are concerned,
FOREX is a perfect market. It is also the
biggest liquid financial market. According
to various assessments, money masses in the
market constitute from 1 to 1.5 trillion US
dollars a day. (It is impossible to
determine an absolutely exact number because
trading is not centralized on an exchange.)
Transactions are conducted all over the
world via telecommunications 24 hours a day
from 00:00 GMT on Monday to 10:00 pm GMT on
Friday. Practically in every time zone (that
is, in Frankfurt-on-Main, London, New York,
Tokyo, Hong Kong, etc.) there are dealers
who will quote currencies.
FOREX is a more objective market, because if
some of its participants would like to
change prices, for some manipulative
purpose, they would have to operate with
tens of billions dollars. That is why any
influence by a single participants in the
market is practically out of the question.
The superior liquidity allows the traders to
open and/or close positions within a few
seconds. The time of keeping a position is
arbitrary and has no limits: from several
seconds to many years. It depends only on
your trading strategies. Although the daily
fluctuations of currencies are rather
insignificant, you may use the credit lines,
that are accessible even to currency
speculators with small capitals ($ 1,000 -
5,000), where the profit may be impressive.
(You can learn more about it in the section:
The main principles of trading.)
The idea of marginal trading stems from the
fact that in FOREX speculative interests can
be satisfied without a real money supply.
This decreases overhead expenses for
transferring money and gives an opportunity
to open positions with a small account in US
dollars, buying and selling a lot of other
currencies. That is, on can conduct
transactions very quickly, getting a big
profit, when the exchange rates go up or
down. Many speculative transactions in the
international financial markets are made on
the principles of marginal trading.
Margin trading is trading with a borrowed
capital. Marginal trading in an exchange
market uses lots. 1 lot equals approximately
$200,000, but to open it it is necessary to
have only from 1% to 4% of the sum.
For example, you have analyzed the situation
in the market and come to the conclusion
that the pound will go up against the
dollar. You open 1 lot for buying the pound
(GBP) with the margin 1% (1:1000 leverage)
at the price of 1.49889 and wait for the
exchange rate to go up. Some time later your
expectations become true. You close the
position at 1.5050 and earn 61 pips (about $
405). For the calculation of 1 pip click
here.
Everyday fluctuations of currencies
constitute about 100 to 150 pips, giving FX
traders an opportunity to make money on
these changes.
In FOREX, it's not obligatory to buy some
currency first in order to sell it later.
It's possible to open positions for buying
and selling any currency without actually
having it. Usually Internet-brokers
establish the minimum deposit such as $
2000, for working in the FOREX market, and
grant a leverage of 1:100. That is, opening
the position at $100,000, a trader invests
$1,000 and receives $99.000 as a credit. The
major currencies traded in FOREX, are Euro (EUR),
Japanese yen (JPY), British Pound (GBP), and
Swiss Franc (CHF). All of them are traded
against the US dollar (USD).
In order to assess the situation in the
market a trader has to be able to use
fundamental and/or technical analysis, as
well as to make decisions in the constantly
changing current of information about
political and economic character. Most small
and medium players in financial markets use
technical analysis. Technical analysis
presupposes that all the information about
the market and its further fluctuations is
contained in the price chain. Any factor,
that has some influence on the price, be it
economic, political or psychological, has
already been considered by the market and
included in the price. The initial data for
a technical analysis are prices: the highest
and the lowest prices, the price of opening
and closing within a certain period of time,
and the volume of transactions.
A technical analysis is founded on three
suppositions:
> Movement of the market considers
everything;
> Movement of prices is purposeful;
> History repeats itself.
That is, technical analysis is a statistical
and mathematical analysis of previous quotes
and a prognosis of coming prices.
A number of technical indicators have been
installed into the trading system. Analyzing
the indicators one can come to the
conclusion about further movements of the
quoted currencies. For a more detailed
description of the indicators, analyzing
price charts and volumes of trading, click
here.
Fundamental analysis is an analysis of
current situations in the country of the
currency, such as its economy, political
events, and rumors. The country's economy
depends on the rate of inflation and
unemployment, on the interest rate of its
Central Bank, and on tax policy. Political
stability also influences the exchange rate.
Policy of the Central Bank has a special
role, as concentrated interventions or
refusal from them greatly influence the
exchange rate.
At the same time one should not consider
fundamental analysis just as an analysis of
the economic situation in the country
itself. A far bigger role in the FOREX
market belongs to the expectations of the
market participants and their assessment of
these expectations. Various prognoses and
bulletins, issued by the participants, have
a strong influence on the expectations. Very
often an effect of the so-called self-filfilling
prophecy occurs when market players raise or
lower the exchange rates according to the
prognosis. But a deep and thorough
fundamental analysis is available only for
big banks with a staff of professional
analysts and constant access to a wide field
of information.
In spite of these different approaches, both
forms of analyses complement one another.
Traders who act on the basis of a
fundamental analysis, have to consider some
technical characteristics of the market (the
main rates of support, such as resistance
and resale), and supporters of the technical
approach to the market must track the main
news (interest rates, important political
events).
The main merits of the FOREX market are:
� The biggest number of participants and the
largest volumes of transactions;
� Superior liquidity and speed of the
market: transactions are conducted within a
few seconds according to online quotes;
� The market works 20 hours a day, every
working days;
� A trader can open a position for any
period of time he wants;
� Low fees, except for the difference
between buying and selling prices;
� An opportunity to get a bigger profit that
the invested sum;
� Qualified work in the FOREX market can
become your main professional activity;
� You can make deals any time you like.
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How to earn?
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The
Main Principles of Trading
In contrast to exchange transactions
with real supply or real currency the
participants of FOREX use trading with a
margin deposit; i.e. marginal or
leverage trading. In marginal trading,
each transaction has two obligatory
stages (they can be divided by period of
time, which can be as long as you like):
buying (selling) of currency at one
price, and then selling (buying) it at
another (or at the same) price. The
first transaction is called opening the
position, the second one, closing the
position.
Opening a position, a trader furnishes a
deposit sum from 1 to 4 per cent of the
credit line, granted for the
transaction. So, in order to buy or sell
200,000 US dollars for Japanese yens,
you will not need the whole sum, but
only from 2000 to 8000 US dollars
depending on your policy of controlling
risks. When the position is closed, the
deposit sum returns, and calculation of
profits or losses is done. All the
profit or losses caused by the change of
currency rates is credited on your
account.
Let's take a
concrete example of getting a profit from
the changing the rate of the Euro, from
0,9162 to 0,9292. If you have anticipated
this change by using technical or
fundamental analysis, you can buy the Euro
cheaper for dollars, and then sell it back
at a higher price. For example, if you
choose leverage 1:100, then 99,000 dollars
of the credit line, granted by the Internet
broker, is added to 1000 dollars, and you
buy the Euro at the price of 0.9162. As a
result of this transaction we get: $ 100,000
/ 0.9162 = Euro 109.146, 47.
When the rate
changes (an average daily change of Euro is
about 70 to 100 pips), you close the
position and sell the Euro for dollars, but
at the rate of 0.9292. You get 109,146.
47*0.9292 =101,418.89 dollars. Your profit
is $ 1,418.89. The same transaction with
leverage 1:200 would give you $2, 837.78 of
profit, with leverage 1:50 the profit would
be 709.45, with leverage 1:25 - 354.72.
We'd like to
remind you that the higher the credit
leverage, the higher is your profit if the
fluctuation of the currency rate was
anticipated correctly. However, if your
anticipation was wrong, your losses will be
bigger.
One cannot feel
confident in the FOREX market without a
thorough knowledge of the terms used there.
Foreign exchange
quotes are a relation between currencies.
USDCHF - the
cost of $1 in Swiss Francs.
USDJPY - the cost of $1 in Japanese yens.
EURUSD - the cost of Euro 1 in US dollars.
GBPUSD - the cost of 1 GBP in US dollars.
That is, quotes are expressed in the units
of the second currency for a unit of the
first one. For example, quote USDJPY 108,91
shows that $1 costs 108,91 Japanese yens.
Quote EURUSD 0.9561 shows that 1 Euro costs
0.9561 US dollars.
The last figure
in the quote is called "pip". The cost of
the pip is different for every currency, and
depends on the leverage and current quote.
The formula for
calculating 1 pip is:
100,000/current
quote without commas * K
where K=1 at leverage 1:100,
K=2 at leverage 1:200,
K=0,5 at leverage 1:50,
K=0,25 at leverage 1:25.
Examples:
USDJPY = 108.91
leverage 1:100
100.000 / 10891 ? 1 = 9,18 USD
EURUSD = 0.9561
leverage1:200
100.000 / 9561 ? 2 =20,92 USD
GBPUSD and
EURUSD are direct quotes, i.e. when the
chart goes up, GBP and EUR become more
expensive, and when it goes down, the
currencies become cheaper. USDCHF and USDJPY
are backward quotes, and when the chart
grows, prices on CHF and JPY fall, and when
the chart goes down, the prices grow.
On direct quotes
you buy according to ASK and sell according
to BID. With backward quotes, you buy
according to BID and sell according to ASK .
Trading in the
FOREX market is realized in lots. When you
open a position, you can choose the number
of lots you want from 1 to 10. One lot
equals $ 100,000. The deposit sum for one
lot will vary from $500 to $2000, depending
on the credit leverage you choose. Leverage
is a financial mechanism that allows
crediting speculative transactions with a
small deposit. We give you an opportunity to
choose a credit leverage in the range of
1:200 to 1:25.
In the course of
trading you can fix your profit or cut off
your losses according to the commands LIMIT
and STOP that have been set up.
LIMIT is set up
higher than the current meaning of the
price.
STOP is set up lower than the current
meaning of the price.
With these
commands the positions is closed without
additional orders when the price reaches the
agreed level.
In the process
of trading you can create pending positions,
that will be activated when the price
reaches the agreed level (open price). When
creating and closing orders, a temporary
delay occurs, and lasts for about 30 to 40
seconds. When you make an inquiry, you are
given a real market price, which is the
current price at the moment of proposal, not
at the moment of inquiry.
The process of
trading is described in detail in section
Description of the Trade Terminal.
The main terms
that characterize the account:
Deal,
realization of 2 trade transactions, when
currency is bought (sold), and then the
reverse conversion is realized.
Balance, the sum on the account of a client
after the last transaction is conducted.
Floating Profit, the current profit on open
positions.
Floating storage, fee for postponement of an
opened position over midnight GMT.
Equity = Balance + Floating + Floating
storage.
Margin requirement, a necessary deposit sum
calculated according to the formula
100,000 / K + 100,000 / K,
where K = leverage, and the number of items
equals the number of open positions.
Percentage, index of an account.
Percentage = Equity / Margin Requirement. At
Percentage lower than 50 % it's impossible
to open new positions.
Margin call, condition of an account when
all opened positions are closed by the
Internet broker according to current quotes.
It occurs at a Percentage lower than 10%.
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Currency Market
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Foreign Exchange Markets
The main participants of a foreign
exchange market are:
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Commercial banks
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Exchange markets
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Central banks
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Firms that conduct foreign trade
transactions
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Investment funds
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Broker companies
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Private persons
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Commercial banks conduct the main volume
of exchange transactions. Other
participants of the market have their
accounts at the banks, conducting
necessary conversion transactions. Banks
accumulate (through transactions with
the clients) the combined needs of the
market in exchange conversions as well
as in calling and distributing money,
breaking with it into new banks. Besides
satisfying clients' requests, banks can
operate independently, using their own
assets. In the end, a foreign exchange
market is a market of interbank
dealings, and when speaking about the
exchange rates movement, one should bear
in mind the existence of an interbank
foreign exchange market. In
international foreign exchange markets,
international banks with the daily
volume of transactions of billions
dollars have the biggest influence.
These are Barclays Bank, Citibank, Chase
Manhatten Bank, Deutsche Bank, Swiss
Bank Corporation, Union Bank of
Switzerland, etc.
Exchange markets Contrary to stock
markets and markets for terminal
exchange dealings, exchange markets do
not work in a definite building and they
do not have definite business hours.
Thanks to the development of
telecommunications most of the leading
financial institutions of the world use
services of exchange markets directly
and via mediators 24 hours a day. The
biggest international exchange markets
are the London, New York and Tokyo
exchange markets. In some countries with
transitional economies there are
exchange markets for currency exchange
by juristic persons and for forming a
market exchange rate. The state usually
regulates the exchange rate in an active
manner, using the compactness of the
exchange market.
Central
banks control currency reserves, realize
interventions that influence the
exchange rate, and regulate the interest
investment rate in the national
currency. The central bank of the United
States, the US Federal Reserve Bank, or
"FED", has the greatest influence in the
international exchange markets. It is
followed by the central banks of
Germany, (the Deutsche Bundesbank or
BUBA) and of Great Britain (the Bank of
England, nicknamed the "Old Lady").
Firms that
conduct foreign trade transactions.
Companies participating in international
trade have a stable demand for foreign
currency (importers) and supply
(exporters). As a rule, these
organizations do not have direct access
to exchange markets, and they conduct
their conversion and deposit
transactions via commercial banks.
Investment funds. These companies,
represented by various international
investment, pension,and mutual funds,
insurance companies, and trusts, realize
the policy of diversified management of
portfolio of assets by placing there
money in securities of the governments
and corporations of different countries.
The world-know fund, Quantum, is owned
by George Soros, and it executes
successful exchange speculations. Big
international corporations as Xerox,
Nestle, General Motors a.o. that make
foreign industrial investments (creating
branches, joint ventures etc.), also are
firms of this kind.
Broker
companies bring together a buyer and a
seller of foreign currency and conduct a
conversion dealing between them. Broker
companies take a broker's fee. As a
rule, in the FOREX market there is no
fee as a per cent from the sum of a
transaction, or as a sum agreed in
advance. Usually the dealers of broker
companies quote currency with a spread,
that includes their fee. A broker
company, having the information about
the asked rates, is a place where the
real exchange rate is formed according
to closed deals. Commersial banks get
their information about the current
exchange rate from broker companies. The
biggest international broker companies
are Lasser Marshall, Harlow Butler,
Tullett and Tokio, Coutts, and
Tradition.
Private
persons. Natural persons realize a wide
range of non-commercial transactions in
the sphere of foreign tourism, transfers
of salaries, pensions, royalties, buying
and selling foreign currency. This is
also the biggest group that realizes
speculative exchange transactions.
The
working hours of the markets
Exchange
markets work all the time. Their work in
the calendar twenty-four-hour period is
started in the Far East, in New Zealand
(Wellington), passing the time zones in
Sydney, Tokyo, Hong Kong, Singapore,
Moscow, Frankfurt-on-Main, London, then
finishing the day in New York and Los
Angeles. The count of time zones begins
from the zero meridian in Greenwich near
London, and the time itself is called
Greenwich Mean Time (GMT). Depending on
the season (summer or winter), the time
in different financial centers of the
globe will differ from the GMT.
The working day of exchange brokers of
Western commercial banks starts, as a
rule, at 7:30 am by local time. At 8:00
am the dealers are already closing
deals. The morning hours are usually
devoted to short analyses of events on
the international exchange markets at
the moment. The dealers use economic and
technical analyses of the situation in
the market, read analytical articles in
newspapers, then exchange points of view
and the latest rumors with each other
and with dealers from other commercial
banks. On the basis of various data, a
picture of possible behavior of the
exchange rate on the coming day is put
together, with variants of all sorts of
possible events.
By 8:00
am the market, consisting of individual
dealers, will have worked out the
tactics of its behavior, and it enters
the operations of the international
exchange market, giving a new and
powerful impulse to the movement of the
exchange rate. Various territorial
markets can be given the following
characteristics of an average typical
activity during a 24 hour day.
Far East.
Here the most active deals in the market
are conversion transactions with the
dollar to the Japanese yen, the dollar
to Euro, Euro to yen, and the dollar to
the Australian dollar. Very often
fluctuations of exchange rates at that
time are insignificant, but there are
days when currencies, especially the
dollar against the yen, make
breath-taking flights. Especially so
when the central bank of Japan makes an
intervention. In Moscow its night and
morning at that time, so till noon one
can work with Tokyo, till mid-day with
Singapore.
Western
Europe. At 10:00 am Moscow time the
market in the European financial centers
of Zurich, Frankfurt-on-Main, Paris,
Luxembourg are open. However, the really
powerful movement of the exchange rate
against the main currencies starts after
11:00 am Moscow time, when the London
market is opened. This continues, as a
rule, for 2 to 3 hours, after that the
dealers of the European banks go to have
lunch, and the activity of the market
falls down a bit.
North
America. The situation livens up with
the opening of the New York market at
4:00 pm Moscow time, when dealers of
American banks start working, and when
European dealers come back from their
lunch. Powers of European and American
banks are about equal, that is why
fluctuations of the rate do not go out
of the limits of usual European
fluctuations. Nevertheless, exchange
dealers look forward to the opening of
the New York market in order to receive
fresh data about a possible movement of
the rate (the more so if the European
market has been sluggish). But when the
European market is closed about 7pm or
8pm Moscow time, aggressive American
banks, left alone on the "thin" market,
are able to cause a sharp change of the
exchange rate of the dollar against
other currencies.
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What is a FX speculator?
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In modern
conditions practically all financial
transactions in the market are
speculative by their nature, and there's
nothing abnormal or criminal in it. One
of the most vivid indices of markets'
globalization is their daily volume of
exchange transactions. Only in 10 major
financial centers it increased from 206
billion dollars in 1986 to 967 billion
dollars in 1992. According to the IMF,
on the whole the volume is over 1
trillion dollars a day, and on some days
it reaches 3 trillions. It is enough to
say that the volume of gold and foreign
exchange reserves of all developed
countries was only 555.2 billion dollars
in 1992, which is two times less than a
daily volume of market transactions.
According to some calculations, the
volume of exchange transactions is 40
times bigger that the daily volume of
foreign trade transactions. Therefore,
most of the deals are caused not by a
commercial necessity, but by financial
reasons. And a financial transaction is
always caused by the fact that money is
looking for some profitable usage.
The
international exchange system
functioning in the world at the moment
develops among people dealing with
exchange and financial transactions: the
so-called speculative psychology. In the
world where exchange rates fluctuate for
some per cent every week, where
currencies, that are considered to be
stable can lose 20 to 30 per cent of
their cost during a few months, it's
absolutely clear that the manager of a
fund, trying to compensate for
inevitable losses, has to use
speculative operations. For example, a
reasonable owner of dollars has to get
rid of them very quickly and exchange
them for Euro every time the expected
fall of the dollar against Euro
surpasses the difference between the
profit from American notes and the
profit from the respective German notes.
For instance, if in the coming months
the dollar is expected to fall against
the Euro by 6%, and the profit from
American notes is 6 per cent bigger than
the profit from German notes, a
speculator will probably decide to keep
dollars. If the gap in the interest
rates is less than the expected fall of
the rate, the "running away from the
dollar" begins.
Who are
these speculators? An analysis shows
that the main speculators acting in the
market are institutional investors.
Among them one can single out, first of
all, official state institutions, and,
secondly, private financial and other
institutions. Thus according to the
report of the "Group of Ten", state
investors in Europe and Japan keep about
20 per cent of their assets in the form
of foreign securities (in the USA only
7.5 per cent). However, the main feature
of the 1980s was the growing
international activity of private
financial institutions: pension funds,
insurance companies, and mutual funds.
The Globalization of international
financial markets is an objective
process, reflecting the growing degree
of economic relations in the world. It
promotes a more effective distribution
of financial resources.
Major
world exchange markets:
AMEX -
American Stock Exchange
BOVESPA - Sao Paulo Stock Exchange
CBOT - Chicago Board of Trade
CHX - Chicago Stock Exchange
CME - Chicago Mercantile Exchange
Commodities on the Web - List of the
commodities
LIFFE - London International Financial
Futures and Options Exchange
London Stock Exchange -London Stock
Exchange
Nasdaq
NYMEX - New York Mercantile Exchange
NYSE - New York Stock Exchange
SBF - la Bourse de Paris
SES - Singapore Exchange
SET - Stock Exchange of Thailand
TSE - Tokyo Stock Exchange
TSE - Toronto Stock Exchange
LSEX - London Stock Exchange
CBOE - Chicago Board Options Exchange
CBOE
PHLX - Philadelphia Stock Exchange.
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