Forex Trading
Online forex trading offers a wide range of benefits that other forms of investing can’t match. Unlike the stock market, the fact that different currencies are always moving up and down means that there will never be a “bear market” - there will always be the ability to make (or lose) money in the marketplace. You success is determined simply by your choice of currencies to invest in for the short term or the long term. In addition, it differs from the stock market in that all traders have access to the same numbers.
Unlike some methods of investing, the forex trading system is actually split into multiple levels of access. The size and financial power of the trader or institution is what determines the level of access. The very top tier of the forex market is the inter-bank market, where each forex trader is a large investment banking firm. These firms, along with high-worth individuals, were the original traders in the forex market, before it became popular with smaller institutions who wanted to take advantage of the many benefits of this type of investing. Even the best forex broker doesn’t have access to the razor sharp spreads in the inter-bank market, unless they are a member of the elite circle that has access to the very top tier.
In the lower levels of access — that is, those available to average online forex traders - the spread (the difference between the bid price and the asking price) can grow wider and wider. Without the assistance of a forex broker, individuals can’t access the market at all. However, the Internet has given rise to a whole industry of forex brokers who cater to the individual investor. If you’re currently looking for one, be sure to check out our directory.
Defination of FOREX
(Foreign Exchange) Market
The foreign exchange
(currency or forex) market
exists wherever one currency is
traded for another. Forex market
is the largest market in the
world, in terms of cash value
traded, and includes trading
between large banks, central
banks, currency speculators,
multinational corporations,
governments, and other financial
markets and institutions. Retail
traders (small speculators) are
a small part of this market may
only participate indirectly
through forex brokers or market
maker like MoneyForex Financial
or banks.
The Foreign Exchange
Market
With international trade, the
currency of one country must be
exchanged for that of another
for settlement of a transaction.
Institutions and corporations in
the international market place
oftentimes need a certain
currency to complete a deal, or
to guard themselves from the
effects of currency swings and
rate changes. This system
involving the exchange of
different currencies has created
the Foreign Exchange market, or
FOREX, or FX. and more correctly
known as the Global Interbank
Currency Exchange Market.
Like stocks, gold and real estate investments, Foreign Exchange has become a very important tool for the investment community. Forex trading provides certain additional advantages:
Margin System
You can enjoy the benefits of
leverage on contracts up to
fifty times your margin deposit.
That is, with 1% of the absolute
value of contracts, you can
enter the largest marketplace in
the world. As long as you are
able to maintain your margin
requirements on the full
contract value, you can remain
indefinitely in the market.
Maximum Liquidity
Being the largest market in the
world with over $1.6 Trillion
bought and sold daily, huge
volume of transactions are
readily executed and cleared.
Unlike futures or the stock
market, there is never a lack of
buyers or sellers on the forex
market. Therefore, it gives the
investor the prerogative to open
or close a position at will.
Attractive Pricing
Forex quotes are based on spot
prices regardless of the
transaction size. Prices are
quoted on a net basis.
Effective Execution
Forex trade orders are executed
and confirmed online or manually
via a recorded phone call.
Customers know immediately the
rate at which the order is
executed. Confirmed orders will
always receive a single price
execution.
Flexible Settlement
Forex system contracts opened
can be rolled over daily for an
indefinite period subject to
roll-over fees.
Hedging Tool
Investors involved in
international trade can minimize
their currency exposure risks by
using a Forex trading system.
Operation Of The Forex
Market
The International
Forex Market is a
non-physical market and has no
central exchange. The major
participants in this foreign
exchange trading market are
Central Banks, prime
multinational banks, large
corporations, brokerage houses
and individual investors. Forex
agents offer various services to
investors, including financial
analysis, information gathering
and market situation updates.
Most transactions are conducted
via the telephone or through
online forex trading systems.
The high liquidity in the forex
market is due to the enormous
volume of transactions generated
by the primary market called the
“interbank
market” where banks, large
financial institutions,
insurance companies and other
large corporations deal with
each other in huge quantities to
manage their own currency risks.
The secondary over-the-counter
market, where retail clients
participate in forex
transactions, has benefited from
this liquidity provided by the
big institutions.
The growth of the average daily volume of Forex trading has been phenomenal and is now currently trading currency to the tune of $1.6 trillion a day, having grown 50% in the last decade from an already large $1.0 trillion a day in 1992. It reached a high level in 2001 with approximately $2.2 trillion but adjusted back to the current $1.6 trillion by 2003. This was likely due to the birth of the single Euro currency in place of the then existing 12 European currencies.
The largest part of the largest financial market in the world consists overwhelmingly of speculation, in the form of spot forex trades (95%). The remaining 5% consists of companies swapping currencies back to their home currency to repatriate profits, forwards moves, and all other transactions.
The Traded Currencies
The six major
currencies of Forex dominate the
overall market share. 76% of all
trades have both currencies in
the currency pair as a major,
and more than 98% of all trades
involve at least one major.
Both of these figures are well
beyond what would be expected if
foreign currency trading were
based solely on the majors’
share of world GDP (74.5%),
demonstrating the value the
majors command abroad relative
to other currencies. Another way
thinking about the majors’
predominance in the currency
markets is to compare the rest
of the world’s economic output
(25.5%), to the less than 2%
share of Forex speculation that
does not have a major on either
side of the currency pair.
The most common currency pairs
are EUR/USD (30%), USD/JPY
(20%), GBP/USD (11%), and USD/CHF
(5%), which together totals 66%
(two-thirds) of all Forex spot
trades.
The Dollar, Euro, Yen, and Pound are the most traded currencies. The six majors combine for a huge bulk of the trading transactions in a single day. Corporations and banks have known this for years, and have often used Forex for hedging purposes. With the increase in global trade, multinational corporations have likewise used the forex market to manage their risk in changes in currency rates.
Source: MoneyForex: Bank of International Settlements, Triennial Central Bank Survey.
Why Trade Forex?
The transformation of the world
economy into a global dimension
and the dawn of technological
advancement create unprecedented
opportunities particularly with
the emergence of new markets
with considerable growth
potential. This scenario
likewise underscores the fact
that up-to-date information in
this modern age is a valuable
commodity made possible by
breakthroughs in information
technology. Now world events are
digested in a matter of seconds
providing the backbone for vital
investment decision making.
Among the most dynamic of the
markets which is highly
sensitive to political and
economic changes is the Foreign
Exchange Market (FOREX).
Whether we like it or not, radical changes in forex exchange rates affect an individual’s or institution’s overall investment portfolio. If your holdings are all in US Dollars, you have chosen to hold the dollar and give up other major currencies. Indirectly, this makes you a currency investor. By investing in, and with, the US currency, then your portfolio becomes dependent on the integrity and value of the US Dollar. Without realizing it, this may have worked against you due to the decline of the value of the US Dollar against other major currencies.
The FOREX market provides the investor a valuable tool in managing the effects of the foreign exchange risk by taking advantage of fluctuations in exchange rates. It is a means by which one can readily access this global market 24 hours a day and be able to hedge his/her outstanding US Dollar-based holdings. In a time when the speed of business increases on a daily basis, you need the ability to react swiftly. This change has created a condition that may leave investors out of the game without being aware of lost opportunities or erosion in their capital assets.
