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Forex - Foreign Exchange Market
What is FOREX?
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.
Only the participants of the market determine
the price of one currency against the other
proceeding from supply and demand.
The high trading volume of almost $2 trillion
dollars traded each day makes the forex market
a very liquid one -- it is the biggest liquid
financial market. According to various assessments,
money masses in the market constitute from 1.5 to
2 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 and online forex trading 24
hours a day from 00:00 GMT on Monday to 10:00 pm
GMT on Friday. In practically every time zone (that
is, in Frankfurt-on-Main, London, New York, Tokyo,
Hong Kong, etc.) there are dealers who will quote
currencies if you're looking to
learn forex trade rates.
In our opinion, the FOREX is a more objective
market -- if some participants would like to change
prices for some manipulative purpose, they would
have to operate with tens of billions dollars. That
is why we believe any influence by a single
forex broker 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 online
currency trading strategies. Although the daily
fluctuations of currencies are rather insignificant,
you may use margin up to 100:1. This is why currency
speculators with small capital of $ 5,000 - $50,000
can profit or loss from small
forex rate moves in the currency market.
The idea of marginal trading stems from the
fact that in FOREX speculative interests can
be satisfied without a hundreds of thousands
of dollars. This decreases overhead expenses
for transferring money and gives an
opportunity to open positions with a small
amount of US dollars. That is, one can
conduct transactions very quickly, getting a
big profit or loss, 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
US$100,000, but to open it is necessary
to have only from 0.25% to 1% 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 of 100:1 meaning you
margined US$1,000 at the price of 1.7700 and
wait for the exchange rate to go up. Some
time later your expectations become true.
You close the position at 1.7800 and earn
100 pips or 1 cent for a return of $1,000.
Remember you could have lost $1,000 also if
the GBP/USD went to 1.7600. This is why we
recommend the use of stop-loss orders to
help protect your investment. For the
calculations of pips please call +1
617-820-5254. Some pip values stay constant,
but some do change. The constant pip values
are 1 pip of the EUR/USD, GBP/USD and AUD/USD
equals US$10 per US$100,000 position.
Everyday fluctuations of currencies average
about 100 to 150 pips, giving FX traders an
opportunity to make or lose 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. This is why margin is used. 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.* "Past performance
is not indicative of future results"
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.
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-fulfilling 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).
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Section Information
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Section Specific
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Learning Center
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Unfamiliar with Forex
trading? Visit International Foreign
Currency's
Learning Center
for a wealth of information about
the Forex market.
 Basics
Great if you're new to the foreign
exchange market.
 Essentials
Learn the mechanics of Forex
trading.
 Pro
A look at sophisticated
Forex trading strategies
and methods.
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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 24 hours a day, 6 days a
week
- A trader can open a position for any
period of time he wants
- No fees, except for the difference between
buying and selling prices (bid/ask spreads)
- An opportunity to get a bigger profit that
the invested sum, but you limit your loss to
no more than what you invest
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 US$250 to US$1,000, granted
for the transaction. So, in order to buy or
sell US$100,000 for British Pounds (Cable,
you will not need the whole sum, but only
from 500 to 2000 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 1.3000 to 1.3200. 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 US$1,000 of
margin will be transfer from you CASH
account into your margin account and you
purchase/BUY 1 lot of the EUR/USD (EURO Vs.
USD meaning you are buying EURO and Selling
US Dollar) at price of 1.3000.
When the rate changes and you close the
position and sell the EUR/USD, but at the
rate of 1.3200, you receive US$2,000 + your
margin of US$1,000 for a profit of US$2,000
[1.3200-1.3000 = 200 pips (each pip = $10)
200 pips * $10*1 Lot = US$2,000]. The same
transaction with leverage 200:1 would give
you a profit of US$4,000 if you had placed a
2 lot (remember with 200:1 the margin is
only US$500 per $100,000 position)
[1.3200-1.3000 = 200 pips (each pip = $10)
200 pips * $10 *2 lots = US$4,000.
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
larger also.
Past performance is not indicative of future
results.
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 1.3000 shows that 1 Euro costs
0.7692 US dollars.
Participants of a foreign exchange market
The main participants of a foreign exchange
market are:
- Commercial banks
- Exchange markets
- Central banks
- Firms that conduct foreign trade
transactions
- Investment funds
- Broker companies
- Private persons
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. Commercial 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 7p m 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.
What is a FX Speculator?
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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