Forex Trading Online Guide for 2009.Read it Online for FREE Here.
Forex Overview
Forex, or the foreign exchange market (also commonly known as FX or simply, “currency”) involves trading one currency for another. Forex is by far and away the largest financial market in the world. Trades are made between large banks, central banks, currency speculators, multinational corporations, governments, and even the other financial markets. According to The Bank for International Settlements (BIS), a world-wide central bank organization, the average daily trade in the global forex and related markets is currently over three trillion US dollars – A DAY. This is several times larger than all the U.S stock markets combined. The trading is done from all round the world, with little or no hard cash changing hands.
Forex vs Stock Market
Two of the main differences between (and some would say advantages over) the forex market compared to the stock market are:
1. Trading hours. The forex market is open 24 hours a day. Trading is done over three continents, allowing a trader to trade continuously and to react immediately to events and new developments. The market opens on Sunday evening and closes Friday night.
2. Commissions. Electronic trading and competition have brought about a sizeable reduction in the bid-offer spread (the equivalent of commissions). The spread covers the risk of the market maker. The spread for the majors remain very low, but can increase as the liquidity of a specific currency drops. Despite recent reductions of commissions through online stock brokers, the Forex market is considered, by some, to have the lowest commissions relative to trade size when compared to other financial markets. This is also in part due to the 100:1 leverage offered by most trading houses. A client with a $10,000 deposit can leverage this to $1,000,000. Some electronic communication network brokerages have introduced a per trade commision alongside a narrow pip spread.
Many retail trading houses would suggest that the large size of the market makes it impossible for a speculator to affect the market. This is not quite the truth - the stakes are higher, larger quantities of money are involved, and the bigger banks spend a lot of time and effort trying to manipulate the market. Governments have been known to step in and affect prices.
“Buy the rumor, sell the fact.”
The price of a currency tends to anticipate the effect of a particular action before it occurs and, when the event comes to pass, react in the opposite direction. This is also referred to as a market being “oversold” or “overbought”.
Unlike the stock market, where retail clients (individuals) have access to almost exactly the same prices as all other participants, the Forex market has several different levels of access and therefore commission costs or spreads. At the top are the largest investment banking firms such as Citi and Deutsche Bank, where the spreads or the difference between bid and ask prices are tiny. These spreads are a closely guarded secret, not normally known outside the inner circles of international finance.
Further down the trading chain, the spreads become wider. Basically, the larger the volume of trades, the narrower the spread. After the major top-tier banks come the smaller investment banks, large multi national corporations, pension funds, insurance companies and, more recently, some of the major retailers. Retail traders are a small fraction of the market and may only participate indirectly, through brokers or banks.
There are many influences on the value of currency when compared to other currencies, but the Forex market is almost a pure supply and demand market. Demand rises or supply falls, prices rise and vice versa. Electronic trading is slowly increasing in the Forex market with Algorithmic trading increasing also.
Spreads in Forex Trading
The BID price is the price at which a client can sell a unit of the base currency (in return for buying the secondary currency) and the ASK/OFFER price is the price at which a client can buy a unit of the base currency. For example, if the quote for the exchange rate of the Euro/U.S. Dollar in the market is 1.2583/1.2586, this means that the client can pay $1.2586 in order to buy one Euro (the base currency) and will receive $1.2583 if one Euro is sold. The BID price is lower than the ASK price and the difference or ’spread’ between the two numbers is measured in ‘pips’ (3 pips here) and represents the profit of the dealing room or trading house.
Useful Foreign Currency Links:
Bank for International Settlements (BIS)
The Bank for International Settlements is an international organization of central banks which exists to “foster cooperation among central banks and other agencies in pursuit of monetary and financial stability.”
Federal Reserve Bank of New York
The Federal Reserve Bank of New York carries out foreign exchange-related activities on behalf of the Federal Reserve System and the U.S. Treasury. In this capacity, the Bank monitors and analyzes global financial market developments, manages the U.S
Bloomberg’s Benchmark Currency Rates
This is a regularly updated chart which displays the cross rates of eight major currencies.
The Financial Times Currency Market Data
Currency cross rates and histories. Data supplied to this feed is at least 10 minutes delayed.
XE.com
XE offers a paid subscription to the XE data feed, real time currency conversions and links to learning facilities and online trading houses.
The National Futures Association
NFA’s Background Affiliation Status Information Center (BASIC) allows investors to quickly and easily check the registration status and disciplinary history of every forex trading firm and individual conducting futures business with the retail public
Bretton Woods System
Bretton Woods and the IMF. The international monetary regime that prevailed from the end of World War II until the early 1970s.
The Royal Bank of India - for the common man
“Welcome to this outreach effort of the Reserve Bank of India - India’s central Bank. As the central bank of the country, we endeavour to preserve the value of your money in more than one way; empowering you with information on how to preserve your w
Forexfactory
An in-depth monologue on the function and structure of Forex brokers
Market Influences
Economic
Economic policy adopted by government agencies and central banks, economic conditions revealed through economic reports, and other economic indicators including government fiscal and monetary policies.
Government budget deficits or surpluses: The market usually reacts positively to tight budgets and surpluses; negatively to increased deficits.
Balance of trade levels. The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country’s currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation’s economy. For example, trade deficits may have a negative impact on a nation’s currency. This can work in reverse also - a large drop in the value of a currency can stimulate trade by making goods and services sold in the currency proportionataly cheaper.
Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. Inflation erodes purchasing power and therefore demand for that particular currency.
Economic growth and health. Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization, detail the levels of a country’s economic growth and health. Generally, the more healthy and robust a country’s economy, the better its currency will perform.
Political
Political strife and upheaval tends to have a negative impact on a nation’s economy and subsequent currency values. The coming to power of a political faction that is perceived to be fiscally responsible can have a positive effect. Also, events in a neighboring country can affect its currency.
Psychological
Unsettling international events can lead to investors seeking a “safe port,” for their money.There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts.
Currency markets often move in visible long-term trends. Cycle analysis looks at longer-term price trends that may arise out of economic or political trends. Accumulated price movements in a currency pair such as GBP/USD can form apparent patterns that traders attempt to use to predict future movements. Many traders study price charts in order to identify these patterns.
Retail Forex Trading
Retail forex brokers or ” market makers ,” working on behalf of retail clients only handle a tiny fraction of the forex market. One retail broker estimates the total retail volume at $25–50 billion daily, which is approximately 2% of the whole market. Nonetheless, this is a substantial market for the individual trader and the ready availability of good quality trading platforms means this is an ever growing segment.
Where to begin forex trading
There are now a large number of online brokerage houses offering trading facilities. This is by no means a complete list, but a good place to start.
Online Brokerages:
Deutsche Bank Forex
dbFX is Deutsche Bank’s online forex platform, offering a free demo account with a starting balance of $50,000 in virtual money.
FOREX.com
FOREX.com is a wholly owned subsidiary of the GAIN Capital Group, also offering a free $50,000 practice account, real-time market information, online courses and forex workshops.
AVA FX
AVA offer an “easy to use” trading platform, a $100,000 practice account a wide range of currency pairs and accounts from only $100.
Saxo Bank
Saxo is a major European bank offering a full range of online trading services including forex and a browser based trading platform that allows mobile phone access.
GCI Financial
GCI offer 200:1 leverage with a 0.5% margin requirement.
Currency Pairs
Currency prices can only fluctuate relative to another currency, so they are always traded in pairs. Two of the most common currency pairs are the price for euros in US dollars EUR/USD and the price for the British pound in US dollars GBP/USD
Leverage
Most Forex brokers permit 100:1 leverage, some as much as 200:1, but also require that you have a certain amount of money in your account to protect against a critical loss point. A $100,000 position held in GBP/USD on 100:1 leverage means the trader has to put up $1,000 to control his position. However, in the event of a decline in value, Forex brokers do not allow traders to go negative. In order to make sure the trader does not lose more money than is held in the account, forex brokers employ automatic systems to close out positions should a client run out of margin (the amount of money in their account not tied to a position). If, for example, you have $2,000 in your account, and buy a $100,000 lot of EUR/USD, $1,000 of your $2,000 is tied up in margin, with $1,000 left to allow your position to fluctuate downward without being closed out.
An online trading platform will show three important numbers associated with your account: balance, equity, and margin remaining. If you have a $10,000 account and open one $100,000 position using 100:1 leverage, this has committed only $1,000 of your money plus you must maintain $1,000 in margin. While this leaves $9,000 free in your account, it is possible to lose it all if the position moves the wrong direction.
Commissions or Spreads
Brokers take part or all of the spread in all currency pairs traded. Here is an example:
EUR/USD. Prices are always quoted with both bid and offer prices ( Buy EUR/USD 1.2000, Sell EUR/USD 1.2003). That difference of 3 pips is the spread and can amount to a substantial amount of money. Because the standard lot is 100,000 units of the base currency, 3 pips on EUR/USD means $30 paid to the broker. A pip is the smallest amount the currency is traded in - 1/100th of a percent in the case of the US dollar. The currency pairs are always purchased by buying 100,000 of the quote currency , also known as the counter currency. For the pair EUR/USD, the base currency is USD, therefore 1/100th of a percent on a pair with USD as the base currency will always have a pip of $10. If, on the other hand, your currency has British Pounds as a base instead of US dollars, then 1/100th of a percent is now worth around $20, because you are buying 100,000 units of British pounds. Retail forex brokers make a lot of money without charging commissions.
Most Traded Currencies
1 United States dollar USD $
2 Eurozone euro EUR €
3 Japanese yen JPY ¥
4 British pound sterling GBP £
5 Swiss franc CHF Fr
6 Australian dollar AUD $
7 Canadian dollar CAD $
8 Swedish krona SEK kr
9 Hong Kong dollar HKD $
10 Norwegian krone NOK kr
BIS Forex News:
06Feb/Alan Bollard: Coping with global financial and economic stresses
…lending, encouraged banks to use emergency lending facilities, and arranged swap lines with each other to ease foreign exchange shortages in offshore markets. Troubled financial institutions had to be rescued with the use of public…
30Dec/Financial globalisation and emerging market capital flows
…of greater development and foreign participation in local currency debt markets; exchange rate volatility and foreign exchange market intervention; Increased cross-border bank flows and their implications for financial stability,…
30Jan/China: the evolution of foreign exchange controls and the consequences of capital flows
BIS Papers No 44 143 China: the evolution of foreign exchange controls and the consequences of capital flows People’s Bank of China I. Introduction With the adoption of market-oriented economic system reforms and the opening-up policy…
Major Currency Traders:
Deutsche Bank
UBS AG
Citigroup
Royal Bank of Scotland
Barclays Capital
Bank of America
HSBC
Goldman Sachs
JPMorgan
Morgan Stanley
Trading Strategies and Types
Forwards
In this transaction, money does not change hands until some agreed upon date in the future . The buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be anywhere from a few days to several years.
Futures
Futures are forward transactions with standard contract sizes and maturity dates. The average contract length is approximately 3 months. Futures contracts are usually inclusive of interest.
Swaps
The most common type of forward transaction is the currency swap. In a swap, two parties agree to exchange currencies for a certain length of time and reverse the transaction at a later date. These are not contracts, are not traded through an exchange and not generally available to the retail trader.
Spot
A two-day delivery transaction, as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included.
Scalping
Scalping is a trading strategy in which the trader makes dozens or even hundreds of trades daily, looking to capture a few pips per trade. Generally, scalpers stay in trades for less than a minute, getting out as soon as their position captures a few pips. Scalpers often trade with electronic communication network (ECN) brokerages, which circumvent the dealing desk allowing online traders to trade directly with one another. ECN brokerages usually have less liquidity than dealing desk brokerages and charge a per trade commission, but their pip spreads are narrower. To be a successful online Forex scalper, traders must follow strict risk management rules. One big loss can wipe out dozens of succesful trades. Traders should be sure to use stop loss orders, ensuring that the profit/loss margin on each trade is very small.
Carry
An online Forex strategy which takes advantage of the different interest rates between two currencies. If one currency has a relatively low interest rate it can be sold against a currency with a high interest rate and the trader may pocket the interest rate differential. Speculators are guaranteed rollover interest deposits in their account at the end of each trading day. This can provide a significant boost to profit. Even when exploiting interest rate differentials, there are still significant risks to a trader - the market can still move against the trader’s position, though the rollover interest adjustments do help mitigate potential losses. Most carryover traders use high leverages to exploit interest rate differentials, meaning even a small move against a position can lead to very high losses.
Option
The owner of an option has the right but not the obligation to make an exchange at a pre-arranged rate on a specified date.
Systems
There are more Forex Trading Systems , than fleas on a dog. Fibonacci analyses of market fluctuations, “Secret Trading Formulas,” “Set and Forget,” with automatic trades being done. No doubt some of these systems will work some of the time, but picking the jewels from the junk is not an easy matter.
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How to Start Trading Forex
Starting out trading forex is a very simple proposition: sign up with an online broker, download any software, deposit some money and you are ready to trade. Most of the reputable brokerage firms have a practice account facility where they will open an account, deposit fake money into the account and allow you to start trading in real time.
Leverage in Forex Trading
Currency movements are measured in “pips” or fractions of a decimal point depending on the currency involved.
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