Understanding Forex Trading

The Foreign Exchange market, also referred to as the “Forex” or “FX” market, is the largest financial market in the world, with a daily average turnover of well over US $1 trillion - 30 times larger than the combined volume of all U.S. equity markets. The word FOREX is derived from the words FOReign EXchange.

Spot and Forward Foreign Exchange

Forex trading may be for spot or forward delivery. Spot transactions are generally undertaken for an actual exchange of currencies - delivery or settlement - for a value date two business days later.

Forward transactions involve a delivery date further in the future, sometimes as far as a year or more ahead. By buying or selling in the forward market, it is possible to protect the value of any anticipated flows of foreign currency, in terms of one's own domestic currency, from exchange rate volatility.

Difference Between Foreign Currency and Foreign Exchange

Anyone who has traveled outside their country of residence would have had some exposure to both foreign currency and foreign exchange.

Forex trading may be for spot or forward delivery. Spot transactions are generally undertaken for an actual exchange of currencies.

For example, if you live in the United States and travelled, lets say, to London, England you may have exchanged your home currency i.e. US $ for British Pounds. The British Pounds are referred to as a foreign currency and the act of exchanging your US $ for British Pounds is called foreign exchange.

The Foreign Exchange Market

Unlike some financial markets, the foreign exchange market has no single location as it is not dealt across a trading floor. Instead, trading is done via telephone and computer links between dealers in different trading centres and different countries.

The FX market is considered an Over The Counter (OTC) or ‘interbank’ market, as transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as it is with the stock and futures markets.

Reasons for Buying and Selling Currencies

Through the mechanism of the foreign exchange market companies, fund managers and banks are enabled to buy and sell foreign currencies in whatever amounts they want. The demand for foreign currency is stimulated by a number of factors such as capital flows arising from trade in goods and services, cross-border investment and loans and speculation on the future level of exchange rates. Exchange deals are typically for amounts between $3 million and $10 million, though transactions for much larger amounts are often done.

There are two basic reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation.

Currency Speculation

Speculators desire to trade forex for the opportunity to profit from a movement in currency exchange rates. For example, if a trader believes that the Euro will weaken relative to the U.S. dollar, then the trader can sell Euros against U.S. dollars in the Forex market. This is referred to as being "short Euros against the dollar" which, from a trading perspective, is the same as being "long dollars against the Euro". If the Euro weakens against the dollar, then the position will profit

For speculators, the best trading opportunities are usually with the most commonly traded and therefore most liquid currencies, called “the Majors.” Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

True 24 Hour Market

Forex is a true 24-hour market and trading begins each day in Sydney, and moves around the globe as the business day begins in each financial centre, first to Tokyo, then London, and then New York. Unlike any other financial market, traders can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.

As with all financial products, FX quotes include a "‘bid" and "offer". The "bid" is the price at which a dealer is willing to buy - and clients can sell - the base currency for the counter currency. The "offer" is the price at which a dealer will sell - and clients can buy - the base currency for the counter currency.

The US Dollar is the Centre-piece

The US dollar is the centre-piece of the Forex market and is normally considered the "base" currency for quotes. In the “Majors,” this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The exceptions to USD-based quoting include the Euro, British pound (also called Sterling), and Australian dollar. These currencies are quoted as dollars per foreign currency as opposed to foreign currencies per dollar.

What Affects the Currency Prices

Currency prices are affected by a variety of economic and political conditions, most significantly interest rates, inflation and political stability. Moreover, governments sometimes participate in the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price. This is known as Central Bank intervention.

Any of these factors, as well as large market orders, can cause volatility in currency prices. However, the size and volume of the Forex market makes it impossible for any one entity to "drive" the market for any length of time.

Currency traders make decisions using both technical factors and economic fundamentals. Technical traders use charts, trend lines, support and resistance levels, and numerous patterns and mathematical analyses to identify trading opportunities. Fundamentalists predict price movements by interpreting a wide variety of economic information, including news, government-issued indicators and reports, and even rumour.

Rewards and Risks in the Forex Trading Market

Trading foreign currencies is a challenging and potentially profitable opportunity for educated and experienced traders.

However, there is considerable exposure to risk in any foreign exchange transaction. Any transaction involving currencies involves risks including, but not limited to, the potential for changing political and/or economic conditions that may substantially affect the price or liquidity of a currency.

Moreover, the leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin call within the time prescribed, your position will be liquidated and you will be responsible for any resulting losses.

Before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, you should not invest money you cannot afford to lose.

As an investor you may lower your exposure to risk by employing risk-reducing strategies such as "stop-loss" or "limit" orders.

There are also risks associated with utilizing an Internet-based deal execution software application including, but not limited to, the failure of hardware and software.

Stephen S Alison is a retired "bean counter" who spent 26 years in middle management positions for major US financial institutions in Europe and a further 10 years as an adviser/consultant to a number of European financial institutions. He owns and operates a number of "hand built" niche websites including: http://www.24carat-gold.com http://www.forex-arbitrage.com

FOREX Scam: How to Catch a Scammer

FOREX is huge business. It’s the mamma of all industries. Almost $3 trillion dollars is exchanged on the Forex currency market every day. With all that money going around, it’s no surprise that there are scammers and hyenas everywhere. You don’t hear of too many scams in the Bonsai tree market, do you?

There is a forex scam problem in the education section of the market in particular, because it isn’t as regulated as the other sections – the forex dealer, broker, institution side. The latter need licenses, government certificates etc., to operate. However, these so called “forex gurus” that show you how to make a killing following their trading systems - they don’t need any certification to operate. They spring up like weeds and no one really keeps them in check.

Ok, I’m going to show you now a quick 1 minute test that you can do to spot if a product, company or a “guru” is a forex scam. Don’t do or buy anything until you do this:

Go to Goo and search:

“Name of product/person” and forums

“Name of product/person” and scam

“Name of product/person” and refund

People who have been scammed usually complain in forex chat forums. People who want to purchase forex products also visit these forums to hear the opinions of others. There are also a few independent websites around which keep tabs on these scammers. You’ll dig up a lot of good, quick information and if you don’t and the company or product has been around in the market for a while, you are most likely fine and it’s all legitimate.

Other things to do? Use COMMON SENSE.

1. Price. If they’re selling an educational product and the price is too low it could be a ‘teaser’ type, meaning they’re trying to catch you only to sell you something more expensive later. If its way too expensive – it’s an automatic red flag.

2. Refund. If there is no money back guarantee, don’t even bother. Move on.

3. Pages. Don’t be fooled by pages. If they are advertising their product with “You Get 14352” pages as their main selling point, it’s a forex scam. They’ve more likely than not copied the information from some freely available place where you could find it as well. There is probably no original content there. Why would it take someone 14534 pages to explain something that they’re supposedly an “expert” about?

Common sense. That’s all it is. Unfortunately, that is the only safeguard available to the retail forex participant.

Jovan Vucetic runs Margin-Strategies.info which provides unbiased reviews of Online Forex Trading Systems. Margin-Strategies.info is about helping the Forex trader develop both mind and method.

 

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