Sunday, February 22, 2009
Wednesday, February 18, 2009
Market Hours
Forex
24-hour a day from 03:00 a.m. Monday till 12:00 a.m. Saturday. Including (approximately):
Japan 03:00 a.m. — 09:30 a.m.
Continental Europe 09:30 a.m. — 04:00 p.m.
Great Britain 11:30 a.m. — 06:30 p.m.
USA 05:30 a.m. — 12:30 a.m.
24-hour a day from 03:00 a.m. Monday till 12:00 a.m. Saturday. Including (approximately):
Japan 03:00 a.m. — 09:30 a.m.
Continental Europe 09:30 a.m. — 04:00 p.m.
Great Britain 11:30 a.m. — 06:30 p.m.
USA 05:30 a.m. — 12:30 a.m.
Market Hours
Forex
24-hour a day from 03:00 a.m. Monday till 12:00 a.m. Saturday. Including (approximately):
Japan 03:00 a.m. — 09:30 a.m.
Continental Europe 09:30 a.m. — 04:00 p.m.
Great Britain 11:30 a.m. — 06:30 p.m.
USA 05:30 a.m. — 12:30 a.m.
24-hour a day from 03:00 a.m. Monday till 12:00 a.m. Saturday. Including (approximately):
Japan 03:00 a.m. — 09:30 a.m.
Continental Europe 09:30 a.m. — 04:00 p.m.
Great Britain 11:30 a.m. — 06:30 p.m.
USA 05:30 a.m. — 12:30 a.m.
Point Value Calculation
All currency pairs can be divided into three categories — pairs with direct quote (EURUSD, GBPUSD), reverse quote pairs (USDJPY, USDCHF), and cross-rates (GBPCHF, EURJPY etc.).
For currency pairs with direct quote the point value measured in dollars is calculated with the formula
PIP = LOT_SIZE × TICK_SIZE
For currency pairs with direct quote the point value is constant and doesn't depend on the current quote.
Example:
For EURUSD the lot size is 100,000 Euro, tick size — 0.0001
PIP = 100,000 * 0.0001 = $10.00
For reverse quote pairs the point value measured in dollars is calculated with the formula
PIP = LOT_SIZE × TICK_SIZE / CURRENT_QUOTE
For reverse quote pairs the point value is changing depending on current quote.
Example:
For USDJPY the lot size is 100,000 US Dollars, tick size — 0.01. USDJPY quote is 114.66
PIP = 100,000 * 0.01 / 114.66 = $8.72
For cross-rates the point value measured in dollars is calculated with the formula
PIP = LOT_SIZE × TICK_SIZE × BASE_QUOTE / CURRENT_QUOTE,
where BASE_QUOTE — current quote of base (first) currency against US Dollar, CURRENT_QUOTE — current pair quote.
For cross-rates the point value is changing depending on current quotes of the pair and base currency.
Example:
For GBPJPY the lot size is 100,000 Pounds, tick size — 0.01, base currency — GBPUSD. GBPJPY quote is 230.82, and GBPUSD is 2.0107
PIP = 100,000 * 0.01 * 2.0107 / 230.82 = $8.71
For currency pairs with direct quote the point value measured in dollars is calculated with the formula
PIP = LOT_SIZE × TICK_SIZE
For currency pairs with direct quote the point value is constant and doesn't depend on the current quote.
Example:
For EURUSD the lot size is 100,000 Euro, tick size — 0.0001
PIP = 100,000 * 0.0001 = $10.00
For reverse quote pairs the point value measured in dollars is calculated with the formula
PIP = LOT_SIZE × TICK_SIZE / CURRENT_QUOTE
For reverse quote pairs the point value is changing depending on current quote.
Example:
For USDJPY the lot size is 100,000 US Dollars, tick size — 0.01. USDJPY quote is 114.66
PIP = 100,000 * 0.01 / 114.66 = $8.72
For cross-rates the point value measured in dollars is calculated with the formula
PIP = LOT_SIZE × TICK_SIZE × BASE_QUOTE / CURRENT_QUOTE,
where BASE_QUOTE — current quote of base (first) currency against US Dollar, CURRENT_QUOTE — current pair quote.
For cross-rates the point value is changing depending on current quotes of the pair and base currency.
Example:
For GBPJPY the lot size is 100,000 Pounds, tick size — 0.01, base currency — GBPUSD. GBPJPY quote is 230.82, and GBPUSD is 2.0107
PIP = 100,000 * 0.01 * 2.0107 / 230.82 = $8.71
What is Carry Trade
This is the trade on interest rates difference for the two currencies within some currency pair. To make it simpler, this is the position opening for currency pair with higher Swap–points and long-term holding of such position in order to get profit through these Swap–points.
For example, if you open 1 lot buy position for GBPJPY, you will be getting about 20 US Dollars a day. If the position is open for the whole year, the additional profit due to positive Swap-points will be $7,300!
What does Swap–points value depend on? As mentioned above, it depends on interest rates difference of the currencies forming some currency pair. E.g. the pound interest rate is 5% per year, and Japanese Yen — 0.5%, what gives us such a big amount of Swap–points in the shown above example.
However, there are currency pairs with more significant difference between interest rates, and, consequently, with more profitable Swap–points. E.g., the introduced in Akmos Trade Icelandic krona pairs — USDISK and EURISK.
The latter, for example, makes daily profit from Swap–points may be up to $50 per 1 lot! It's not hard to calculate, what will it make for a year.
However, we must say that such currency pairs usually highly volatile, and thus, rather high spreads are established.
Thus, for CARRY TRADE strategy you need to have rather big deposit, not to use “all money”and to hold open positions for quite a long period of time.
For example, if you open 1 lot buy position for GBPJPY, you will be getting about 20 US Dollars a day. If the position is open for the whole year, the additional profit due to positive Swap-points will be $7,300!
What does Swap–points value depend on? As mentioned above, it depends on interest rates difference of the currencies forming some currency pair. E.g. the pound interest rate is 5% per year, and Japanese Yen — 0.5%, what gives us such a big amount of Swap–points in the shown above example.
However, there are currency pairs with more significant difference between interest rates, and, consequently, with more profitable Swap–points. E.g., the introduced in Akmos Trade Icelandic krona pairs — USDISK and EURISK.
The latter, for example, makes daily profit from Swap–points may be up to $50 per 1 lot! It's not hard to calculate, what will it make for a year.
However, we must say that such currency pairs usually highly volatile, and thus, rather high spreads are established.
Thus, for CARRY TRADE strategy you need to have rather big deposit, not to use “all money”and to hold open positions for quite a long period of time.
Swap Calculation
At Forex market the position opening means the exchange of one currency to another. For example, when you open the position USDCHF BUY 1 lot, a trader acquires 100,000 US Dollars (USD) in exchange for the corresponding amount of Swiss Franks (CHF).
At the moment of writing 100,000 US Dollars corresponds to approximately 117,000 Franks. A trader usually doesn't have such amount of Franks (the transaction is made with leverage of 1:100). At first, he/she borrows it. After the position is opened, a trader starts to owe 117,000 Franks, and his account is credited with 100,000 US Dollars. The obtained CHF loan requires servicing — a trader has to pay an interest on its amount, and USD on his/her account, on the contrary, brings interest to this trader.
Since we don't now in advance how much time will the trader leave the position open, the shortest terms of loan and free cash placement are used. Usually such overnight rates are presented by LIBOR for loan, and LIBID — free cash placement. Besides, we add (with SELL) or reduce (with BUY) the interest rate difference the additional margin of 0.75%.
At the moment of writing LIBOR CHF rates were 2.08%, LIBID USD — 4.77%. Thus, a trader will get from placement of free dollars more, than he/she spend for servicing of CHF loan.
USDCHF BUY calculation example:
SWAP_USDCHF_BUY = ((LIBID_USD − LIBOR_CHF − 0.75%) × LOT_SIZE) / 100% / 365 =(4.77 − 2.08 − 0.75) × 100000 / 100 / 365 = $5.38
where 365 — number of bank days a year.
Thus, for holding the position USDCHF BUY, a trader with the above mentioned rates values will earn $5.38 a day.
For accounts with EUR as a deposit currency, the swap values are reduced to it through division by current EURUSD rate.
All the calculations are usually performed on the value date — the second day since the current date. The second day since Wednesday midnight is weekend, thus there occur three days settlements on Wednesday night — the payments are collected or charged in triple amount. The settlements are not made on weekends (Friday and Saturday nights).
Positive values in swap table mean payments to traders, negative values — deduction of values from trader's account.
At the moment of writing 100,000 US Dollars corresponds to approximately 117,000 Franks. A trader usually doesn't have such amount of Franks (the transaction is made with leverage of 1:100). At first, he/she borrows it. After the position is opened, a trader starts to owe 117,000 Franks, and his account is credited with 100,000 US Dollars. The obtained CHF loan requires servicing — a trader has to pay an interest on its amount, and USD on his/her account, on the contrary, brings interest to this trader.
Since we don't now in advance how much time will the trader leave the position open, the shortest terms of loan and free cash placement are used. Usually such overnight rates are presented by LIBOR for loan, and LIBID — free cash placement. Besides, we add (with SELL) or reduce (with BUY) the interest rate difference the additional margin of 0.75%.
At the moment of writing LIBOR CHF rates were 2.08%, LIBID USD — 4.77%. Thus, a trader will get from placement of free dollars more, than he/she spend for servicing of CHF loan.
USDCHF BUY calculation example:
SWAP_USDCHF_BUY = ((LIBID_USD − LIBOR_CHF − 0.75%) × LOT_SIZE) / 100% / 365 =(4.77 − 2.08 − 0.75) × 100000 / 100 / 365 = $5.38
where 365 — number of bank days a year.
Thus, for holding the position USDCHF BUY, a trader with the above mentioned rates values will earn $5.38 a day.
For accounts with EUR as a deposit currency, the swap values are reduced to it through division by current EURUSD rate.
All the calculations are usually performed on the value date — the second day since the current date. The second day since Wednesday midnight is weekend, thus there occur three days settlements on Wednesday night — the payments are collected or charged in triple amount. The settlements are not made on weekends (Friday and Saturday nights).
Positive values in swap table mean payments to traders, negative values — deduction of values from trader's account.
What is US Dollar Index
Just as Dow Jones Industrial Average reflects the general state of American stock market, US Dollar Index (USDXsup>®) reflects the general assessment of US Dollar. USDX does it through exchange rates averaging of US Dollar and six most tradable global currencies.
USDX = 50.14348112 × EURUSD−0.576 × USDJPY0.136 × GBPUSD−0.119 × USDCAD0.091 × USDSEK0.042 × USDCHF0.036
Those 20 countries (15 eurozone countries and five other countries, whose currencies are represented in USDX) make up the basis of global trade with the USA, have highly developed currency markets with the quotes which are independently determined by market participants. Besides, many currencies not included into USDX, are traded in close correlation with the currencies included in USDX. USDX value is calculated 24-hours a day, seven days a week.
Currencies and weights used in USDX calculation match the currencies and weights used in calculation of trade weighted US Dollar index by US Fed.
As USDX is based on indicative values of quotes, it can vary depending on quote source used.
USDX is calculated as geometric progression weighted average of six currencies rates against US Dollar in comparison with March, 1973. USDX measures the US Dollar value reduced to 100.00. Quote value 105.50 means that US Dollar value in relation to currency basket grew 5.50% from March, 1973.
March, 1973 was chosen as a zero point due to its significance in Forex market history. Those times the leading trade nations allowed their currencies to be quoted freely against each other. Such agreement was made in Smithsonian Institution in Washington, and is considered to be a victory of free market theorists. Smithsonian agreement replaced the collapsed fixed rate regime launched approximately 25 years earlier in Bretton Woods, New Hampshire.
Current rate of USDX reflects the average dollar value against this base period of 1973. Since that time, Dollar Index has reached the peak 165 and the low 76. The volatility of such instrument by amplitude and variability can be compared with stock index futures.
USDX = 50.14348112 × EURUSD−0.576 × USDJPY0.136 × GBPUSD−0.119 × USDCAD0.091 × USDSEK0.042 × USDCHF0.036
Those 20 countries (15 eurozone countries and five other countries, whose currencies are represented in USDX) make up the basis of global trade with the USA, have highly developed currency markets with the quotes which are independently determined by market participants. Besides, many currencies not included into USDX, are traded in close correlation with the currencies included in USDX. USDX value is calculated 24-hours a day, seven days a week.
Currencies and weights used in USDX calculation match the currencies and weights used in calculation of trade weighted US Dollar index by US Fed.
As USDX is based on indicative values of quotes, it can vary depending on quote source used.
USDX is calculated as geometric progression weighted average of six currencies rates against US Dollar in comparison with March, 1973. USDX measures the US Dollar value reduced to 100.00. Quote value 105.50 means that US Dollar value in relation to currency basket grew 5.50% from March, 1973.
March, 1973 was chosen as a zero point due to its significance in Forex market history. Those times the leading trade nations allowed their currencies to be quoted freely against each other. Such agreement was made in Smithsonian Institution in Washington, and is considered to be a victory of free market theorists. Smithsonian agreement replaced the collapsed fixed rate regime launched approximately 25 years earlier in Bretton Woods, New Hampshire.
Current rate of USDX reflects the average dollar value against this base period of 1973. Since that time, Dollar Index has reached the peak 165 and the low 76. The volatility of such instrument by amplitude and variability can be compared with stock index futures.
From 1971, the existent owners of this market had been banks, multinational corporations, and leading brokers. If a person wanted to invest capital into this market, he/she would have to do it with a bank, about 1 mln. US Dollars in accordance with the requirement of 5-10 mln. US Dollars of the accepted deal value. Brokers could reduce the minimum deposit in average to 0.250 mln. US Dollars.
But nowadays Forex market is open for investors with minimal funds. In contrast to huge amounts earlier requested by banks and brokers, significantly reduced marginal requirements finally became available to many people, and know allow every person to play with "big sharks". Besides, small investors can use the Internet advantages what made this market as available as it used to be for big players.
Now, when I better understand what is Forex, why should I choose Akmos Trade?
We have been working at Forex market for more than 13years, and being one of the oldest companies in this field. We were first in Russia to provide full-scale access to Forex market through Internet.
Technical level and equipment of Akmos Trade Dealing Center provides you with 24–hour connection to global Forex market and the most effective access to market from any location of the world with a help of Internet.
Minimum deposit amount allows you to enter the market at minimum cost. It's worth noting that the more funds you use, the more potential and market flexibility you have.
Zero charge speaks for itself.
You can open your own demo account, and test your trader's skills for free
But nowadays Forex market is open for investors with minimal funds. In contrast to huge amounts earlier requested by banks and brokers, significantly reduced marginal requirements finally became available to many people, and know allow every person to play with "big sharks". Besides, small investors can use the Internet advantages what made this market as available as it used to be for big players.
Now, when I better understand what is Forex, why should I choose Akmos Trade?
We have been working at Forex market for more than 13years, and being one of the oldest companies in this field. We were first in Russia to provide full-scale access to Forex market through Internet.
Technical level and equipment of Akmos Trade Dealing Center provides you with 24–hour connection to global Forex market and the most effective access to market from any location of the world with a help of Internet.
Minimum deposit amount allows you to enter the market at minimum cost. It's worth noting that the more funds you use, the more potential and market flexibility you have.
Zero charge speaks for itself.
You can open your own demo account, and test your trader's skills for free
5. STOP and LIMIT orders
Now it's time to learn more about useful trade tools that allow in some way protect you from unexpected losses and to fix the planned profit.
These are STOP and LIMIT. You can any time (during market working hours) put the order to close the open position when the price reaches the specific value. For example, you open a position, expecting that quotes will go up (on the chart). Besides, in order to secure oneself from the significant losses when the currency sharply moves lower, especially when you either do not control, or can lose control of the market, you put STOP, i.e. indicate the price lower than the current value, at which your position should be closed without additional orders. By analogy, if you opened down, you indicate the price higher the current value. You should take into consideration that if STOP will be too close to the current value, than the incidental price jump may close with loss the correctly opened position, and if it will be too far — the losses may be too serious. LIMIT, in turn, is the specified quote which when reached will be closed with profit, i.e. the LIMIT quote is always higher than the current value, if you trade up, and lower — if you trade down.
There is a very widespread mistake that is made by many beginners. You need to remember for which quote — BID or ASK — the order shall be executed. Let's see the example of BUY position. As we said before, the BUY position is opened at ASK, and closed at BID, i.e. STOP or LIMIT will be executed only when BID reaches the specified price. As ASK on charts is always higher than BID, than chart HIGH is always ASK, and LOW — BID. Thus, the chart shall go through LIMIT for a spread value, before LIMIT is executed. STOP will likely to be executed as soon as the chart touches the price. As a rule, the beginners are very surprised to see that their LIMIT was not triggered, despite the chart HIGH is several points higher than the LIMIT price. It should be like that, as HIGH shall be higher than LIMIT by a value not less than spread.
Another widespread mistake is that trader doesn't differ the indicative charts built based on information quotes, i.e. received from hundreds, or even thousands banks and brokers, from quotes of specific company with which he/she works.êîòèðîâêàìè êîíêðåòíîé êîìïàíèè, ñ êîòîðîé îí ðàáîòàåò. The indicative charts have more frequent quotes and broader dispersion than at each of the brokers. Besides, different brokers have different indicative charts due to different providers used for chart building. Thus, to understand why some order was triggered or not triggered, you need to observe the charts from brokers which you work with. And you'd better build the chart only by its own, if possible, quotes. You need to indicate “AKM” source code in AFMCharts.
Now it's time to learn more about useful trade tools that allow in some way protect you from unexpected losses and to fix the planned profit.
These are STOP and LIMIT. You can any time (during market working hours) put the order to close the open position when the price reaches the specific value. For example, you open a position, expecting that quotes will go up (on the chart). Besides, in order to secure oneself from the significant losses when the currency sharply moves lower, especially when you either do not control, or can lose control of the market, you put STOP, i.e. indicate the price lower than the current value, at which your position should be closed without additional orders. By analogy, if you opened down, you indicate the price higher the current value. You should take into consideration that if STOP will be too close to the current value, than the incidental price jump may close with loss the correctly opened position, and if it will be too far — the losses may be too serious. LIMIT, in turn, is the specified quote which when reached will be closed with profit, i.e. the LIMIT quote is always higher than the current value, if you trade up, and lower — if you trade down.
There is a very widespread mistake that is made by many beginners. You need to remember for which quote — BID or ASK — the order shall be executed. Let's see the example of BUY position. As we said before, the BUY position is opened at ASK, and closed at BID, i.e. STOP or LIMIT will be executed only when BID reaches the specified price. As ASK on charts is always higher than BID, than chart HIGH is always ASK, and LOW — BID. Thus, the chart shall go through LIMIT for a spread value, before LIMIT is executed. STOP will likely to be executed as soon as the chart touches the price. As a rule, the beginners are very surprised to see that their LIMIT was not triggered, despite the chart HIGH is several points higher than the LIMIT price. It should be like that, as HIGH shall be higher than LIMIT by a value not less than spread.
Another widespread mistake is that trader doesn't differ the indicative charts built based on information quotes, i.e. received from hundreds, or even thousands banks and brokers, from quotes of specific company with which he/she works.êîòèðîâêàìè êîíêðåòíîé êîìïàíèè, ñ êîòîðîé îí ðàáîòàåò. The indicative charts have more frequent quotes and broader dispersion than at each of the brokers. Besides, different brokers have different indicative charts due to different providers used for chart building. Thus, to understand why some order was triggered or not triggered, you need to observe the charts from brokers which you work with. And you'd better build the chart only by its own, if possible, quotes. You need to indicate “AKM” source code in AFMCharts.
4. BID and ASK prices
It's understood that any transaction is executed at exact price, while Quote Spread Sheet table has three prices for each price, e.g.:
Each Forex market participant in each transaction acts as either SELLER of the currency, or BUYER. And the seller offers the higher price, e.g. GBPUSD at 2.0254, and the buyer asks the lower price, e.g. GBPUSD at 2.0250. Thus, the offer price à seller is called ASK, and he price of buyer — BID. Consequently, if you assume GBPUSD will appreciate (your chart shows that GBPUSD curve goes higher), than you decide to buy pound while its cheaper, in order to sell it higher. You can buy (this operation is called BUY) only from the seller who will offer it at ASK price. When you sell pound (this operation is called SELL), the buyer will offer for it BID price (it works for all currencies). This clearly implies that if you OPENED position (the operation is called OPEN), i.e. executed BUY GBPUSD, and want to CLOSE it right away (the operation is called CLOSE), i.e. to sell the just bought pounds, you can make it only with the loss equal to the one in any foreign exchange office. Consequently, in order to get profit, the move of the currency price in the desired direction should exceed the difference between BID and ASK. The third value is called LAST — it represents the average value between the last BID and ASK at Forex market.
As stipulated in Section 3, only currencies with the direct quote appreciate when charts go higher. It's evident that the rule, under which the BUY operation during move higher brings profit for some currencies and loss for others, will be inconvenient. Thus, upon execution BUY operation for reverse quote currencies, you buy not the currency, but US Dollar, and the currency is sold. For example, BUY USDCHF at 1.1724 buys 100,000 US Dollars at 117,240 Swiss Franks. Thus, BUY operation always brings profit when the chart moves up, and SELL operation — when chart moves down.
To sum up, OPEN BUY (up) executes at ASK price, and CLOSE — at BID price; OPEN SELL (down) — at BID price, and CLOSE — at ASK price.
Sometimes the quotes can be shown in pair, e.g. 114.88/92. Such form of notation reflects the BID/ASK pair. First, the BID value is written, and then the last two numbers of ASK quote. Knowing that ASK exceeds BID, and that the difference between them is more than 100 points, you can always explicitly determine the value of second quote. In this case ASK = 114.92.
It's understood that any transaction is executed at exact price, while Quote Spread Sheet table has three prices for each price, e.g.:
Each Forex market participant in each transaction acts as either SELLER of the currency, or BUYER. And the seller offers the higher price, e.g. GBPUSD at 2.0254, and the buyer asks the lower price, e.g. GBPUSD at 2.0250. Thus, the offer price à seller is called ASK, and he price of buyer — BID. Consequently, if you assume GBPUSD will appreciate (your chart shows that GBPUSD curve goes higher), than you decide to buy pound while its cheaper, in order to sell it higher. You can buy (this operation is called BUY) only from the seller who will offer it at ASK price. When you sell pound (this operation is called SELL), the buyer will offer for it BID price (it works for all currencies). This clearly implies that if you OPENED position (the operation is called OPEN), i.e. executed BUY GBPUSD, and want to CLOSE it right away (the operation is called CLOSE), i.e. to sell the just bought pounds, you can make it only with the loss equal to the one in any foreign exchange office. Consequently, in order to get profit, the move of the currency price in the desired direction should exceed the difference between BID and ASK. The third value is called LAST — it represents the average value between the last BID and ASK at Forex market.
As stipulated in Section 3, only currencies with the direct quote appreciate when charts go higher. It's evident that the rule, under which the BUY operation during move higher brings profit for some currencies and loss for others, will be inconvenient. Thus, upon execution BUY operation for reverse quote currencies, you buy not the currency, but US Dollar, and the currency is sold. For example, BUY USDCHF at 1.1724 buys 100,000 US Dollars at 117,240 Swiss Franks. Thus, BUY operation always brings profit when the chart moves up, and SELL operation — when chart moves down.
To sum up, OPEN BUY (up) executes at ASK price, and CLOSE — at BID price; OPEN SELL (down) — at BID price, and CLOSE — at ASK price.
Sometimes the quotes can be shown in pair, e.g. 114.88/92. Such form of notation reflects the BID/ASK pair. First, the BID value is written, and then the last two numbers of ASK quote. Knowing that ASK exceeds BID, and that the difference between them is more than 100 points, you can always explicitly determine the value of second quote. In this case ASK = 114.92.
3. How to Read Quotes
Quotes are usually showed in 5-character number. For example, USDJPY = 114.90 means that 1 US Dollar is equal to 114.90 of Japanese Yens (i.e. for 1 dollar you can get that amount of yen upon buying and selling). Besides, GBPUSD = 2.0252 means that 1 British Pound is equal to 2.0252 US Dollars. In general, of the quote XXXYYY = Z, it means that you can get for one XXX unit Z units of YYY.
When the quote is changing, e.g. USDJPY = 114.92 to USDJPY = 114.93, or GBPUSD = 2.0254 to 2.0255, the price has changed by one point. According to the above mentioned, in this example Yen got DEPRECITED by one point, and Pound APPRECITED by one point.
According to the above mentioned, only the charts of Euro (EURUSD) and British Pound (GBPUSD), i.e. currencies with “direct” quote, reflect the real price movement (i.e. chart goes higher – the price is higher), and the appreciation ((i.e. chart goes higher) for USDJPY and USDCHF (currencies with “reverse” quote) means not increase, but decrease of its quotes (price).
Quotes are usually showed in 5-character number. For example, USDJPY = 114.90 means that 1 US Dollar is equal to 114.90 of Japanese Yens (i.e. for 1 dollar you can get that amount of yen upon buying and selling). Besides, GBPUSD = 2.0252 means that 1 British Pound is equal to 2.0252 US Dollars. In general, of the quote XXXYYY = Z, it means that you can get for one XXX unit Z units of YYY.
When the quote is changing, e.g. USDJPY = 114.92 to USDJPY = 114.93, or GBPUSD = 2.0254 to 2.0255, the price has changed by one point. According to the above mentioned, in this example Yen got DEPRECITED by one point, and Pound APPRECITED by one point.
According to the above mentioned, only the charts of Euro (EURUSD) and British Pound (GBPUSD), i.e. currencies with “direct” quote, reflect the real price movement (i.e. chart goes higher – the price is higher), and the appreciation ((i.e. chart goes higher) for USDJPY and USDCHF (currencies with “reverse” quote) means not increase, but decrease of its quotes (price).
2. Currency Notation
There is a three-letter code assigned to each currency. E.g. US Dollar code — USD (United States Dollar), Euro code — EUR (EURo), Swiss Frank — CHF (Confederation Helvetica Franc), Japanese Yen — JPY (JaPanese Yen), UK Pound — GBP (Great British Pound). The currency codes are defined by the ISO-4217 standard. Usually they are defined from two-letter ISO-3166 country code and first letter of the currency. There are not many exceptions, particularly, European currency euro represented by EUR, and ruble represented by RUB, and not RUR, as could be expected.
Exchange rates reflect the relation of currencies of different countries to each other. Exchange rate codes are represented in 6-letter words made of two 3-letter currency code. First, usually, goes the code of the more expensive currency. The quotes are denominated in the units of the second currency for the unit of the first currency. For example, USDCHF (USD–CHF) reflects the amount of Swiss franks for one US Dollar, and GBPUSD (GBP–USD), on the contrary, how many US Dollars you need to pay for one British Pound. For more details of financial toll codes, see the specific table
There is a three-letter code assigned to each currency. E.g. US Dollar code — USD (United States Dollar), Euro code — EUR (EURo), Swiss Frank — CHF (Confederation Helvetica Franc), Japanese Yen — JPY (JaPanese Yen), UK Pound — GBP (Great British Pound). The currency codes are defined by the ISO-4217 standard. Usually they are defined from two-letter ISO-3166 country code and first letter of the currency. There are not many exceptions, particularly, European currency euro represented by EUR, and ruble represented by RUB, and not RUR, as could be expected.
Exchange rates reflect the relation of currencies of different countries to each other. Exchange rate codes are represented in 6-letter words made of two 3-letter currency code. First, usually, goes the code of the more expensive currency. The quotes are denominated in the units of the second currency for the unit of the first currency. For example, USDCHF (USD–CHF) reflects the amount of Swiss franks for one US Dollar, and GBPUSD (GBP–USD), on the contrary, how many US Dollars you need to pay for one British Pound. For more details of financial toll codes, see the specific table
. Trading Goal
The goal of trading at every market is to buy the product at lower price, and to sell it at higher. The global foreign exchange (Forex) market is not an exception. The product at this market is exchange rate of different national currencies.
To perform the settlements between the partners from different countries, international settlements, speculative operations etc., the world banks perform currency exchange operations at Forex. Depending on trading, economic and other indicators, interest rate, central bank policy, time of the day, preferences and expectations of the stock market participants, on different reasons, the quotes, i.e. currency prices, are always in motion.
The goal of trader is to predict the direction of currency price dynamic, and to buy the currency, the price of which is increasing, or to sell the currency, the price of which is decreasing, and then through reverse transaction to get profit.
(Akmos FOREX Master) program pack, which offers the currency quotes of different bank and leading global stock exchanges in real time — Forex market participants. At the same time, here you can get the current price charts for each currency, and latest economic news that can have direct or indirect impact on currency rates in future.
Finally, you have special trade account allowing to buy and sell the selected currencies. And even if you have US Dollars on youê trading account, you can start trading from selling Euro, Yen and other tools, though you didn't buy them.
The goal of trading at every market is to buy the product at lower price, and to sell it at higher. The global foreign exchange (Forex) market is not an exception. The product at this market is exchange rate of different national currencies.
To perform the settlements between the partners from different countries, international settlements, speculative operations etc., the world banks perform currency exchange operations at Forex. Depending on trading, economic and other indicators, interest rate, central bank policy, time of the day, preferences and expectations of the stock market participants, on different reasons, the quotes, i.e. currency prices, are always in motion.
The goal of trader is to predict the direction of currency price dynamic, and to buy the currency, the price of which is increasing, or to sell the currency, the price of which is decreasing, and then through reverse transaction to get profit.
(Akmos FOREX Master) program pack, which offers the currency quotes of different bank and leading global stock exchanges in real time — Forex market participants. At the same time, here you can get the current price charts for each currency, and latest economic news that can have direct or indirect impact on currency rates in future.
Finally, you have special trade account allowing to buy and sell the selected currencies. And even if you have US Dollars on youê trading account, you can start trading from selling Euro, Yen and other tools, though you didn't buy them.
Forex is an interbank market that was created in 1971 when international trade transitioned from fixed to floating exchange rates. Since then the rates of currencies relative to each other are determined by the most obvious means which is the exchange at a mutually agreed rate.
This market surpasses the others in its volume. For example, the daily turnover of world equity market is estimated at $300 billion, while Forex approaches 1 to 3 trillion US dollars a day.
However, Forex is not a market in a traditional sense. It doesn't have a fixed location of the trading floor as, for example, shares or currency futures market does. The trading is done over the telephone and at the computer terminals in thousands of banks around the world simultaneously.
Besides, futures and stock markets have one significant difference, and, at the same time, restriction — the trade is interrupted at the day end and resumes only next morning. And if you trade in the Russian market, and some significant events happen in the USA, the market open may differ from your expectations.
Forex market is open 24 hours a day, and currency exchange operations continue during the whole working week. There are dealers willing to quote the currency practically in every time zone (London, New York, Tokyo, Hong Kong, Sydney etc.).
This market surpasses the others in its volume. For example, the daily turnover of world equity market is estimated at $300 billion, while Forex approaches 1 to 3 trillion US dollars a day.
However, Forex is not a market in a traditional sense. It doesn't have a fixed location of the trading floor as, for example, shares or currency futures market does. The trading is done over the telephone and at the computer terminals in thousands of banks around the world simultaneously.
Besides, futures and stock markets have one significant difference, and, at the same time, restriction — the trade is interrupted at the day end and resumes only next morning. And if you trade in the Russian market, and some significant events happen in the USA, the market open may differ from your expectations.
Forex market is open 24 hours a day, and currency exchange operations continue during the whole working week. There are dealers willing to quote the currency practically in every time zone (London, New York, Tokyo, Hong Kong, Sydney etc.).
Tuesday, February 17, 2009
What is Forex?
FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.
Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.
In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.
Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.
Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study.
Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.
This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).
Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.
Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.
In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.
Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.
Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study.
Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.
This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).
Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.
An overview of the Forex market
The Forex market is a non-stop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are constantly and simultaneously bought and sold across local and global markets and traders' investments increase or decrease in value based upon currency movements. Foreign exchange market conditions can change at any time in response to real-time events.
The main enticements of currency dealing to private investors and attractions for short-term Forex trading are:
24-hour trading, 5 days a week with non-stop access to global Forex dealers.
An enormous liquid market making it easy to trade most currencies.
Volatile markets offering profit opportunities.
Standard instruments for controlling risk exposure.
The ability to profit in rising or falling markets.
Leveraged trading with low margin requirements.
Many options for zero commission trading.
Forex tradingThe investor's goal in Forex trading is to profit from foreign currency movements. Forex trading or currency trading is always done in currency pairs. For example, the exchange rate of EUR/USD on Aug 26th, 2003 was 1.0857. This number is also referred to as a "Forex rate" or just "rate" for short. If the investor had bought 1000 euros on that date, he would have paid 1085.70 U.S. dollars. One year later, the Forex rate was 1.2083, which means that the value of the euro (the numerator of the EUR/USD ratio) increased in relation to the U.S. dollar. The investor could now sell the 1000 euros in order to receive 1208.30 dollars. Therefore, the investor would have USD 122.60 more than what he had started one year earlier. However, to know if the investor made a good investment, one needs to compare this investment option to alternative investments. At the very minimum, the return on investment (ROI) should be compared to the return on a "risk-free" investment. One example of a risk-free investment is long-term U.S. government bonds since there is practically no chance for a default, i.e. the U.S. government going bankrupt or being unable or unwilling to pay its debt obligation.
When trading currencies, trade only when you expect the currency you are buying to increase in value relative to the currency you are selling. If the currency you are buying does increase in value, you must sell back the other currency in order to lock in a profit. An open trade (also called an open position) is a trade in which a trader has bought or sold a particular currency pair and has not yet sold or bought back the equivalent amount to close the position.
However, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency.
The main enticements of currency dealing to private investors and attractions for short-term Forex trading are:
24-hour trading, 5 days a week with non-stop access to global Forex dealers.
An enormous liquid market making it easy to trade most currencies.
Volatile markets offering profit opportunities.
Standard instruments for controlling risk exposure.
The ability to profit in rising or falling markets.
Leveraged trading with low margin requirements.
Many options for zero commission trading.
Forex tradingThe investor's goal in Forex trading is to profit from foreign currency movements. Forex trading or currency trading is always done in currency pairs. For example, the exchange rate of EUR/USD on Aug 26th, 2003 was 1.0857. This number is also referred to as a "Forex rate" or just "rate" for short. If the investor had bought 1000 euros on that date, he would have paid 1085.70 U.S. dollars. One year later, the Forex rate was 1.2083, which means that the value of the euro (the numerator of the EUR/USD ratio) increased in relation to the U.S. dollar. The investor could now sell the 1000 euros in order to receive 1208.30 dollars. Therefore, the investor would have USD 122.60 more than what he had started one year earlier. However, to know if the investor made a good investment, one needs to compare this investment option to alternative investments. At the very minimum, the return on investment (ROI) should be compared to the return on a "risk-free" investment. One example of a risk-free investment is long-term U.S. government bonds since there is practically no chance for a default, i.e. the U.S. government going bankrupt or being unable or unwilling to pay its debt obligation.
When trading currencies, trade only when you expect the currency you are buying to increase in value relative to the currency you are selling. If the currency you are buying does increase in value, you must sell back the other currency in order to lock in a profit. An open trade (also called an open position) is a trade in which a trader has bought or sold a particular currency pair and has not yet sold or bought back the equivalent amount to close the position.
However, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency.
What is Forex (Foreign Exchange)?
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Foreign Exchange (FOREX) is the arena where a nation's currency is exchanged for that of another. The foreign exchange market is the largest financial market in the world, with the equivalent of over $1.9 trillion changing hands daily; more than three times the aggregate amount of the US Equity and Treasury markets combined. Unlike other financial markets, the Forex market has no physical location and no central exchange (off-exchange). It operates through a global network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another in all the major financial centers. Traditionally, retail investors' only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders and hedge funds all use the FOREX market to pay for goods and services, transact in financial assets or to reduce the risk of currency movements by hedging their exposure in other markets. MG Financial, now operating in over 100 countries, serves all manner of clients, comprising speculators and strategic traders. Whether it’s day-traders looking for short-term gains, or fund managers wanting to hedge their non-US assets, MG's DealStation™ allows them to participate in FOREX trading by providing a combination of live quotes, Real-Time charts, and news and analysis that attracts traders with an orientation towards fundamental and/or technical analysis.
How to Get Started Free Demo Account The MG Advantage Open an Account
Foreign Exchange (FOREX) is the arena where a nation's currency is exchanged for that of another. The foreign exchange market is the largest financial market in the world, with the equivalent of over $1.9 trillion changing hands daily; more than three times the aggregate amount of the US Equity and Treasury markets combined. Unlike other financial markets, the Forex market has no physical location and no central exchange (off-exchange). It operates through a global network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another in all the major financial centers. Traditionally, retail investors' only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders and hedge funds all use the FOREX market to pay for goods and services, transact in financial assets or to reduce the risk of currency movements by hedging their exposure in other markets. MG Financial, now operating in over 100 countries, serves all manner of clients, comprising speculators and strategic traders. Whether it’s day-traders looking for short-term gains, or fund managers wanting to hedge their non-US assets, MG's DealStation™ allows them to participate in FOREX trading by providing a combination of live quotes, Real-Time charts, and news and analysis that attracts traders with an orientation towards fundamental and/or technical analysis.
FOREX.com is a division of GAIN Capital Group, a dedicated partner to professional FX traders and fund managers worldwide. Institutional services include IB programs, white label solutions, and asset management. Individual forex traders can take advantage of the market expertise and financial strength of GAIN Capital Group and access an institutional FX trading platform, FOREXTrader, along with our powerful real-time forex charts, professional forex market research, and suite of advanced forex trading tools. For traders new to the currency trading, FOREX.com offers forex training programs, forex minis, and information about trading the foreign currency market.
Friday, February 6, 2009
There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is not a single dollar rate but rather a number of different rates (prices), depending on what bank or market maker is trading. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. A joint venture of the Chicago Mercantile Exchange and Reuters, called FXMarketSpace opened in 2007 and aspires to the role of a central market clearing mechanism.The main trading centers are in London, New York, Tokyo, and Singapore, but banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.3045 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.On the spot market, according to the BIS study, the most heavily traded products were:* EUR/USD: 28 %* USD/JPY: 18 %* GBP/USD (also called sterling or cable): 14 %and the US currency was involved in 88.7% of transactions, followed by the euro (37.2%), the yen (20.3%), and the sterling (16.9%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers.Although trading in the euro has grown considerably since the currency's creation in January 1999, the foreign exchange market is thus far still largely dollar-centered. For instance, trading the euro versus a non-European currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market.Factors affecting currency tradingAlthough exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychologyEconomic factorsThese include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).Economic conditions include:Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.Balance of trade levels and trends: 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.Inflation levels and trends: 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. This is because inflation erodes purchasing power, thus demand, for that particular currency.Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, 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, and the more demand for it there will be.Political conditionsInternal, regional, and international political conditions and events can have a profound effect on currency markets.For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.Market psychologyMarket psychology and trader perceptions influence the foreign exchange market in a variety of ways:Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts.Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends. [4]"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[5] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns. Algorithmic trading in forexElectronic trading is growing in the FX market, and algorithmic trading is becoming much more common. There is much confusion about the technique. According to financial consultancy Celent estimates, by 2008 up to 25% of all trades by volume will be executed using algorithm, up from about 18% in 2005.Financial instrumentsThere are several types of financial instruments commonly used.Spot: A spot transaction is 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 in the agreed-upon transaction. The data for this study come from the spot market. Spot has the largest share by volume in FX transactions among all instruments.Forward transaction: One way to deal with the Forex risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A 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 a few days, months or years.Futures: Foreign currency futures are forward transactions with standard contract sizes and maturity dates — for example, 500,000 British pounds for next November at an agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.Swap: The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange.Options: A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.SpeculationControversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, many economists (e.g. Milton Friedman) have argued that speculators perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do. Other economists (e.g. Joseph Stiglitz) however, may consider this argument to be based more on politics and a free market philosophy than on economics.Large hedge funds and other well capitalized "position traders" are the main professional speculators.Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not, according to this view; it is simply gambling, that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 150% per annum, and later to devalue the krona. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.[7]Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and forex speculators made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.
Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.Hedge fundsHedge funds, such as George Soros's Quantum fund have gained a reputation for aggressive currency speculation since 1990. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.Retail forex brokersRetail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $25–50 billion daily, which is about 2% of the whole market and it has been reported by the CFTC website that unexperienced investors may become targets of forex scams.Trading characteristicsMost traded currenciesCurrency distribution of reported FX market turnover Rank Currency ISO 4217code Symbol % daily share(April 2004)1 United States dollar USD $ 88.7%2 Eurozone euro EUR € 37.2%3 Japanese yen JPY ¥ 20.3%4 British pound sterling GBP £ 16.9%5 Swiss franc CHF Fr 6.1%6 Australian dollar AUD $ 5.5%7 Canadian dollar CAD $ 4.2%8 Swedish krona SEK kr 2.3%9 Hong Kong dollar HKD $ 1.9%10 Norwegian krone NOK kr 1.4%Other 15.5%Total 200%
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems, such as EBS (now owned by ICAP), Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, FXMarketSpace, Bloomberg, and TradeBook(R). The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.Commercial companiesAn important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.Central banksNational central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.Investment management firmsInvestment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximization.
FOREX MARKET
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is over US$ 3 trillion.[1] Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks, and are subject to forex scams.ContentsMarket size and liquidityThe foreign exchange market is unique because of* its trading volume,* the extreme liquidity of the market,* the large number of, and variety of, traders in the market,* its geographical dispersion,* its long trading hours: 24 hours a day (except on weekends),* the variety of factors that affect exchange rates.According to the BIS,[1] average daily turnover in traditional foreign exchange markets is estimated at $1,880 billion. Daily averages in April for different years, in billions of US dollars, are presented on the chart below:This $1.88 trillion in global foreign exchange market "traditional" turnover was broken down as follows:* $621 billion in spot transactions* $208 billion in outright forwards* $944 billion in forex swaps* $107 billion estimated gaps in reportingIn addition to "traditional" turnover, $1.26 trillion was traded in derivatives.Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).Average daily global turnover in traditional foreign exchange market transactions totaled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the world’s equity markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms has also made it easier for retail traders to trade in the foreign exchange market. Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006. RPPThe ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $100,000.These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition has greatly increased with pip spreads shrinking on the major pairs to as little as 1 to 2 pips.Market participantsTop 10 Currency Traders % of overall volume, May 2006 Source: Euromoney FX survey[3] Rank Name % of volume1 Deutsche Bank 19.262 UBS AG 11.863 Citigroup 10.394 Barclays Capital 6.615 Royal Bank of Scotland 6.436 Goldman Sachs 5.257 HSBC 5.048 Bank of America 3.979 JPMorgan Chase 3.8910 Merrill Lynch 3.68Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips only for major currencies like the Euro). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.BanksThe interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.
forex
FOREX - the foreign exchange market or currency market orForex is the market where one currency is traded foranother. It is one of the largest markets in the world.Some of the participants in this market are simply seekingto exchange a foreign currency for their own, likemultinational corporations which must pay wages and otherexpenses in different nations than they sell products in.However, a large part of the market is made up of currencytraders, who speculate on movements in exchange rates,much like others would speculate on movements of stockprices. Currency traders try to take advantage of evensmall fluctuations in exchange rates.
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, 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.
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