FOREX — the foreign exchange (currency or forex, or FX) market is the and the most liquid financial market with the daily volume of more than $3.2 trillion. Trading on this market involves buying and selling world currencies taking the profit from the exchange rates difference. Forex trading can yield high profits, but it is also very risky. The currency trading ( fore exchange , forex , fx) market is the the biggest and fastest growing on earth. Its daily turnover is more then 2.5 trillion dollares. The Participants in this market are central and commercials banks, corporatons, institional investors, hedge funds, and private individuals like you. Markets are places where goods are traded, and the same goes with Forex . In Forex makets, the ''goods'' are the currencies of various counters (as wel as gold and silver). For example, you might buy Euro with US dollars, or you might sell Japanese Yes for Conadian dollars. It's as basic as Trading one currency for another. Of Cours ,you Don't have to Purchase or sell actual, phyical currency: you trade and work with your own base Currency, and deal with any currency pair you wish to. The ratio of investment to actual value is called "leverage". Using a $1,000 to buy a Forex contract with a $100,000 value is "leveraging" at a 1:100 ratio.The $1,000 is all you invest and all you risk, but the gains you can make maybe many times greater. Obviously, buy low and sell high! The profit potential comes from the fluctuations (changes) in the currency exchange market. Unlike the stock market, where share are purchased, Forex trading does not require physical purchase of the currencies, but rather involves contracts for amount and exchange rate of currency pairs. The advantageous thing about the Forex market is that regular daily fluctuations – in the regular currency exchange markets, often around 1% - are multiplied by 100! You cannot lose more than your initial investment (also called your "margin"). The profit you may make is unlimited, but you can never lose more than the margin. You are strongly advised to never risk more than you can afford to. The Market
what happens in market?
"Leverage" is the Forex advantage
How does one profit in the Forex market?
How risky is Forex trading?
The investor's goal in Forex trading is to profit from foreign currency movements. More than 95% of all Forex trading performed today is for speculative purposes (e.g. to profit from currency movements). The rest belongs to hedging (managing business exposures to various currencies) and other activities. Forex trades (trading onboard internet platforms) are trades: currencies are not physically traded, but rather there are currency contracts which are agreed upon and performed. Both parties to such contracts (the trader and the trading platform) undertake to fulfill their obligations: one side undertakes to sell the amount specified, and the other undertakes to buy it. As mentioned, over 95% of the market activity is for speculative purposes, so there is no intention on either side to actually perform the contract (the physical delivery of the currencies). Thus, the contract ends by offsetting it against an opposite position, resulting in the profit and loss of the parties involved.non-delivery
A Forex deal is a contract agreed upon between the trader and the market- maker (i.e. the Trading Platform). The contract is comprised of the following components: •The currency pairs (which currency to buy; which currency to sell) •The principal amount (or "face", or "nominal": the amount of currency involved in the deal) •The rate (the agreed exchange rate between the two currencies). Time frame is also a factor in some deals, but this chapter focuses on Day- Trading (similar to "Spot" or "Current Time" trading), in which deals have a lifespan of no more than a single full day. Thus, time frame does not play into the equation. Note, however, that deals can be renewed ("rolled-over") to the next day for a limited period of time. The Forex deal, in this context, is therefore an obligation to buy and sell a specified amount of a particular pair of currencies at a pre-determined exchange rate. Forex trading is always done in currency pairs. For example, imagine that the exchange rate of EUR/USD (euros to US dollars) on a certain day is 1.5000 (this number is also referred to as a "spot rate", or just "rate", for short). If an investor had bought 1,000 euros on that date, he would have paid 1,500.00 US dollars. If one year later, the Forex rate was 1.5100, the value of the euro has increased in relation to the US dollar. The investor could now sell the 1,03300 euros in order to receive 1,510.00 US dollars. The investor would then have USD 10.00 more than when he started a 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. Long-term US government bonds are considered to be a risk-free investment since there is virtually no chance of default - i.e. the US government is not likely to go bankrupt, or be unable or unwilling to pay its debts. 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 that currency in order to lock in the profit. An open trade (also called an "open position") is one in which a trader has bought or sold a particular currency pair, and has not yet sold or bought back the equivalent amount to complete the deal. It is estimated that around 95% 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.
Because currencies are traded in pairs and exchanged one against the other when traded, the rate at which they are exchanged is called the exchange rate. The majority of currencies are traded against the US dollar (USD), which is traded more than any other currency. The four currencies traded most frequently after the US dollar are the euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP) and the Swiss franc (CHF). These five currencies make up the majority of the market and are called the major currencies or "the Majors". Some sources also include the Australian dollar (AUD) within the group of major currencies. The first currency in the exchange pair is referred to as the base currency. The second currency is the counter currency or quote currency. The counter or quote currency is thus the numerator in the ratio, and the base currency is the denominator. The exchange rate tells a buyer how much of the counter or quote currency must be paid to obtain one unit of the base currency. The exchange rate also tells a seller how much is received in the counter or quote currency when selling one unit of the base currency. For example, an exchange rate for EUR/USD of 1.5083 specifies to the buyer of euros that 1.5083 USD must be paid to obtain 1 euro.
It is the difference between BUY and SELL, or BID and ASK. In other words, this is the difference between the market maker's "selling" price (to its clients) and the price the market maker "buys" it from its clients. If an investor buys a currency and immediately sells it (and thus there is no change in the rate of exchange), the investor will lose money. The reason for this is "the spread". At any given moment, the amount that will be received in the counter currency when selling a unit of base currency will be lower than the amount of counter currency which is required to purchase a unit of base currency. For instance, the EUR/USD bid/ask currency rates at your bank may be 1.4975/1.5025, representing a spread of 500 pips (percentage in points; one pip = 0.0001). Such a rate is much higher than the bid/ask currency rates that online Forex investors commonly encounter, such as 1.5015/1.5020, with a spread of 5 pips. In general, smaller spreads are better for Forex investors since they require a smaller movement in exchange rates in order to profit from a trade. The price of a currency (in terms of the counter currency), is called "Quote". There are two kinds of quotes in the Forex market: Direct Quote: the price for 1 US dollar in terms of the other currency, e.g. – Japanese Yen, Canadian dollar, etc. Indirect Quote: the price of 1 unit of a currency in terms of US dollars, e.g. – British pound, euro. The market maker provides the investor with a quote. The quote is the price the market maker will honor when the deal is executed. This is unlike an "indication" by the market maker, which informs the trader about the market price level, but is not the final rate for a deal. Cross rates – any quote which is not against the US dollar is called "cross". For example, GBP/JPY is a cross rate, since it is calculated via the US dollar. Here is how the GBP/JPY rate is calculated: GBP/USD = 2.0000; USD/JPY = 110.00; Therefore: GBP/JPY = 110.00 x 2.0000 = 220.00.Prices, Quotes and Indications
Banks and/or online trading providers need collateral to ensure that the investor can pay in the event of a loss. The collateral is called the "margin" and is also known as minimum security in Forex markets. In practice, it is a deposit to the trader's account that is intended to cover any currency trading losses in the future. Margin enables private investors to trade in markets that have high minimum units of trading, by allowing traders to hold a much larger position than their account value. Margin trading also enhances the rate of profit, but similarly enhances the rate of loss, beyond that taken without leveraging. Most trading platforms require a "maintenance margin" be deposited by the trader parallel to the margins deposited for actual trades. The main reason for this is to ensure the necessary amount is available in the event of a "gap" or "slippage" in rates. Maintenance margins are also used to cover administrative costs. When a trader sets a Stop-Loss rate, most market makers cannot guarantee that the stop-loss will actually be used. For example, if the market for a particular counter currency had a vertical fall from 1.1850 to 1.1900 between the close and opening of the market, and the trader had a stop-loss of 1.1875, at which rate would the deal be closed? No matter how the rate slippage is accounted for, the trader would probably be required to add-up on his initial margin to finalize the automatically closed transaction. The funds from the maintenance margin might be used for this purpose.Maintenance Margin
Leveraged financing is a common practice in Forex trading, and allows traders o use credit, such as a trade purchased on margin, to maximize returns. ollateral for the loan/leverage in the margined account is provided by the nitial deposit. This can create the opportunity to control USD 100,000 for as ittle as USD 1,000. There are five ways private investors can trade in Forex, directly or directly: The spot market •Forwards and futures •Options •Contracts for difference •Spread betting •Please note that this book focuses on the most common way of trading in the Forex market, "Day-Trading" (related to "Spot"). Please refer to the glossary for explanations of each of the five ways investors can trade in Forex. A spot transaction is a straightforward exchange of one currency for another. he spot rate is the current market price, which is also called the "benchmark rice". Spot transactions do not require immediate settlement, or payment on the spot". The settlement date, or "value date" is the second business ay after the "deal date" (or "trade date") on which the transaction is agreed y the trader and market maker. The two-day period provides time to confirm he agreement and to arrange the clearing and necessary debiting and rediting of bank accounts in various international locations. Although Forex trading can lead to very profitable results, there are ubstantial risks involved: exchange rate risks, interest rate risks, credit risks nd event risks. pproximately 80% of all currency transactions last a period of seven days or ess, with more than 40% lasting fewer than two days. Given the extremelyhort lifespan of the typical trade, technical indicators heavily influence enry, exit and order placement decisionsA spot transaction
Risks
Today, the Forex market is a nonstop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are continually and simultaneously bought and sold across local and global markets. The value of traders' investments increases or decreases based on currency movements. Foreign exchange market conditions can change at any time in response toreal-time events. The main attractions of short-term currency trading to private investors are:24-hour trading, 5 days a week with nonstop access (24/7) to global •Forex dealers. An enormous liquid market, making it easy to trade m ost currencies. •Volatile markets offering profit opportunities. •Standard instruments for controlling risk exposure. •The ability to profit in rising as well as falling markets. •Leveraged trading with low margin requirements. •Many options for zero commission trading. The following is an overview into the historical evolution of the foreign exchange market and the roots of the international currency trading, from the days of the gold exchange, through the Bretton-Woods Agreement, to its current manifestation. A brief history of the Forex market
The Bretton-Woods Agreement, established in 1944, fixed national currencies against the US dollar, and set the dollar at a rate of USD 35 per ounce of gold. In 1967, a Chicago bank refused to make a loan in pound sterling to a college professor by the name of Milton Friedman, because he had intended to use the funds to short the British currency. The bank's refusal to grant the loan was due to the Bretton-Woods Agreement. Bretton-Woods was aimed at establishing international monetary stability by preventing money from taking flight across countries, thus curbing speculation in foreign currencies. Between 1876 and World War I, the gold exchange standard had ruled over the international economic system. Under the gold standard, currencies experienced an era of stability because they were supported by the price of gold. However, the gold standard had a weakness in that it tended to create boom- bust economies. As an economy strengthened, it would import a great deal, running down the gold reserves required to support its currency. As a result, the money supply would diminish, interest rates would escalate and economic activity would slow to the point of recession. Ultimately, prices of commodities would hit rock bottom, thus appearing attractive to other nations, who would then sprint into a buying frenzy. In turn, this would inject the economy with gold until it increased its money supply, thus driving down interest rates and restoring wealth. Such boom-bust patterns were common throughout the era of the gold standard, until World War I temporarily discontinued trade flows and the free movement of gold. The Bretton-Woods Agreement was founded after World War II, in order to stabilize and regulate the international Forex market. Participating countries agreed to try to maintain the value of their currency within a narrow margin against the dollar and an equivalent rate of gold. The dollar gained a premium position as a reference currency, reflecting the shift in global economic dominance from Europe to the USA. Countries were prohibited from devaluing their currencies to benefit export markets, and were only allowed to devalue their currencies by less than 10%. Post-war construction during the 1950s, however, required great volumes of Forex trading as masses of capital were needed. This had a destabilizing effect on the exchange rates established in Bretton-Woods. In 1971, the agreement was scrapped when the US dollar ceased to be exchangeable for gold. By 1973, the forces of supply and demand were in control of the currencies of major industrialized nations, and currency now moved more freely across borders. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s. New financial instruments, market deregulation and trade liberalization emerged, further stoking growth of Forex markets. The explosion of computer technology that began in the 1980s accelerated the pace by extending the market continuum for cross-border capital movements through Asian, European and American time zones. Transactions in foreign exchange increased rapidly from nearly $70 billion a day in the 1980s, to more than $3 trillion a day two decades later.
The rapid development of the Eurodollar market, which can be defined as US dollars deposited in banks outside the US, was a major mechanism for speeding up Forex trading. Similarly, Euro markets are those where currencies are deposited outside their country of origin. The Eurodollar market came into being in the 1950s as a result of the Soviet Union depositing US dollars earned from oil revenue outside the US, in fear of having these assets frozen by US regulators. This gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government reacted by imposing laws to restrict dollar lending to foreigners. Euro markets were particularly attractive because they had far fewer regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euro markets an advantageous place for holding excess liquidity, providing short- term loans and financing imports and exports. London was and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market, when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London's convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euro market.
The euro to US dollar exchange rate is the price at which the world demand for US dollars equals the world supply of euros. Regardless of geographical origin, a rise in the world demand for euros leads to an appreciation of the euro. Factors affecting the Euro to US dollar exchange rate Four factors are identified as fundamental determinants of the real euro to US dollar exchange rate: The international real interest rate differential between the Federal •Reserve and European Central Bank Relative prices in the traded and non-traded goods sectors •The real oil price •The relative fiscal position of the US and Euro zone •The nominal bilateral US dollar to euro exchange is the exchange rate that attracts the most attention. Notwithstanding the comparative importance of
In the long run, the correlation between the bilateral US dollar to euro exchange rate, and different measures of the effective exchange rate of Euroland, has been rather high, especially when one looks at the effective real exchange rate. As inflation is at very similar levels in the US and the Euro area, there is no need to adjust the US dollar to euro rate for inflation differentials. However, because the Euro zone also trades intensively with countries that have relatively high inflation rates (e.g. some countries in Central and Eastern Europe, Turkey, etc.), it is more important to downplay nominal exchange rate measures by looking at relative price and cost developments. The steady and orderly decline of the US dollar from early 2002 to early 2007 against the euro, sterling, Australian dollar, Canadian dollar and a few other currencies (i.e. its trade-weighted average, which is what counts for purposes of trade adjustment), remains significant. In the wake of the sub-prime mortgage crises in the US, dollar losses escalated and continued to feel the backlash. The Fed responded with several rounds of rate hikes while weighing the balance of domestic growth and inflation fears. When was the last time the EUR-JPY pair was over 150.00? (Have a look at).The fall of the US dollar
In competitive markets, free of transportation cost barriers to trade, identical products sold in different countries must sell at the same price when the prices are stated in terms of the same currency. If capital is allowed to flow freely, exchange rates become stable at a point where equality of interest is established. These two reciprocal forces determine euro vs. US dollar exchange rates. Various factors affect these two forces, which in turn affect the exchange rates: Positive indications (in terms of government policy, competitive advantages, market size, etc.) increase the demand for the currency, as more and more enterprises want to invest in its place of origin. The major stock indices also have a correlation with the currency rates, providing a daily read of the mood of the business environment. All exchange rates are susceptible to political instability and anticipation about new governments. For example, political instability in Russia is also a flag for the euro to US dollar exchange, because of the substantial amount of German investment in Russia. Economic data such as labor reports (payrolls, unemployment rate and average hourly earnings), consumer price indices (CPI), producer price indices (PPI), gross domestic product (GDP), international trade, productivity, industrial production, consumer confidence etc., also affect currency exchange rates. Confidence in a currency is the greatest determinant of the real euro to US dollar exchange rate. Decisions are made based on expected future developments that may affect the currency. Law of One Price:
Interest rate effects:
The dual forces of supply and demand
The business environment:
Stock market:
Political factors:
Economic data:
An exchange can operate under one of four main types of exchange rate systems: Fully fixed exchange rates In a fixed exchange rate system, the government (or the central bank acting on its behalf) intervenes in the currency market in order to keep the exchange rate close to a fixed target. It is committed to a single fixed exchange rate and does not allow major fluctuations from this central rate. Semi-fixed exchange rates Currency can move within a permitted range, but the exchange rate is the dominant target of economic policy-making. Interest rates are set to meet the target exchange rate. Free floating The value of the currency is determined solely by supply and demand in the foreign exchange market. Consequently, trade flows and capital flows are the main factors affecting the exchange rate. The definition of a floating exchange rate system is a monetary system in which exchange rates are allowed to move due to market forces without intervention by national governments. The Bank of England, for example, does not actively intervene in the currency markets to achieve a desired exchange rate level. With floating exchange rates, changes in market supply and demand cause a currency to change in value. Pure free floating exchange rates are rare - most governments at one time or another seek to "manage" the value of their currency through changes in interest rates and other means of controls. Managed floating exchange rates Most governments engage in managed floating systems, if not part of a fixed exchange rate system. The advantages of fixed exchange rates Fixed rates provide greater certainty for exporters and importers and, under normal circumstances, there is less speculative activity - though this depends on whether dealers in foreign exchange markets regard a given fixed exchange rate as appropriate and credible. The advantages of floating exchange rates Fluctuations in the exchange rate can provide an automatic adjustment for countries with a large balance of payments deficit. A second key advantage of floating exchange rates is that it allows the government/monetary authority flexibility in determining interest rates as they do not need to be used to influence the exchange rate. The EUR-USD has dropped? So w hat! (you can profit in any direction it takes, provided you chose the winning direction…)
account for less than 5% of the market, but are the key reason futures and other such financial instruments exist. The group using these hedging tools is primarily businesses and other organizations participating in international trade. Their goal is to diminish or neutralize the impact of currency fluctuations. account for more than 95% of the market. This group includes private individuals and corporations, public entities, banks, etc. They participate in the Forex market in order to create profit, taking advantage of the fluctuations of interest rates and exchange rates. The activity of this group is responsible for the high liquidity of the Forex market. They conduct their trading by using leveraged investing, making it a financially efficient source for earning. Since most Forex deals are made by (individual and organizational) traders, in conjunction with market makers, it’s important to understand the role of the market maker in the Forex industry. market maker is the counterpart to the client. The Market Maker does not operate as an intermediary or trustee. A Market Maker performs the hedging of its clients' positions according to its policy, which includes offsetting various clients' positions, and hedging via liquidity providers (banks) and its equity capital, at its discretion. Banks, for example, or trading platforms. who buy and sell financial instruments "make the market". That is contrary to intermediaries, which represent clients, basing their income on commission. By definition, a market maker is the counterpart to all its clients' positions, and always offers a two-sided quote (two rates: BUY and SELL). Therefore, there is nothing personal between the market maker and the customer. Generally, market makers regard all of the positions of their clients as a whole. They offset between clients' opposite positions, and hedge their net exposure according to their risk management policies and the guidelines of regulatory authorities. Market makers are not intermediaries, portfolio managers, or advisors, who represent customers (while earning commission). Instead, they buy and sell currencies to the customer, in this case the trader. By definition, the market maker always provides a two-sided quote (the sell and the buy price), and thus is indifferent in regards to the intention of the trader. Banks do that, as do merchants in the markets, who both buy from, and sell to, their customers. The relationship between the trader (the customer) and the market maker is simply based on the fundamental market forces of supply and demand. Definitely not, because the Forex market is the nearest thing to a "perfect market" (as defined by economic theory) in which no single participant is powerful enough to push prices in a specific direction. This is the biggest market in the world today, with daily volumes reaching 3 trillion dollars. No market maker is in a position to effectively manipulate the market. The major source of earnings for market makers is the spread between the bid and the ask prices. Trading Platform, for instance, maintains neutrality regarding the direction of any or all deals made by its traders; it earns its income from the spread. The way most market makers hedge their exposure is to hedge in bulk. They aggregate all client positions and pass some, or all, of their net risk to their liquidity providers. Easy-Forex™, for example, hedges its exposure in this fashion, in accordance with its risk management policy and legal requirements. For liquidity, works in cooperation with world's leading banks providing liquidity to the Forex industry: UBS (Switzerland) and RBS (RoyalBank of Scotland).Hedgers
Speculators
Market making
Questions and answers about 'market making' What is a market maker?
Who are the market makers in the Forex industry?
Do market makers go against a client's position?
Do market makers and clients have a conflict of interest?
Can a market maker influence market prices against a client’s position?
What is the main source of earnings for Forex market makers?
How do market makers manage their exposure?