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.
Do to the high trading volume of almost $2 Trillion Dollars traded each day makes the Forex Market a very liquid market. It is also the biggest liquid
financial market. According to various assessments, money masses in
the market constitute from 1.5 to 2 trillion US dollars a day. (It
is impossible to determine an absolutely exact number because trading
is not centralized on an exchange.) Transactions are conducted all
over the world via telecommunications 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.
In our opinion, the FOREX is a more objective market, because if some of its participants
would like to change prices, for some manipulative purpose, they would
have to operate with tens of billions dollars. That is why we believe any influence
by a single participant in the market is practically out of the question.
The superior liquidity allows the traders to open and/or close positions
within a few seconds. The time of keeping a position is arbitrary
and has no limits: from several seconds to many years. It depends
only on your trading strategies. Although the daily fluctuations of
currencies are rather insignificant, you may use margin up to 100:1. This is why currency speculators with small
capital of $ 5,000 - $50,000 can profit or loss from small moves in the currency
market.
The idea of marginal trading stems from the fact that in FOREX speculative
interests can be satisfied without a hundreds of thousands of dollars. This decreases
overhead expenses for transferring money and gives an opportunity
to open positions with a small amount of US dollars. That is, one can conduct transactions very
quickly, getting a big profit or loss, when the exchange rates go
up or down. Many speculative transactions in the international financial
markets are made on the principles of marginal trading.
Margin trading is trading with a borrowed capital. Marginal trading
in an exchange market uses lots. 1 lot equals approximately US$100,000,
but to open it it is necessary to have only from 0.25% to 1% of the
sum.
For example, you have analyzed the situation in the market and come
to the conclusion that the pound will go up against the dollar. You
open 1 lot for buying the pound (GBP) with the margin of 100:1 meaning
you margined US$1,000 at the price of 1.7700 and wait for the exchange
rate to go up. Some time later your expectations become true. You
close the position at 1.7800 and earn 100 pips or 1 cent for a return
of $1,000. Remember you could have lost $1,000 also if the GBP/USD went to 1.7600. This is why we recommend the use of stop-loss orders to help protect your investment. For the calculations of pips please call +1 781-440-0093.
Some pip values stay constant, but some do change. The constant pip
values are 1 pip of the EUR/USD, GBP/USD and AUD/USD equals US$10
per US$100,000 position.
Everyday fluctuations of currencies average about 100 to 150 pips,
giving FX traders an opportunity to make or lose money on these changes.
In FOREX, it's not obligatory to buy some currency first in order
to sell it later. It's possible to open positions for buying and selling
any currency without actually having it. This is why margin is used.
In order to assess the situation in the market a trader has to be
able to use fundamental and/or technical analysis, as well as to make
decisions in the constantly changing current of information about
political and economic character. Most small and medium players in
financial markets use technical analysis. Technical analysis presupposes
that all the information about the market and its further fluctuations
is contained in the price chain. Any factor, that has some influence
on the price, be it economic, political or psychological, has already
been considered by the market and included in the price. The initial
data for a technical analysis are prices: the highest and the lowest
prices, the price of opening and closing within a certain period of
time, and the volume of transactions.
A technical analysis is founded on three suppositions:
• Movement of the market considers everything;
• Movement of prices is purposeful;
• History repeats itself.* "Past performance is not indicative of future results"
That is, technical analysis is a statistical and mathematical analysis
of previous quotes and a prognosis of coming prices.
A number of technical indicators have been installed into the trading
system. Analyzing the indicators one can come to the conclusion
about further movements of the quoted currencies.
Fundamental analysis is an analysis of current situations in the
country of the currency, such as its economy, political events,
and rumors. The country's economy depends on the rate of inflation
and unemployment, on the interest rate of its Central Bank, and
on tax policy. Political stability also influences the exchange
rate. Policy of the Central Bank has a special role, as concentrated
interventions or refusal from them greatly influence the exchange
rate.
At the same time one should not consider fundamental analysis just
as an analysis of the economic situation in the country itself.
A far bigger role in the FOREX market belongs to the expectations
of the market participants and their assessment of these expectations.
Various prognoses and bulletins, issued by the participants, have
a strong influence on the expectations. Very often an effect of
the so-called self-fulfilling prophecy occurs when market players
raise or lower the exchange rates according to the prognosis. But
a deep and thorough fundamental analysis is available only for big
banks with a staff of professional analysts and constant access
to a wide field of information.
In spite of these different approaches, both forms of analyses complement
one another. Traders who act on the basis of a fundamental analysis,
have to consider some technical characteristics of the market (the
main rates of support, such as resistance and resale), and supporters
of the technical approach to the market must track the main news
(interest rates, important political events).
The main merits of the FOREX market are:
• The biggest number of participants and the largest volumes
of transactions
• Superior liquidity and speed of the market: transactions
are conducted within a few seconds according to online quotes
• The market works 24 hours a day, 6 days a week
• A trader can open a position for any period of time he wants
• No fees, except for the difference between buying and selling
prices (bid/ask spreads)
• An opportunity to get a bigger profit that the invested
sum, but you limit your loss to no more than what you invest
The Main Principles of Trading
In contrast to exchange transactions with real supply or real currency
the participants of FOREX use trading with a margin deposit; i.e.
marginal or leverage trading. In marginal trading, each transaction
has two obligatory stages (they can be divided by period of time,
which can be as long as you like): buying (selling) of currency
at one price, and then selling (buying) it at another (or at the
same) price. The first transaction is called opening the position,
the second one, closing the position.
Opening a position, a trader furnishes a deposit sum from US$250
to US$1,000, granted for the transaction. So, in order to buy or
sell US$100,000 for British Pounds (Cable), you will not need the
whole sum, but only from 500 to 2000 US dollars depending on your
policy of controlling risks. When the position is closed, the deposit
sum returns, and calculation of profits or losses is done. All the
profit or losses caused by the change of currency rates is credited
on your account.
Let's take a concrete example of getting a profit from the changing
the rate of the Euro, from 1.3000 to 1.3200. If you have anticipated
this change by using technical or fundamental analysis, you can
buy the Euro cheaper for dollars, and then sell it back at a higher
price. For example, if you choose leverage 1:100, then US$1,000
of margin will be transfer from you CASH account into your margin
account and you purchase/BUY 1 lot of the EUR/USD (EURO Vs. USD
meaning you are buying EURO and Selling US Dollar) at price of 1.3000.
When the rate changes and you close the position and sell the EUR/USD,
but at the rate of 1.3200, you receive US$2,000 + your margin of
US$1,000 for a profit of US$2,000 [1.3200-1.3000 = 200 pips (each
pip = $10) 200 pips * $10*1 Lot = US$2,000]. The same transaction
with leverage 200:1 would give you a profit of US$4,000 if you had
placed a 2 lot (remember with 200:1 the margin is only US$500 per
$100,000 position) [1.3200-1.3000 = 200 pips (each pip = $10) 200
pips * $10 *2 lots = US$4,000.
We'd like to remind you that the higher the credit leverage, the
higher is your profit if the fluctuation of the currency rate was
anticipated correctly. However, if your anticipation was wrong,
your losses will be larger also.
Past performance is not indicative of future results.
One cannot feel confident in the FOREX market without a thorough
knowledge of the terms used there.
Foreign exchange quotes are a relation between currencies.
• USDCHF - the cost of $1 in Swiss Francs.
• USDJPY - the cost of $1 in Japanese yens.
• EURUSD - the cost of Euro 1 in US dollars.
• GBPUSD - the cost of 1 GBP in US dollars.
That is, quotes are expressed in the units of the second currency
for a unit of the first one. For example, quote USDJPY 108,91 shows
that $1 costs 108.91 Japanese yens. Quote EURUSD 1.3000 shows that
1 Euro costs 0.7692 US dollars.
Participants of a foreign exchange market
The main participants of a foreign exchange market are:
• Commercial banks
• Exchange markets
• Central banks
• Firms that conduct foreign trade transactions
• Investment funds
• Broker companies
• Private persons
Commercial banks conduct the main volume of exchange transactions.
Other participants of the market have their accounts at the banks,
conducting necessary conversion transactions. Banks accumulate (through
transactions with the clients) the combined needs of the market
in exchange conversions as well as in calling and distributing money,
breaking with it into new banks. Besides satisfying clients' requests,
banks can operate independently, using their own assets. In the
end, a foreign exchange market is a market of interbank dealings,
and when speaking about the exchange rates movement, one should
bear in mind the existence of an interbank foreign exchange market.
In international foreign exchange markets, international banks with
the daily volume of transactions of billions dollars have the biggest
influence. These are Barclays Bank, Citibank, Chase Manhatten Bank,
Deutsche Bank, Swiss Bank Corporation, Union Bank of Switzerland,
etc.
Exchange markets Contrary to stock markets and markets for terminal
exchange dealings, exchange markets do not work in a definite building
and they do not have definite business hours. Thanks to the development
of telecommunications most of the leading financial institutions
of the world use services of exchange markets directly and via mediators
24 hours a day. The biggest international exchange markets are the
London, New York and Tokyo exchange markets. In some countries with
transitional economies there are exchange markets for currency exchange
by juristic persons and for forming a market exchange rate. The
state usually regulates the exchange rate in an active manner, using
the compactness of the exchange market.
Central banks control currency reserves, realize interventions that
influence the exchange rate, and regulate the interest investment
rate in the national currency. The central bank of the United States,
the US Federal Reserve Bank, or "FED", has the greatest
influence in the international exchange markets. It is followed
by the central banks of Germany, (the Deutsche Bundesbank or BUBA)
and of Great Britain (the Bank of England, nicknamed the "Old
Lady").
Firms that conduct foreign trade transactions. Companies participating
in international trade have a stable demand for foreign currency
(importers) and supply (exporters). As a rule, these organizations
do not have direct access to exchange markets, and they conduct
their conversion and deposit transactions via commercial banks.
Investment funds. These companies, represented by various international
investment, pension,and mutual funds, insurance companies, and trusts,
realize the policy of diversified management of portfolio of assets
by placing there money in securities of the governments and corporations
of different countries. The world-know fund, Quantum, is owned by
George Soros, and it executes successful exchange speculations.
Big international corporations as Xerox, Nestle, General Motors
a.o. that make foreign industrial investments (creating branches,
joint ventures etc.), also are firms of this kind.
Broker companies bring together a buyer and a seller of foreign
currency and conduct a conversion dealing between them. Broker companies
take a broker's fee. As a rule, in the FOREX market there is no
fee as a per cent from the sum of a transaction, or as a sum agreed
in advance. Usually the dealers of broker companies quote currency
with a spread, that includes their fee. A broker company, having
the information about the asked rates, is a place where the real
exchange rate is formed according to closed deals. Commersial banks
get their information about the current exchange rate from broker
companies. The biggest international broker companies are Lasser
Marshall, Harlow Butler, Tullett and Tokio, Coutts, and Tradition.
Private persons. Natural persons realize a wide range of non-commercial
transactions in the sphere of foreign tourism, transfers of salaries,
pensions, royalties, buying and selling foreign currency. This is
also the biggest group that realizes speculative exchange transactions.
The Working Hours of the Markets
Exchange markets work all the time. Their work in the calendar twenty-four-hour
period is started in the Far East, in New Zealand (Wellington),
passing the time zones in Sydney, Tokyo, Hong Kong, Singapore, Moscow,
Frankfurt-on-Main, London, then finishing the day in New York and
Los Angeles. The count of time zones begins from the zero meridian
in Greenwich near London, and the time itself is called Greenwich
Mean Time (GMT). Depending on the season (summer or winter), the
time in different financial centers of the globe will differ from
the GMT.
The working day of exchange brokers of Western commercial banks
starts, as a rule, at 7:30 am by local time. At 8:00 am the dealers
are already closing deals. The morning hours are usually devoted
to short analyses of events on the international exchange markets
at the moment. The dealers use economic and technical analyses of
the situation in the market, read analytical articles in newspapers,
then exchange points of view and the latest rumors with each other
and with dealers from other commercial banks. On the basis of various
data, a picture of possible behavior of the exchange rate on the
coming day is put together, with variants of all sorts of possible
events.
By 8:00 am the market, consisting of individual dealers, will have
worked out the tactics of its behavior, and it enters the operations
of the international exchange market, giving a new and powerful
impulse to the movement of the exchange rate. Various territorial
markets can be given the following characteristics of an average
typical activity during a 24 hour day.
Far East. Here the most active deals in the market are conversion
transactions with the dollar to the Japanese yen, the dollar to
Euro, Euro to yen, and the dollar to the Australian dollar. Very
often fluctuations of exchange rates at that time are insignificant,
but there are days when currencies, especially the dollar against
the yen, make breath-taking flights. Especially so when the central
bank of Japan makes an intervention. In Moscow its night and morning
at that time, so till noon one can work with Tokyo, till mid-day
with Singapore.
Western Europe. At 10:00 am Moscow time the market in the European
financial centers of Zurich, Frankfurt-on-Main, Paris, Luxembourg
are open. However, the really powerful movement of the exchange
rate against the main currencies starts after 11:00 am Moscow time,
when the London market is opened. This continues, as a rule, for
2 to 3 hours, after that the dealers of the European banks go to
have lunch, and the activity of the market falls down a bit.
North America. The situation livens up with the opening of the New
York market at 4:00 pm Moscow time, when dealers of American banks
start working, and when European dealers come back from their lunch.
Powers of European and American banks are about equal, that is why
fluctuations of the rate do not go out of the limits of usual European
fluctuations. Nevertheless, exchange dealers look forward to the
opening of the New York market in order to receive fresh data about
a possible movement of the rate (the more so if the European market
has been sluggish). But when the European market is closed about
7p m or 8pm Moscow time, aggressive American banks, left alone on
the "thin" market, are able to cause a sharp change of
the exchange rate of the dollar against other currencies.
What is a FX Speculator?
In modern conditions practically all financial transactions in the
market are speculative by their nature, and there's nothing abnormal
or criminal in it. One of the most vivid indices of markets' globalization
is their daily volume of exchange transactions. Only in 10 major
financial centers it increased from 206 billion dollars in 1986
to 967 billion dollars in 1992. According to the IMF, on the whole
the volume is over 1 trillion dollars a day, and on some days it
reaches 3 trillions. It is enough to say that the volume of gold
and foreign exchange reserves of all developed countries was only
555.2 billion dollars in 1992, which is two times less than a daily
volume of market transactions. According to some calculations, the
volume of exchange transactions is 40 times bigger that the daily
volume of foreign trade transactions. Therefore, most of the deals
are caused not by a commercial necessity, but by financial reasons.
And a financial transaction is always caused by the fact that money
is looking for some profitable usage.
The international exchange system functioning in the world at the
moment develops among people dealing with exchange and financial
transactions: the so-called speculative psychology. In the world
where exchange rates fluctuate for some per cent every week, where
currencies that are considered to be stable can lose 20 to 30 per
cent of their cost during a few months, it's absolutely clear that
the manager of a fund, trying to compensate for inevitable losses,
has to use speculative operations. For example, a reasonable owner
of dollars has to get rid of them very quickly and exchange them
for Euro every time the expected fall of the dollar against Euro
surpasses the difference between the profit from American notes
and the profit from the respective German notes. For instance, if
in the coming months the dollar is expected to fall against the
Euro by 6%, and the profit from American notes is 6 per cent bigger
than the profit from German notes, a speculator will probably decide
to keep dollars. If the gap in the interest rates is less than the
expected fall of the rate, the "running away from the dollar"
begins.
Who are these speculators? An analysis shows that the main speculators
acting in the market are institutional investors. Among them one
can single out, first of all, official state institutions, and,
secondly, private financial and other institutions. Thus according
to the report of the "Group of Ten", state investors in
Europe and Japan keep about 20 per cent of their assets in the form
of foreign securities (in the USA only 7.5 per cent). However, the
main feature of the 1980s was the growing international activity
of private financial institutions: pension funds, insurance companies,
and mutual funds. The Globalization of international financial markets
is an objective process, reflecting the growing degree of economic
relations in the world. It promotes a more effective distribution
of financial resources.
Major world exchange markets:
AMEX - American Stock Exchange
BOVESPA - Sao Paulo Stock Exchange
CBOT - Chicago Board of Trade
CHX - Chicago Stock Exchange
CME - Chicago Mercantile Exchange
Commodities on the Web - List of the commodities
LIFFE - London International Financial Futures and Options Exchange
London Stock Exchange -London Stock Exchange
Nasdaq
NYMEX - New York Mercantile Exchange
NYSE - New York Stock Exchange
SBF - la Bourse de Paris
SES - Singapore Exchange
SET - Stock Exchange of Thailand
TSE - Tokyo Stock Exchange
TSE - Toronto Stock Exchange
LSEX - London Stock Exchange
CBOE - Chicago Board Options Exchange CBOE
PHLX - Philadelphia Stock Exchange
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