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.
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 any influence by a single participants 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 the credit lines, that are accessible even to currency speculators with small capitals ($ 1,000 - 5,000), where the profit may be impressive. (You can learn more about it in the section: The main principles of trading.)
The idea of marginal trading stems from the fact that in FOREX speculative interests can be satisfied without a real money supply. This decreases overhead expenses for transferring money and gives an opportunity to open positions with a small account in US dollars, buying and selling a lot of other currencies. That is, on can conduct transactions very quickly, getting a big profit, 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 $100,000, but to open it it is necessary to have only from 0.5% to 4% 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 1% (1:1000 leverage) at the price of 1.49889 and wait for the exchange rate to go up. Some time later your expectations become true. You close the position at 1.5050 and earn 61 pips (about $ 405). For the calculation of 1 pip click here.
Everyday fluctuations of currencies constitute about 100 to 150 pips, giving FX traders an opportunity to make 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. Usually Internet-brokers establish the minimum deposit such as $ 2000, for working in the FOREX market, and grant a leverage of 1:100. That is, opening the position at $100,000, a trader invests $1,000 and receives $99.000 as a credit. The major currencies traded in FOREX, are Euro (EUR), Japanese yen (JPY), British Pound (GBP), and Swiss Franc (CHF). All of them are traded against the US dollar (USD).
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.
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 PRO-CHARTS trading system. Analyzing the indicators one can come to the conclusion about further movements of the quoted currencies. For a more detailed description of the indicators, analyzing price charts and volumes of trading, click here.
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-filfilling 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, every working days;
- A trader can open a position for any period of time he wants;
- No fees, except for the difference between buying and selling prices;
- An opportunity to get a bigger profit that the invested sum;
- Qualified work in the FOREX market can become your main professional activity;
- You can make deals any time you like.
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 0.5 to 4 per cent of the credit line, granted for the transaction. So, in order to buy or sell 100,000 US dollars for Japanese yens, 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 0,9162 to 0,9292. 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 99,000 dollars of the credit line, granted by the Internet broker, is added to 1000 dollars, and you buy the Euro at the price of 0.9162. As a result of this transaction we get: $ 100,000 / 0.9162 = Euro 109.146, 47.
When the rate changes (an average daily change of Euro is about 70 to 100 pips), you close the position and sell the Euro for dollars, but at the rate of 0.9292. You get 109,146. 47*0.9292 =101,418.89 dollars. Your profit is $ 1,418.89. The same transaction with leverage 1:200 would give you $2, 837.78 of profit, with leverage 1:50 the profit would be 709.45, with leverage 1:25 - 354.72.
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 bigger.
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 0.9561 shows that 1 Euro costs 0.9561 US dollars.
The last figure in the quote is called "pip". The cost of the pip is different for every currency, and depends on the leverage and current quote.
The formula for calculating 1 pip is:
100,000/current quote without commas * K
where К=1 at leverage 1:100,
К=2 at leverage 1:200,
К=0,5 at leverage 1:50,
K=0,25 at leverage 1:25.
Examples:
USDJPY = 108.91 leverage 1:100
100.000 / 10891 х 1 = 9,18 USD
EURUSD = 0.9561 leverage1:200
100.000 / 9561 х 2 =20,92 USD
GBPUSD and EURUSD are direct quotes, i.e. when the chart goes up, GBP and EUR become more expensive, and when it goes down, the currencies become cheaper. USDCHF and USDJPY are backward quotes, and when the chart grows, prices on CHF and JPY fall, and when the chart goes down, the prices grow.
On direct quotes you buy according to ASK and sell according to BID. With backward quotes, you buy according to BID and sell according to ASK .
Trading in the FOREX market is realized in lots. When you open a position, you can choose the number of lots you want from 1 to 10. One lot equals $ 100,000. The deposit sum for one lot will vary from $500 to $2000, depending on the credit leverage you choose. Leverage is a financial mechanism that allows crediting speculative transactions with a small deposit. We give you an opportunity to choose a credit leverage in the range of 1:200 to 1:25.
In the course of trading you can fix your profit or cut off your losses according to the commands LIMIT and STOP that have been set up.
LIMIT is set up higher than the current meaning of the price.
STOP is set up lower than the current meaning of the price.
With these commands the positions is closed without additional orders when the price reaches the agreed level.
In the process of trading you can create pending positions, that will be activated when the price reaches the agreed level (open price). When creating and closing orders, a temporary delay occurs, and lasts for about 30 to 40 seconds. When you make an inquiry, you are given a real market price, which is the current price at the moment of proposal, not at the moment of inquiry.
The process of trading is described in detail in section Description of the Trade Terminal.
The main terms that characterize the account:
- Deal, realization of 2 trade transactions, when currency is bought (sold), and then the reverse conversion is realized.
- Balance, the sum on the account of a client after the last transaction is conducted.
- Floating Profit, the current profit on open positions.
- Floating storage, fee for postponement of an opened position over midnight GMT.
- Equity = Balance + Floating + Floating storage.
- Margin requirement, a necessary deposit sum calculated according to the formula
- 100,000 / K + 100,000 / K,
- where K = leverage, and the number of items equals the number of open positions.
- Percentage, index of an account.
- Percentage = Equity / Margin Requirement. At Percentage lower than 50 % it's impossible to open new positions.
- Margin call, condition of an account when all opened positions are closed by the Internet broker according to current quotes. It occurs at a Percentage lower than 10%.
Please note that contrary to the majority of other companies, in PRO-FOREX.com price levels of client's orders may differ from the current price only by 5 pips. However, very rarely are orders executed worse than requests, because of the high market volatility.
Foreign Exchange Markets
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
Other useful resourses
It's only natural that, for professional work as an FX trader, a mere wish alone and technical opportunity are not enough. A person may be very gifted, but first he should learn a craft with all its subtleties and peculiarities. It's also clear that our web-site can neither replace a pile of manuals nor present a huge amount of articles, online textbooks and other material, supplied by the Web.
Of course, we do have some auxiliary materials: advice, FAQ, but still it is not enough if you are a newcomer in the FOREX market. That is why we present here a rather extensive list of references supplied other recourses available for reading and copying by the user of the Internet. If you can offer an interesting reference or an article, we'd be pleased to place it in this section.
ANALYSIS:
- Accurate Forex Trading Signals - Forex Trading Signals/Alerts for Swing Traders.
- Foreign Currency Exchange - Make your international payments with North America’s leading foreign exchange services provider including funds transfer, forward contracts, and currency risk management.
- AceTrader - trade signals on the majors, updated six times/day. Trade signals with stops and profit objectives, plus in depth technical analysis and wave analysis.
- K.B. Advisory Ltd - Daily FX forecasts and trade signals for professional FX traders.
- Elliott Wave Analysis by A. Bezrodny - technical analysis using Elliott wave analysis for yen, swiss, and euro.
- BBSP - technical analysis, commentary and trade signals for currencies and other sectors.
- Dukascopy Analysis - advanced proprietary TA for all markets, emphasis on fx using quantum mechanics.
- Forex Market Outlook - elliott wave analysis.
- Penny Stocks Guide - Get important information about penny stocks that will help with your investment choices.
- Currency Trading USA - Trade currencies online and get free training when you open a forex account. Sign up for a 30-day free trial of our online trading system today. Great for swing trading and day trading.
- Forex Day Trading Online - Get free training on our award-winning, online currency trading system. Use our platform to learn how to day trade free for 30 days. Trading currencies requires a lot less money than trading stocks. See how well you do trading the forex market in 30 days.
- Stock Market Charts - Get stock market quotes, live charts, news and other financial information at The Financials.
- Go Forex - A one-stop forex trading shop. Includes a wide range of information and resources about foreign exchange trading.
- The Official Forex Training Site - Free information about the forexmarket, forex news, etc.
FINANCIAL MAGAZINES:
FINANCIAL SOFTWARE:
- TradeStation by Omega Research - Imagine historically testing any idea you have for buying and selling, and revealing the results in seconds. Imagine if you could pinpoint the ones that could have worked (and those that wouldn't have) before you risk one penny on a trade. Now imagine being able to automate the real-time monitoring and execution of any strategy you ultimately select. In effect, to harness the power of your PC to identify and react to market opportunities (however your strategy defines them) more quickly and easily than you ever thought possible.
- MetaStock by Equis International - The unparalleled market technical analysis software! Analyze market data in real time. Plan your own strategy to make money, regardless of upward or downward trending markets. Technical analysis has never been easier! MetaStock's incredibly intuitive drag-and-drop charting tools allow you to spend your time charting, without any confusing coding or programming. Powerful back-testing functions, over 100 preset indicators and easy formula customization give you unmatched control of your market trading strategy.
