Monday, December 6, 2010

What is Forex?

Forex, or Foreign Exchange, is the simultaneous exchange of one country’s currency for that of another. FXCM provides foreign exchange for the purpose of investor speculation. The investor wishes to purchase or sell one currency for another with the hope of making a profit when the value of the currencies changes in favor of the investor, whether from market news or events that take place in the world. This market of exchange has more daily volume, both buyers and sellers, than any other in the world. Taking place in the major financial institutions across the globe, the Forex market is open 24-hours a day.[1].

1.1.1 Forex vs. Stocks

Historically, the majority of the general public has viewed the securities markets as an investment vehicle. In the last ten years securities have taken on a more speculative nature. This was perhaps due to the downfall of the overall stock market as many security issues experienced extreme volatility because of the irrational exuberance displayed in the marketplace. The implied return associated with an investment was no longer true. (If indeed it ever was.) Many traders engaged in the day trader rush of the late 90s only to realize that, from a leverage standpoint, it took quite a bit of capital to day trade and the return, while potentially higher than long-term investing, was not exponential. After the onset of the day trader rush, many traders moved into the futures stock index markets where they found they could leverage their capital greater and not have their capital tied up when it could be earning interest or making money somewhere else. Like the futures markets, spot currency trading is an excellent vehicle for pattern day traders who desire to leverage their current capital to trade. Spot currency or Forex trading provides more options, greater volatility and stronger trends than currently available in stock futures indexes. Former securities day traders have an excellent home in spot foreign exchange (Forex). [1]

1.1.1.1 No Middlemen

Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen. Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees. Spot currency trading does away with the middlemen and allows clients to interact directly with the market-maker responsible for the pricing on a particular currency pair. Forex traders get quicker access and cheaper costs.[1]

1.1.1.2 Buy/Sell programs do not control the market

How many times have you heard that "fund A" was selling "X" or buying "Z"? Rumor had it that the funds were taking profits because of the end of the financial year or because today is "triple witching day", all as an explanation of why this stock is up or the market in general is down or positive on the session. No matter what your broker says, the stock market is very susceptible to large fund buying and selling and it is not uncommon for a fund to run a particular issue for a few days. In spot currency trading, the liquidity of the Forex market makes the likelihood of any one fund or bank to control a particular currency very slim. Banks, hedge funds, FCMs, governments, retail currency conversion houses and large net-worth individuals are just some of participants in the spot currency markets where the liquidity is unprecedented .[1]

1.1.1.3 Analysts and brokerage firms are less likely to influence the market

Have you watched TV lately? Heard about a certain Telecom stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as "buy" when the stock was rapidly declining? . No matter what the government does to step in and discourage this type of activity, we have not heard the last of it. IPOs are big business for both the companies going public and the brokerage houses. Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear. Foreign exchange, as the prime market, generates billions in revenue for the world's banks and is a necessity of the global markets. Analysts in foreign exchange don't drive the deal flow, they just analyze the Forex market.

1.1.1.4 8000 stocks vs 4 major currency pairs

There are approximately 4,500 stocks listed on the New York Stock Exchange. Another 3,500 are listed on the NASDAQ. Which one will you trade? Got the software? Got the time? In spot currency trading, you have 4 major markets, 24 hours a day 5.5 days a week. You have approximately 34 second-tier currencies to look at in your spare time (if you are so inclined). Concentrate on the majors, find your trade. Spend your afternoon on the golf course or with your kids (instead of with your eye doctor trying to diagnose why you are seeing double).

1.1.1.5 Commission free

Simply put: no commissions, no clearing fees, no exchange fees, no government fees, and no brokerage fees. Sure there may be different names for different fees at different places, but in spot currencies no commissions means just that – NO COMMISSIONS.

1.1.1.6 Same price for broker assisted trades

There is no premium for calling in orders, whether or not you trade Forex via the phone, use market orders, stop orders, limit orders or even contingent orders. In spot currency trading you do not have to worry about extra charges. Ever wonder why a securities brokerage houses charges you more if they have to guarantee you a price than if you give them a market order with no price qualifier? Well you don't have to worry about it if you trade the currency markets.

1.1.1.7 Trade off of your profits

Ever been up on a stock and wished you could leverage that profit and get in a little more of the issue? In spot currency trading you can. Use your open profits to add to your positions. As you gain experience, experiment with pyramid trading strategies. The options are endless because the market is cutting edge.

1.1.2 Forex vs. Futures

1.1.2.1 Highly Trending markets

Because the foreign exchange market gaps are very limited (the market is closed briefly on weekends), it's not dramatically affected by buying programs that allow it to be easily manipulated. The Forex market offers some of the smoothest trends available in any market. No other market can come close to the amount of monetary volume and participation as the Forex market, making it a haven for traders who do not have to deal with gaps and price movements, erratic spikes and other choppy market conditions more commonly experienced in the lower volume markets, like futures or options.

1.1.2.2 No Commissions or Hidden Fees

Some speculators are unaware that all financial markets have a spread (the difference between the bid and ask price). In the futures market you are not only paying the spread, but you are also paying commission charges, clearing and exchange fees on top of the spread. Ticker prices in the futures market typically signify the last traded price, not the spread. Global Forex Trading offers you commission-free trading on tradable prices. In a sense, what you see is what you get, allowing you to make quick decisions on your Forex trades without having to account for fees that may affect your profit/loss or slippage between the price you have just seen on the ticker and the price upon which the order will be filled.

1.1.2.3 Better Leverage

Trading in the spot currency markets provides advantages over trading currency futures contracts. One of the main advantages for traders trading spot currencies is the margin rate or leverage that clients are given. In spot currency trading, customers receive one low margin rate for trades done 24 hours a day. In currency futures trading, the client has one margin rate for "day" trades and one margin rate for "overnight" positions. This can become a hassle for traders and decreases the overall tradability of the currency futures markets. Margin rates in spot currency trading vary from around 1 to 5 percent depending on the size of transactions a particular trader initiates. Global Forex Trading's spot currency trading gives the customer one rate all the time, no hassles and no margin calls. One rate enables the traders to manage their own risk efficiently and simply.

1.1.2.4 24-hour Trading

Since the Forex market, in a sense, follows the sun around the globe the market, it rarely experiences periods of illiquidity. What this means is that any trader in any time zone can trade Forex at any time during the day or night. You no longer have to wait for the market to open when news has already hit the streets or have to stop trading because the CME, CBOT or other American futures pits have closed for the day. This gives the Forex trader added flexibility and continuous market opportunities that just aren't available in futures.
To explain the global effect on the Forex market, there are three main economic zones that are linked throughout the world. For instance, when the Pacific Rim markets such as Japan and Singapore begin to slow, the European markets of England, Switzerland and Germany begin. These Forex markets are followed by the North American markets of the United States, Canada and Mexico. As the North American markets begin to slow down for the evening, the Pacific Rim starts its trading day again. This example shows that you are no longer limited to trading using the comparatively short trading day offered by U.S. markets only.
Foreign exchange is one of the few true 24-hour markets. When trading Forex, clients enjoy unparalleled liquidity 24 hours a day. In many futures markets, however, the overnight access available to traders is simply window dressing. The lack of liquidity and restrictions on what types of orders a client can place make trading and protecting positions a nightmare.
A good example is the Globex market. While the Globex market is only closed for a 15 minute period each day, the liquidity available after the open outcry market is closed in Chicago is normally very low. Spreads are wider and the ability to place larger orders is non-existent. Because of this, most volume traders are forced into trading the exchange instead   of physical market overnight. The EFP market is the spot market priced in futures pricing. EFPs, however, come with additional fees and are not available from an electronic interface. Electronic access, speed, no fees and unmatched liquidity, 24-hours-a-day makes spot Forex the choice for the foreign currency trader.

1.1.2.5 Forex Methodology

Foreign exchange is the principal market of the world. If you study any market trading through the civilized world everything is valued in money, the root of all pricing. Global finance is the distribution and redistribution of money throughout different channels and different financial derivatives. Trading spot currencies can be done with many different methods and you will find many types of traders. From fundamental traders speculating on mid-to-long term positions based on worldwide cash flow analysis and fixed income formulas, to the technical trader watching for breakout patterns in consolidating markets or the Gann fanatic looking to duplicate the techniques of W.D. Gann, the methods for trading foreign exchange are many. Spot currencies are a great market for the "trader". It is where "big boys" trade and can provide both large profit potential as well as commensurate risk for the speculator.

1.2 The Principles of Trading

The most basic precept of trading FX is Risk Management. In order to sustain profitability, a trader must properly monitor his positions by employing stops and limits.
Risk management factors into the two major schools of thought that exist surrounding the analysis of the FX market: fundamental analysis and technical analysis. Fundamental analysis focuses on underlying economic conditions and indicators - for example economic growth rates, interest rates, inflation, and unemployment. Technical analysis uses historical prices and charts to predict future movements in prices.
Though there is a debate over which school of thought is the more accurate, accuracy is really a function of the time frame used. Short-term traders prefer to use technical analysis because these traders focus their strategies primarily on historical price action. Long term trading is more suited to fundamental traders as they analyze a currency's proper current value as well as future value.

1.3 Buying/Selling

In this market you may buy or sell currencies. The objective is to earn a profit from your position. If you have bought a currency, for example, and currency appreciates in value, then you will earn a profit by closing your position. When you close your position and sell the currency back in order to lock in the profit, you are in actuality buying the counter currency in the pair. By trading currency pairs, one currency valued against another, a rate of worth has been established. After all, a country’s currency has value only relative to the currency of another country.

1.4 Quoting Conventions

Currencies are quoted in pairs. The first listed currency is known as the base currency, while the second is called the counter or quote currency. In the wholesale market, currencies are quoted using five significant numbers, with the last placeholder called a point or a pip.
Like all financial products, FX quotes include a "bid" and "ask". By quoting both the bid and ask in real time, FXCM ensures that traders always receive a fair price on all transactions. As in any traded instrument, there is an immediate cost in establishing a position. For example, USD/JPY may bid at 131.40 and ask at 131.45; this five-pip spread defines the trader’s cost, which can be recovered with a favorable currency move in the market.

1.5 Margin

The margin deposit is not a down payment on a purchase of equity, as many perceive margins to be in the stock markets. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value.

1.6 Rollover

For positions open at 5pm EST, there is a daily rollover interest rate that a trader either pays or earns, depending on your established margin and position in the market. If you do not want to earn or pay interest on your positions, simply make sure it is closed at 5pm EST, the established end of the market day

1.7 What Every Currency Trader Should Know

The Forex market is one of the most popular markets for speculation due to its enormous size, liquidity, and tendency for currencies to move in strong trends. An enticing aspect of trading currencies is the high degree of leverage available.  Without proper risk management, this high degree of leverage can lead to enormous swings between profit and loss. As even seasoned traders suffer losses, speculation in the Forex market should only be conducted with risk capital funds that, if lost, will not significantly deplete one's personal financial well being.

 Mini accounts were designed for those new to online currency trading. There is a smaller deposit required to open mini account and trading sizes are 1/10th the size of a regular account. The smaller trade size enables traders to take smaller risks. The Mini account were intended to introduce traders to the excitement of currency trading while minimizing risk.

1.8 Be Able To Ride Down Trends

In the equity market, finding profitable trades in a downward moving market is difficult. Market regulations make it impossible to short a stock when the price is moving down. As a result, equity traders are often faced with the choice of not trading or fighting against the trend.

Unlike the equity market, there are no restrictions on short selling the major currency pairs. Profit potential exists in the currency market regardless of whether a trader is long or short, or which way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. This means a trader has equal potential to profit in a rising or falling market. As a cautionary note, to profit from a trade you must be right about the market direction (up or down) or you will lose money.

1.9 Technical Analysis

The same technical strategies and tools used to analyze the equities and futures markets can be applied to Forex. The large number of buyers and sellers in foreign exchange combined with the strong trending nature of the market make it the ideal market for technical analysis.

1.10 Liquidity

The spot Forex market is the largest and most liquid market in the world with a daily volume of over $1.4 trillion. Because many foreign exchange brokers have access to the largest banks in the world, their clients consistently receive the best prices, spreads, and the best execution.

1.11 Analyze Countries Like Stocks

Currencies are traded in pairs so if a trader “buys” one currency he is simultaneously “selling” the other. As with a stock investment, it is better to invest in the currency of a country that is growing faster and is in a better economic condition. Currency prices reflect the balance of supply and demand for currencies. Two primary factors affecting supply and demand are interest rates and the overall strength of the economy. Economic indicators such as GDP, foreign investment, and the trade balance reflect the general health of an economy and are therefore responsible for the underlying shifts in supply and demand for that currency. There is a tremendous amount of data released at regular intervals, some of which is more important than others. Data related to interest rates and international trade is looked at the closest.

1.12 Equity Market: Making the Transition to Forex

Equity markets can be used as a key indicators for movement in the Forex market. As technology has made transportation of capital easier, investing in global equity markets has become far more feasible. Accordingly, a rallying equity market in any part of the world serves as an ideal opportunity for all, regardless of geographic location. The result of this has become a strong correlation between a country's equity markets and its currency: if the equity market is rising, the investor are coming in to seize the opportunity. Conversely, falling equity markets will have domestic investors selling their shares of local publicly traded firms only to seize investment opportunities abroad.

2 References

  1. http://www.fxcm.com/guide/principles-of-trading.html
  2. http://www.fxcm.com/guide/resources.html
  3. http://www.gftForex.com/Forex/Forexvsfutures.asp
  4. http://www.euromoney.com

0 التعليقات:

Post a Comment