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Forex Learn and Trade |
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Trading History In 1967, a Chicago bank refused a college professor by the name of Milton Friedman a loan in pound sterling because he had intended to use the funds to short the British currency. Friedman, he had perceived sterling to be priced too high against the dollar, wanted to sell the currency, then later buy it back to repay the bank after the currency declined, thus pocketing a quick profit. The bank's refusal to grant the loan was due to the Bretton Woods Agreement, established twenty years earlier, which fixed national currencies against the dollar, and set the dollar at a rate of $35 per ounce of gold. The Bretton Woods Agreement, set up in 1944, aimed at installing international monetary stability by preventing money from fleeing across nations, and restricting speculation in the world currencies Prior to the Agreement, the gold exchange standard--prevailing between 1876 and World War I--dominated the international economic system. Under the gold. exchange, currencies gained a new phase of stability as they were backed by the price of gold. It abolished the age-old practice used by kings and rulers of arbitrarily debasing money and triggering inflation. But the gold exchange standard didn't lack faults. As an economy strengthened, it would import heavily from abroad until it ran down its gold reserves required to back its money. As a result, money supply would shrink, interest rates rose and economic activity slowed to the extent of recession. Ultimately, prices of goods had hit bottom, appearing attractive to other nations, which would rush into buying sprees that injected the economy with gold until it increased its money supply, and drive down interest rates and recreate wealth into the economy. Such boom-bust patterns prevailed throughout the gold standard until the outbreak of World War I interrupted trade flows and the free movement of gold. After the Wars, the Bretton Woods Agreement was founded, where participating countries agreed to try and maintain the value of their currency with a narrow margin against the dollar and a corresponding rate of gold as needed. Countries were prohibited from devaluing their currencies to their trade advantage and were only allowed to do so for devaluations of less than 10%. Into the 1950s, the ever-expanding volume of international trade led to massive movements of capital generated by post-war construction. That destabilized foreign exchange rates as set up in Bretton Woods. The Agreement was finally abandoned in 1971, and the US dollar would no longer be convertible into gold. By 1973, currencies of major industrialized nations became more freely floating, controlled mainly by the forces of supply and demand which acted in the foreign exchange market. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s, giving rise to new financial instruments, market deregulation and trade liberalization. In the 1980s, cross-border capital movements accelerated with the advent of computers and technology, extending market continuum through Asian, European and American time zones. Transactions in foreign exchange rocketed from about $70 billion a day in the 1980s, to more than $1.5 trillion a day two decades later. Free Floating Currencies In 1971 and 1972 two more attempts at free-floating currency against the U.S. dollar, namely the Smithsonian Agreement and the European Joint Float. The first was just a modification of the Bretton-Woods accord with allowances for greater fluctuation, while the European one aimed to reduce dependence of their currencies on the dollar. After the failure of each of these agreements, nations were allowed to peg their currencies to freely float, and was actually mandated to do so by 1978 by the IMF. The free-floating system managed to hold out for several years, but many denominations had failed against the strong currencies. The Euromarket A major catalyst to the acceleration of foreign exchange trading was the rapid development of the euro-dollar market; where US dollars are deposited in banks outside the US. Similarly, Euromarkets are those where assets are deposited outside the currency of origin. The Eurodollar market first came into being in the 1950s when Russia's oil revenue-- all in dollars -- was deposited outside the US in fear of being frozen by US regulators. That gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government imposed laws to restrict dollar lending to foreigners. Euromarkets were particularly attractive because they had far less regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euromarkets a beneficial center 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 Euromarket. The Birth of Euro Although Europeans were already very comfortable with the concept of forex trading, much of the rest of the world were still unfamiliar with the territory. The establishment of the European Union in 1992 gave birth to the euro seven years later, in 1999. The euro was the first single-currency used as legal currency for the member states in the European Union. It became the first currency able to rival the historical leaders in the Foreign Exchange market and create the stability that Europe and the forex market had long desired.
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Forex Trading Concept |
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Forex Trading Concept Foreign Exchange is the simultaneous buying of one currency and selling of another. The foreign exchange market ( FOREX ) is the largest financial market in the world, with a volume of over $1.3 trillion daily; more than three times the aggregate amount of the US Equity and Treasury markets combined. Unlike other financial markets, the Forex market has no physical location, no central exchange. It operates through an electronic network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another across the major financial centers. Traditionally, investors' only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. Forex Trading Advantages A 24-hour market - A trader may take advantage of all profitable market conditions at any time. There is no waiting for the opening bell. High liquidity - The Forex market with an average trading volume of over $1.3 trillion per day. It is the most liquid market in the world. It means that a trader can enter or exit the market at will in almost any market condition minimal execution marries or risk and no daily limit. Low transaction cost - The retail transaction cost (the bid/ask spread) is typically less than 0.1% (10 pips or points) under normal market conditions. At larger dealers, the spread could be smaller. Uncorrelated to the stock market - A trader in the Forex market involves selling or buying one currency against another. Thus, there is no correlation between the foreign currency market and the stock market. Bull market or a bear market for a currency is defined in terms of the outlook for its relative value against other currencies. If the outlook is positive, we have a bull market in which a trader profits by buying the currency against other currencies. Conversely, if the outlook is pessimistic, we have a bull market for other currencies and traders take profits by selling the currency against other currencies. In either case, there is always a good market trading opportunity for a trader. Inter-bank market - The backbone of the Forex market consists of a global network of dealers. They are mainly major commercial banks that communicate and trade with one another and with their clients through electronic networks and telephones. There are no organized exchanges to serves a central location to facilitate transactions the way the New York Stock Exchange serves the equity markets. The Forex market operates in a manner similar to the way the NASDAQ market in the United States operates, thus it is also referred to as an over the counter ( OTC ) market. No one can corner the market - The Forex market is so vast and has so many participants that no single entity, not even a central bank, can control the market price for an extended period of time. Even interventions by mighty central banks are becoming increasingly ineffectual and short lived. Thus central banks are becoming less and less inclined to intervene to manipulate market prices.
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Global Market |
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Global Market The following schedule is based on Eastern Standard Time (GMT-5). Forex market opens at 19:00 between Sunday and Thursday. Then at 21:00, Singapore and Hong Kong open. Between Sunday and Friday, European markets opens in Frankfurt at 2:00am. Then London opens at 3:00am. When Asian shift is almost finished, European markets are in full throttle at 16:00. At 7:00, European markets are almost finished. At 8:00, US market opens in New York. At 9:00am, New York Stock Exchange opens. At 17:00, Australia opens. Forex market operates globally 24 hours a day, starting from 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.
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Margin and Leverage |
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A Margin Based System Currency trading used to be an investment for wealthy investors. Ordinary investors could only envy the returns made from the currency hedge fund managers. However, due to the advent of the internet and prevalence of online trading, currency trading has become more and more popular. Today, foreign exchange trading is no longer only available to the wealthiest through the big investment banks. Futures commercial merchants approved by CFTC are also able to offer foreign exchange as a product to everyday investors at an affordable level. Thanks to the invention of leverage and margin trading system, investors can trade much bigger contract size with a fraction amount of deposits required. Increase Your Buying Power Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. Many traders consider leverage dangerous because traders add bigger position sizes without actually owning them. Nevertheless, leverage is an exceptionally good tool that can be utilized to increase your buying power as long as trader has a risk management plan associated with it. Some seasoned currency trader harness leverage effectively in currency trading. They apply small leverage to test the market sentiment. Once the strategy works with small position size and leverage, they then multiply leverage quickly to maximize profit potentials.
How it Works For Example: in order to trade 100,000 units of USD/JPY. Traditionally, trader needs 100,000 US dollars or we say 1:1 leverage (trading cash). However, with 100:1 leverage, currency trader is only required to deposit 1/100th of the amount needed, 1,000 US dollars.
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What is Rollover |
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Rollover or Premium In the spot Forex market trades settle in two business days. If a trader sells 10,000 euros on Tuesday, the seller must deliver 10,000 euros on Thursday unless the position is held open and rolled over to the next value date. Roll over involves exchanging the expiring position for a position expiring the following settlement date. The positions being exchanged are not valued at the same price. If a trader is long the currency bearing the higher interest rate, the position "being sold" is worth more than the position being acquired. The reverse is also true; if a trader is short the currency bearing the higher interest rate, the trader is acquiring a position worth more than the one "being sold". The amount of the difference varies based on the currency pair, the interest rate differential between the two currencies, and fluctuates day to day. At 5:00 PM each day, funds are subtracted from or added to accounts with open positions because of this automatic roll over. Wednesday 3 Day Roll On Wednesdays, the amount added or subtracted to an account as a result of rolling over a position is three times the usual amount. This "3-Day" rollover accounts for settlement of trades through the weekend period. When there are bank holidays in either settlement country the normal roll schedule does not apply.
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Forex Glossary |
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Forex Glossary Accrual - The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals , over the period of each deal. Appreciation - A currency is said to 'appreciate' when it strengthens in price in response to market demand. Arbitrage - The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets. Ask (Offer) Price - The price at which the market is prepared to sell a specific Currency in a Foreign Exchange Contract or Cross Currency Contract. At this price, the trader can buy the base currency. In the quotation, it is shown on the right side of the quotation. For example, in the quote USD/CHF 1.4527/32, the ask price is 1.4532; meaning you can buy one US dollar for 1.4532 Swiss francs. Bear Market - Someone who believes the prices/market will decline. Bid - The price that a buyer is prepared to purchase at; the price offered for a currency. Bretton Woods Accord of 1944 - An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and set the price of gold at US $35 per ounce. The agreement lasted until 1971. See More on Bretton Woods. Bull Market - A market characterised by rising prices. Broker - An agent who handles investors' orders to buy and sell currency. For this service, a commission is charged which, depending upon the broker and the amount of the transaction, may or may not be negotiated. Cable - Dealers slang for the Sterling/US Dollar exchange rate. Call Rate - The overnight interbank interest rate. Cash Market - The market for the purchase and sale of physical currencies. Convertible Currency - Currency which can be freely exchanged for other currencies or gold without special authorisation from the appropriate central bank. Counter Party - The customer or bank with whom a foreign deal is made. The term is also used in interest and currency swaps markets to refer to a participant in a swap exchange. Cross Rate - An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, measured against the United States dollar. Currency Risk - The risk of incurring losses resulting from an adverse change in exchange rates. Currency Swap - Contract which commits two counter-parties to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity. Currency Option - Option contract which gives the right to buy or sell a currency with another currency at a specified exchange rate during a specified period. Currency Swaption - OTC Option to enter into a currency swap contract. Currency Warrant - OTC Option; long-dated (more than one year) currency option. Day Trading - Refers to opening and closing the same position or positions within one day's trading. Dollar Rate - When a variable amount of a foreign currency is quoted against one US Dollar, regardless of where the dealer is located or in what currency he is requesting a quote. The exception is the Sterling/US Dollar rate (cable) which is quoted as variable amount of US Dollars to one Sterling. EMS - Abbreviation for European Monetary System, an agreement between member nations of the European Union to maintain an alignment between the exchange rates of their respective currencies. European Monetary Unit - The principal goal of the EMU is to establish a single European currency called the Euro, which will officially replace the national currencies of the member EU countries in 2002. Currently, the Euro exists only as a banking currency and for paper financial transactions and foreign exchange. The current members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal. Federal Reserve (Fed) - The Central Bank of the United States. Fixed Exchange Rate - Official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower bands, leading to intervention. Flat / Square - To be neither long nor short is the same as to be flat or square. One would have a flat book if he has no positions or if all the positions cancel each other out. Floating Rate Interest - As opposed to a fixed rate, the interest rate on this type of deal will fluctuate with market rates or benchmark rates. One example of a floating rate interest is a standard mortgage. Foreign Exchange Swap - Transaction which involves the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract (short leg), at a date further in the future at a rate agreed at the time of the contract (the long leg). Forward - A deal that will commence at an agreed date in the future. Forward trades in FX are usually expressed as a margin above (premium) or below (discount) the spot rate. To obtain the actual forward FX price, one adds the margin to the spot rate. The rate will reflect what the FX rate has to be at the forward date so that if funds were re-exchanged at that rate there would be no profit or loss (i.e. a neutral trade). The rate is calculated from the relevant deposit rates in the 2 underlying currencies and the spot FX rate. Unlike in the futures market, forward trading can be customized according to the needs of the two parties and involves more flexibility. Also, there is no centralized exchange. Fundamental Analysis - Thorough analysis of economic and political data with the goal of determining future movements in a financial market. GTC - "Good Till Cancelled". An order left with a Dealer to buy or sell at a fixed price. The order remains in place until it is cancelled by the client. Hedging - The practice of undertaking one investment activity in order to protect against loss in another, e.g. selling short to nullify a previous purchase, or buying long to offset a previous short sale. While hedges reduce potential losses, they also tend to reduce potential profits. High/Low - Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day. Initial Margin - The required initial deposit of collateral to enter into a position as a guarantee on future performance. Interbank Rates - The Foreign Exchange rates at which large international banks quote other large international banks. Limit Order - An order to buy at or below a specified price or to sell at or above a specified price. Long Position - A market position where the Client has bought a currency he previously did not hold own. Normally expressed in base currency terms. Margin - Customers must deposit funds as collateral to cover any potential losses from adverse movements in prices. Margin Call - A demand for additional funds. A requirement by a clearing house that a clearing member (or by a brokerage firm that a client) brings margin deposits up to a required minimu m level to cover an adverse movement in price in the market. Market Maker - A dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices. A market maker runs a trading book. Offer - The price, or rate, that a willing seller is prepared to sell at. One Cancels Other Order (O.C.O. Order) - A contingent order where the execution of one part of the order automatically cancels the other part. Open Position - Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date. Over The Counter (OTC) - Used to describe any transaction that is not conducted over an exchange. Overnight Trading - Refers to a purchase or sale between the hours of 9.00 pm and 8.00 am. on the following day. Pip (or Points) - The term used in currency market to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY). Political Risk - The uncertainty in return on an investment due to the possibility that a government might take actions which are detrimental to the investor's interests. Quote - An indicative market price, normally used for information purposes only. Resistance - A price level at which you would expect selling to take place. Risk Capital - The amount of money that an individual can afford to invest, which, if lost would not affect their lifestyle. Rollover - Where the settlement of a deal is rolled forward to another value date based on the interest rate differential of the two currencies. Settlement - Actual physical exchange of one currency for another. Short - To go 'short' is to have sold an instrument without actually owning it, and to hold a short position with expectations that the price will decline so it can be bought back in the future at a profit. Spot - A transaction that occurs immediately, but the funds will usually change hands within two days after deal is struck. Spread - The difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads usually signify high liquidity. Stop Loss Order - An order to buy or sell at the market when a particular price is reached, either above or below the price that prevailed when the order was given. Support Levels - A price level at which you would expect buying to take place. Technical Analysis - An effort to forecast future market activity by analyzing market data such as charts, price trends, and volume. Tomorrow to Next - Simultaneous buying and selling of a currency for delivery the following day and selling for the next day or vice versa. Two-Way Price - Rates for which both a bid and offer are quoted. US Prime Rate - The interest rate at which US banks will lend to their prime corporate customers. Value Date - Settlement date of a spot or forward deal. Variation Margin - An additional margin requirement that a broker will need from a client due to market fluctuation. Volatility - A statistical measure of a market or a security's price movements over time and is calculated by using standard deviation. Associated with high volatility is a high degree of risk. Whipsaw - slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal. Yard - Slang for a billion.
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Broker Check List |
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Know Your Forex Broker In the United States, forex industry is regulated by CFTC (Commodity Futuers Trading Commission) and NFA (National Futures Association). Forex brokers must register with CFTC as a FCM ( Futures Commercial Merchant ) before they can accept deposits from investors. If companies or individuals are involved in soliciting clients and not able to accept deposits, then they are not FCMs. They are introducing brokers. Introducing brokers recruit cilents for FX clearing house and usually compensated by FCMs. Each Futures Commercial Merchant has an unique NFA ID number so perspective clients can check standings of FCMs with the regulatory authorities. Before selecting your forex broker, you must know who they are, what kind of products or services they offer and what their ratings are with the government authorities. We provide you with a check list to help you determine which forex broker is the right one for you.
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Take a Forex Quiz |
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Forex Quiz Test your knowledge in Forex trading. We have come up with 10 short questions for Forex traders. These questions will rotate every two weeks. Don't be nervous, take a few minutes to complete the quiz and see how much you know about Forex!
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