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What is FOREX?
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Welcome to the fascinating
world of Foreign Exchange trading. If you have been involved in the
investment world, you have probably heard the term Forex thrown around, but
what exactly is Forex? |
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Forex
Forex is a term which stands for foreign exchange, also referred to as
“Spot FX”, “Retail FX”, “FX” or “4X”. In the simplest of definitions, it
is buying and selling two nations currencies at the same time. Hence the
term currency trading, it is a continuous physical occurrence taking
place in the global economic system. With the daily average turnover of
approximately US$4.0 Trillion, it is the largest financial market in the
world. If you compare that to the $25 billion a day volume that the New
York Stock Exchange trades, you will easily realize how enormous the
Foreign Exchange really is. It actually equates to more than 3 times the
total amount of the New York Stock Exchange and the NASDAQ combined!
Interbank Market /
Over-The-Counter
Unlike stock and futures markets, FX trading is not
centralized on any one exchange. It is considered to be an
Over-the-Counter (OTC), or 'Inter-bank,' market. This is because
transactions are conducted between two counterparts over the telephone,
or via an electronic network.
Participants in Forex trading
Inter-bank market means that it was dominated by banks up until recently
– i.e., central banks, commercial banks, investment banks, etc. However,
thanks to market makers brokers, other market players then entered the
market in record numbers. They include international money brokers,
large multinational corporations, registered dealers, global money
managers, private speculators, and futures and options traders.
A 24-Hours Market
There is no waiting for the opening bell daily. It is 24-hours market
from Monday morning to Saturday morning SST (Singapore Standard Time).
The Forex market never sleeps except weekend. That is why recently many
part time individual traders involve in Forex trading in their own base.
The Factors that affect the
currency price
Currency prices are affected by a variety of economic and political
conditions – most importantly inflation, interest rates, large market
orders, and political climate. Furthermore, one nation governments
sometimes enter the Forex market to influence the value of their
currencies, either by flooding the market with their domestic currency
to lower its price, or conversely by buying it to give it a boost. This
is commonly called “central bank intervention.” Any of these factors can
cause volatile currency prices. However, the sheer size and volume of
the Forex market makes it virtually impossible for any one entity to
"influence" the market for any length of time.
The Majors Currencies
The most commonly traded are those that are 'liquid' – i.e., those of
countries with stable governments, low inflation, and respected central
banks. Over 85% of all trading activity revolves around the major
currencies – i.e., the U.S. Dollar, Euro, Japanese Yen, British Pound,
Swiss Franc, Canadian Dollar, the Australian Dollar and the New Zealand
Dollar. Forex currency symbols are always three letters, where the first
two letters identify the name of the country and the third letter
identifies the name of that country’s currency. The most popular
currencies along with their symbols are shown below:
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Country |
Currency |
Symbol |
Nickname |
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U.S.A. |
Dollar |
USD |
Green Buck |
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Euro members |
Euro |
EUR |
Fiber |
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Japan |
Yen |
JPY |
Yen |
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Great Britain
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Pound |
GBP |
Cable |
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Switzerland
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Franc |
CHF |
Swissy |
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Canada |
Dollar |
CAD |
Loonie |
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Australia |
Dollar |
AUD |
Aussie |
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New Zealand
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Dollar |
NZD |
Kiwi |
The Exchange Rate
The base currency is the term for the first currency in the pair. The
counter currency is the term for the second currency in the pair. The
exchange rate represents the number of units of the counter currency
that one unit of the base currency can purchase. In a foreign exchange
trade, clients are speculating on the exchange rate between two
currencies. The exchange rate measures the relative
value of a currency-- meaning it measures how much one currency is worth
in terms of another currency.
Price Interest Points (P.I.P.)
A pip is the unit of measurement for exchange rate movement. The number
of pips a currency pair moves determines how much a trader will earn or
lose on the position. A pip is the fourth significant digit after
decimal point in an exchange rate, and is the term used to define the
unit of measurement for exchange rate movements. The number of pips that
the exchange rate moves dictates how much a trader has gained or lost
through an FX trade.
Spreads
You will notice that there are always 2 prices for each currency pair.
In Forex, there is a BID and ASK price
The “Bid” is the price at which a dealer is willing to buy and clients
can sell the base currency in exchange for the counter currency.
The “Ask” is the price at which a dealer is willing to sell and a client
can buy.
BID = the price at which the trader (You) Can sell
ASK = the price at which the trader (You) Can buy
Margins
In Forex, only a small percentage of the actual position value needs to
be deposited prior to entering the trade. This small deposit, known as
the margin, is not a down payment, but rather a performance bond or good
faith deposit to ensure against trading losses. The margin requirement
allows traders to hold positions much larger than their account value.
Margin requirements are as low as 1%.
Leverage
In Forex trading, a small margin deposit can control
a much larger total contract value. Leverage gives the trader the
ability to make nice profits, and at the same time keep risk capital to
a minimum. For example, Forex brokers offer 200 to 1 leverage, which
means that a $50 dollar margin deposit would enable a trader to buy or
sell $10,000 worth of currencies. Similarly, with $500 dollars, one
could trade with $100,000 dollars and so on.
Long Position and Short Position
A long position is one in which a trader buys a
currency at one price and aims to sell it later at a higher price. In
this scenario, the investor benefits from a rising market. A short
position is one in which the trader sells a currency in anticipation
that it will depreciate. In this scenario, the investor benefits from a
declining market. However, it is important to remember that every Forex
position requires an investor to go long in one currency and short the
other.
An Intraday Position and Overnight
Position
Intraday positions are all positions opened anytime
during the 24 hour period after the close of normal trading hours at
4:30a.m. SST. Overnight positions are positions that are still on at the
end of normal trading hours (4:30a.m. SST). Which are automatically
rolled at competitive rates (based on the currencies interest rate
differentials) to the next day's price.
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