Forex Basics

Today the currency exchange market (Forex) leaves all other world markets far behind in terms of trading volumes. For example, the daily turnover for securities is estimated at 300 billion US dollars, while Forex operates with turnovers of several trillions US dollars every day. But huge turnovers are not the only thing that makes Forex a very attractive market for investors.
There are many other benefits:
• It is a global market.
• It has a very high liquidity: currencies are bought and sold within few seconds.
• Currencies change all the time, giving a real possibility to close a proper trading deal.
• You can make trading contracts 24 hours a day.
• All transactions are done very quickly.
• No commissions are taken when you make a contract (there are no exchange fees on Forex, because brokerage companies get revenue from spread on buy and sell rates).
Forex market was created in 1971-1976 as an interbank “tool” used for operating huge monetary assets between the countries. At that time the rate of one currency to another was defined by mutually agreed exchange rate.
Many years have passed and today Forex turned into one of the major income sources for the banks. Such renowned banking institutions as Citibank, Chase Manhattan Bank, Barclays Bank, Societe Generale Bank & Trust, ABN-AMRO Bank report to get their biggest revenue from currency operations.
Modern technologies made Forex accessible to all investors. Acceleration in transfer of monetary assets and supersonic informational exchange combined with latest technological inventions made it possible to trade on Forex even with small capitals (starting from $100). That is why Forex attracted a new wave of small investors and this surely increased the liquidity of this market.

Advantages to Trading in Forex
Liquidity: Because of the size of the Foreign Exchange Market, investments are extremely liquid. International banks are continuously providing bid and ask offers and the high number of transactions each day means there is always a buyer or a seller for any currency.

Accessibility: The market is open 24 hours a day, 5 days a week. The market opens Monday morning Australian time and closes Friday afternoon New York time. Trades can be done on the Internet from anywhere.
Open Market: Currency fluctuations are usually caused by changes in national economies. News about these changes is accessible to everyone at the same time – there can be no 'insider trading' in FOREX.
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. As the market has grown, even central bank interventions have become increasingly ineffectual and short lived as a tool for controlling the value of a particular currency.
Tradability in Rising and Falling Markets: Unlike the US Equity markets, which require that investors only short a stock if the prior trade was equal to or lower than the short sale price; Forex markets allow the short sale of currencies without any requirements. Trading opportunities exist 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.
Low trading costs: The over-the-counter structure of the Forex market eliminates exchange and clearing fees, which in turn lowers transaction costs. Costs are further reduced by the efficiency created by a purely electronic market place that allows clients to deal directly with the market maker, eliminating both ticket costs and middlemen. Because the currency market offers round-the-clock liquidity, traders receive tight competitive spreads both intra-day and night.
Profit/Loss Potential: The potential for profit/loss exists because there is always movement between currencies. Even small changes can result in substantial profits/losses because of the large amount of money involved in each transaction.
Margin Trading On FOREX Market
To encourage investors who have less than 1 million dollars to trade on Forex the mechanism of margin trading is used. This mechanism was introduced to world currency trading in 1986. Margin trading lies in buying/selling currencies, using leverage and deposit insurance, which allows traders to make trading contracts on huge sums without providing the real money for it. BUT every trader should remember that increasing leverage increases risk.
Investors with small and moderate deposit sums run Forex trading through the dealing companies. Usually the minimum one should have to start trading on currency market equals to 2,000 US dollars. Dealing company offers its clients a credit line (or “dealing leverage”) which profoundly exceeds the deposited sum. For example, a credit leverage of 1:100 allows using the initial deposit of 10,000 dollars for trading 1,000,000 dollars. So, private capitals of investors make up only 1-3 % of the sums traded by them on the market. Even small profits on Forex turn into great revenues when compared to what is deposited by investors to get these profits. BUT once again, please remember that increasing leverage increases risk.
Let’s have a look at this example to clarify all details. You have 2,000 US dollars on your account. With the credit leverage of 100:1 you can open trading position of 200,000 dollars. At 11:00 A.M. US dollar rate to Swiss franc reached 1.4045 – 1.4050. You think that dollar has to grow, and give trading order to buy 100,000 dollars at this price. At 3:00 P.M. dollar rate becomes 1.4250 – 1.4255. You decide to close the position and sell your 100,000 dollars at a new price. After calculating pure income you find out that it is 2,000 Swiss francs (or about 1,400 US dollars).
This goes as 140% revenue from the deposited amount. When closing the position, this money goes to your trading account automatically. BUT we want to notify you one more time that increasing leverage increases risk – in this case you can get 100% drawdown – the loss of all trading capital.

Major Players on FOREX Market
Commercial Banks: These institutions support the major flow of exchange transactions. All other market makers have their accounts opened at the banks: in other words, all exchanging, depositing and crediting transactions made by market makers go through bank wire. Banks accumulate (through client operations) the total market demand for currency exchange and all monetary replacements, creating a kind of “offer” to other banks. Usually the banks do not limit their activity to execution of client orders only: quite often they make independent transactions, using their personal funds for these purposes. So, objectively the currency market is represented by a market of agreements between many banks. Further mentioning of directions for currency and other rates should be related to foreign exchange market.
Companies Performing Foreign Transactions: Companies take part in international trading create stable demand for foreign currency (importers) and stable proposition of foreign currency (exporters). Moreover, they contribute to converting free foreign assets into short-term deposits. Most of these companies do not have direct access to currency market, as they make exchanging and depositing operations via commercial banks.
There are many companies that make depositing of foreign assets: investment funds, money market funds, international corporations. These companies are engaged into customized managing of various assets’ portfolios by purchasing securities of different governments and corporations. Dealing slang calls these companies simply “funds”. The most famous funds are “Quantum” Fund (George Soros) and “Dean Witter” Fund.
Great international corporations which make foreign production investments (creation of branches, joint companies, representative structures, etc.) belong to this group of market makers as well. The list of these corporations goes on with Xerox, Nestle, General Motors, British Petroleum and others.
Central Banks: Central banks are involved into currency regulation on the foreign market: protecting national currencies from swift “jumps”, supporting export/import balance, etc. Central banks may influence exchange market either directly (through currency intervention) or indirectly (by regulating monetary volumes and rates).
Forex Brokers: These brokers specialize in matching buyers and sellers of foreign currency and in executing necessary exchanging/depositing operations for these clients. Brokers take certain percentage from general volume of transactions as fee for providing their services.
Physical Bodies: Physical bodies may perform a wide range of non-trading operations in sphere of tourism, sending salaries, pensions, buying and selling the currencies they own, etc. Today, using the benefits of leverage trading physical bodies can even invest small capitals into Forex for getting income from quotes fluctuations on this market.

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