Fast cash flows, low cost on performed transactions, high liquidity and leverage that allow trades for the amounts of as much as $5000, while investing only $10 of your own funds – all these make Forex one the most promising markets.
Currencies of different countries serve as goods (sold items) at Forex. For example, let’s take a look at trading on the Euro vs. US dollar rate. This rate is marked as EUR/USD and shows the value of 1 EUR in relation to 1 USD. Let’s assume that at a certain point the EUR/USD rate on Forex equalled to 1.5730, however in an half an hour the situation changed and the quotation changed to 1.5830, or it has changed by 100 points (segment A-B). On the whole, this is a very insignificant change and, if calculated as a relative value, it amounts to 0.6%.
However, to a trader on Forex even such slight rate change can bring profit due to margin trading – automatic credit extension to a client for conducting a trading operation. For this, the client places a deposit, which amount can be relatively small (starting from several dollars). Later on, during transactions, the dealing center automatically extends credit to the client for the amount, which may exceed the pledge by 50-500 times depending on the leverage value. For example, with a 10 USD pledge the client has the opportunity to work with 5,000 US dollars, if the leverage equals 1:500.
Predicting the situation, a trader performs a transaction buying euros for US dollars at the rate of 1.5730 (point A). At the time of purchase the dealing center automatically extends credit. With $100 USD in the trading account, and the leverage of 1:500, the trader can buy currency (EUR) for the sum of $50000 at the rate of 1.5730 which amounts to EUR 31786 . Later on, when the EUR/USD rate reaches 1.5830 (point B), the trader closes this trading transaction selling the 31,786 EUR he bought and gaining $50317. When the transaction closes, the credit is automatically withdrawn and the trader’s net yield from the transaction makes up $317.
How can I learn to trade?
If you want to try trading at Forex, all you need is to download the trading terminal,
install it on your computer, and open a free Practice Account, which our company offers.
Practice (or demo) accounts have an unrestricted validity term.
You can indicate any amount of deposit (virtual money) on your account.
Trading conditions on your practice account will be fully identical to the real conditions of trade.
How to trade on Forex?
This section will help you to start trading on the Forex market, see examples trading operations, explanations of main terminology and principles of market operations ...
Forex is a system of trading, investment and speculative operations with foreign currencies which are conducted through a system of over-the-counter institutions.
The international currency market as we know it today did not appear until 1973, but the beginnings of its history can be traced back as far as the summer of 1944 and is connected to the events at the American resort town of Bretton-Woods.
To prevent the collapse of post-war currencies, the Financial Forum in Bretton Woods set up a number of financial institutions including the International Monetary Fund, which was initially created as a pool of currencies into which all countries (largely the USA) contributed their share and from where they could lend money to sustain their currencies. The IMF provided a gold warranty at 35 US dollars per Troy ounce of gold, and other currencies were tied to the US dollar at fixed exchanged rates. At the end of the 1950s, the European business market no longer had such a demand for American goods as before. European companies found other investment opportunities, which were more attractive than US dollar deposits, and therefore no longer wanted to keep the US dollar surplus. At first, the US Treasury was willing to buy back US dollars paying in the established gold value and preventing the US dollar depreciation in relation to other currencies. However, this outflow of gold from the US halved the American gold reserve in the early 1960s.
For a long time foreign central banks also maintained the fixed US dollar rate against national currencies by buying out dollar surplus from the population, private banks and businesses. The system of fixed exchange rates was in use until early the 1970s. By that time, the US no longer had a favorable balance of trade since other countries were selling an increasing amount of goods to America and at the same time buying less and less of US products. US dollars, which were not as essential to have outside of the US as they had been , settled in foreign central banks as unwanted and unattractive capital. For several years the USA tried to resist the inevitable depreciation of the dollar and did not agree to switch to floating rates. However, after a number of problems in the early 1970s they decided to no longer tie their currency to gold. Since that time the US dollar rate is determined by market demand and supply. By 1980, the price of gold grew almost to 730 US dollars per Troy ounce (from the beginning of 1975 Americans obtained a legal right to purchase gold as an investment). At the end of the 1970s, the US dollar fell to reach its post-war minimum and its history thus far has been a sequence of increases and decreases
All major foreign currencies today are in a free floating mode. This means that their price is determined by the market in relation to the demand for a particular currency in order to purchase goods, make investments, or settle transactions between governments. Of course this floating mode is not entirely free: every country has its Central Bank the main function of which, according to local laws, is to ensure the stability of the national currency.
Forex is considered to be the over-the-counter or "inter-bank" market as each transaction is executed by the two parties over the telephone or via electronic networking. Trading is decentralized and is not restricted to one or several stock exchanges like with stock or futures market.
Today, FOREX is the world’s largest market. Its volume takes up about 90% of the world’s capital market. Thousands of participants in this market - banks, brokerage firms, investment funds, financial and insurance companies - buy and sell currencies 24 hours a day making deals within seconds anywhere in the world. United into a single global network by satellite links, using the most sophisticated computer systems, they create currency turnover which in its annual volume exceeds the overall annual GNP of all counties in the world by ten times.
Forex Market Structure
Commercial Banks are the ones that perform the largest number of currency transactions. Other market players have open accounts in those banks and perform necessary conversions, deposit and lending operations with them. Banks accumulate (through operations with clients), the overall market demand for currency conversions, as well as for financial borrowing and investment funds. They also contact other banks in relation to this demand. Apart from responding to clients’ requests, banks themselves can conduct transactions using their own funds.
In summary, the foreign currency market is the market of inter-bank transactions, and when talking about quote fluctuation and interest rates we mean within the inter-bank currencies market. The world currency markets are significantly influenced by international banks, whose daily volume of operations can be as large as several billion dollars. These include banks such as Deutsche Bank, Barclays Bank, Union Bank of Switzerland, Citibank, Chase Manhattan Bank, Standard Chartered Bank and others. These banks are unique in their trading volumes which can lead to considerable changes in quotes and prices of currencies.
Typically, major players fall into two categories – bulls and bears. Bulls are market players whose interest is in the future currency rate increase, while bears are interested in the decrease of the rate. Typically, the market maintains equilibrium between bulls and bears in which case the fluctuation of quote differences is rather narrow. However when either bulls or bears gain the upper hand the currency quotes change rather rapidly and with greater impact.
Companies that perform foreign trade transactions
Companies involved in foreign trade, show steady foreign currency demand (importers) or foreign currency supply (exporters). They also invest or direct free currency surplus into short-term deposits. But as a rule, such companies do not have direct access to the foreign exchange market and thus conduct conversion or deposit operations through commercial banks.
Investment Funds, Money Market Funds, International Corporations
These companies are represented by various international investment funds and carry out the policy of portfolio management diversification by investing funds into government or corporate securities within different countries. According to dealer slang, they are simply called “funds”. The most famous of funds is George Soros’s “Quantum”, which conducts successful speculation operations and “Dean Witter”. These types of companies also include large international corporations which carry out foreign production investments, branching, setting up joint ventures etc, such as XEROX, Nestle, General Motors, British Petroleum and others.
Central Banks
The main function of the central bank is to regulate the external market, namely, to prevent surges in the national currency rate with the purpose of averting economic crises and the maintenance of export-import balance, etc. Central banks have considerable influence on the foreign exchange market. This influence can be direct, like currency intervention, and indirect, through regulation of money stock and interest rates. They cannot be classified as either bulls or bears since they can both operate for a rise or for a fall depending on the particular purpose at that given time. A central bank can act alone to exercise influence on the national currency. It can also act in alignment with other central banks to implement a joint currency policy on the international market, or to carry out joint interventions. The most important role in the world of foreign exchange markets is played by the US Federal Reserve (FED), the Deutsche Bundesbank and the Bank of England (also known as "Old Lady").
Currency Exchanges
In a number of countries which are in transition, there are currency exchanges which offer currency exchange to legal entities and set market exchange rates. Typically the governments are actively involved in regulating the exchange rates using the tight nature of the exchange market.
Foreign exchange broker firms
Their functions include bringing together the buyer and seller of foreign currency and conducting conversion, deposit, and lending operations between them. For this, the firms charge brokerage fees which are a percentage of the transaction sum.
Individuals
Individuals conduct a wide range of non-trading operations related to international tourism, transfer of wages, pensions, fees, and buying or selling currency in cash. However, with the introduction of the margin trade in 1986, individuals gained the opportunity to invest free cash for profit in the Forex market.
Financial institutions which allow and facilitate meeting the supply and demand on the Forex market are known as market-makers. These are 20% of the world banks that perform up to 60% of the overall transaction volume. These banks mark quotes for buying and selling various currencies and enter into operations with them.
Forex Market Working Hours
Today, the daily turnover on the international foreign exchange market is over 3 billion US dollars. Such turnover by far exceeds the overall value of stocks and shares that switch their owners on the world stock markets all year round. The possibility of fast and practically unlimited gain, while working with these instruments, explains why many business people prefer Forex and product markets to ”slow paced” stock exchanges. If reasonable, well-balanced and reliable risk management mechanisms are employed, trading on global markets can lay the foundation for long-term financial success.
The foreign exchange market is open 24 hours. It does not depend on the fixed working hours of stock exchange, and trading can take place between banks located far apart on the globe. Quite often currency rates fluctuate by several percentages giving the opportunity to conduct multiple transactions each day. If one has developed a well-tested, reliable trading approach, this may become a business with profitability which can by far exceed that of any other business.
Let’s assume that at a certain point the EUR/USD rate on Forex equalled to 1.5730, however in an half an hour the situation changed and the quotation changed to 1.5830, or it has changed by 100 points (segment A-B). On the whole, this is a very insignificant change and, if calculated as a relative value, it amounts to 0.6%.
