FOREX:

Introduction to FOREX

The Foreign Exchange market, also referred to as the "Forex" or "FX" market is the largest financial market in the world, with a daily average turnover of well over US$3 trillion -- 90 times larger than the combined volume of all U.S. equity markets.

"Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation.

For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.

The FX market is considered an Over The Counter (OTC) or 'interbank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets.

What factors influence the FOREX market?

The factors that affect the FX market are mainly political and economic. Economies of different countries develop in a cyclical fashion (upturns and depressions), and the cycles do not often coincide. Market participants carefully analyze these processes. They analyze data on inflation, trade balances, output and many other indicators. This is called fundamental analysis.

One factor affecting exchange rates between two countries is the trade balance. By definition, the merchandise trade balance is the net difference between the value of merchandise being exported and imported into a particular country. For example, consider the exchange rate for Euros against US dollars. The United States imports products from Europe. To pay for them, Americans need Euros; therefore, the U.S. companies trade the U.S. dollar for Euros. On the other hand, because Europeans desire American-made goods, they purchase U.S. dollars to pay for U.S. goods. The American demand for European goods and services contributes to the demand for Euros while European purchases of American goods and services contribute to the demand of U.S. dollars. In this case, the net difference between American purchases of European goods and services, and European purchases of American goods and services, is the merchandise trade balance between the two countries.

In the near term, these capital flows are greatly influenced by yield differentials. All else being equal, the higher the yield on European securities compared to American securities, the more attractive European securities are relative to American securities. An increase in European yields would tend to raise the flow of U.S. dollars into European securities as well as decrease the outflow of Euros to American securities. Combined, this increased flow of funds into Europe would lower the value of the U.S. dollar and increase the value of the Euro; therefore, the Euro to U.S. dollar ("EUR/USD") ratio, as it is represented in the Forex market, would increase.

The rate of inflation is another factor influencing currency exchange rates. The currency from the lower inflation country rises in value, while the currency from the higher inflation country falls in value. Both the inflation factor and the purchasing power of the currencies directly impact currency exchange rates.

Another type of analysis used in foreign currency trading (as well as many other financial markets) is technical analysis. Price graphs are used in this analysis.

Three premises on which the technical approach is based:
prices move in trends
history repeats itself
market actions/events discount everything

The last statement reminds us that action taken in the marketplace or unforeseen global events make technical analysis less useful until stability returns.

Many factors are affecting the FX market everyday. They may be political developments, natural disasters, or just rumors of such. Market participants react to these developments seeking to protect their money. Thus, unexpected, and even dramatic moves occur in this market at times. That is why often the very expectation of a certain development can influence the market more than the event itself. It is for this reason that the currency market is never in equilibrium, and its behavior can be defined as the perennial quest for an ever-elusive equilibrium.

The FOREX market is the world’s largest financial market. Why is it so attractive? Let us consider the principal reasons:

Liquidity. Over a trillion dollars a day in foreign currencies are traded, with hundreds of thousands of people trading, and millions of transactions executed daily. That is why you have the opportunity to enter and exit the market at any time.

Uninterrupted operation. The market operates around the clock, except for Saturday and Sunday. While one trading center is closing another is opening. Business hours overlap around the world to create the 24-hour market. It opens with the start of the workday on Monday in Sydney and then moves around the world, from one time belt to another until its closure on Friday in the USA.

Predictable market. In one sense, the FOREX market is quite predictable. Currency price curves exhibit certain regularities, creating, what is known in technical trading, as price trends. These price trends increase your chances of trading profitably.

Accessibility. The market is accessible from any point where there is a phone or access to the Internet.

• Currency Codes

Each currency bears its appropriate three-letter code, its ISO Code developed by the International Organization of Standardization. For example, the US dollar code is USD (United States Dollar), the Euro code is EUR (Euro), the Swiss franc is CHF (Confederation Helvetica Franc), the Japanese yen is JPY (Japanese Yen), the British pound is GBP (Great Britain Pound), and similarly, the Australian dollar is AUD, the Canadian dollar is CAD.

Exchange rates reflect how much one currency values to another currency. Exchange rate codes are expressed in 6-letter currency codes. In the first place, there is a base currency code. Quotations are expressed in units of the second currency against one unit of the first currency. Say, quotations USD/CHF (USD-CHF) show an amount in Swiss francs against one US dollar, while quotations GBP/USD (GBP-USD) on the contrary show how many US dollars should be paid for one British pound.

• Currency quotes

Each quote consists of 2 numbers, e.g. the currency pair US dollar/Swiss franc is designated as USD/CHF 1.6217/1.6222. The first number is called the bid and it stands for the market’s willingness to buy US dollars for Swiss francs at the given price (rate). The second number is called the ask or offer and it stands for a the market’s willingness to sells US dollars against Swiss francs at the given price (rate). This example shows that the market is ready to buy (bid) US dollars by paying 1.6217 francs for each dollar, or sell (ask) US dollars for 1.6222 francs. The trader who enters this deal in the market perceives the situation as opposite – s/he sells the US dollars (base currency) at the broker’s bid price and buys dollars at the market ask price.

• Spread

Spread is the difference between the ask and the bid prices expressed in pips. An average spread on core currencies under quiet market conditions is Competitive. When market swings occur, the spread increases. In cross currency rates and low demand currencies, the spread can be of 7 to 10 pips in a quiet market. In major transactions (over 10 million US dollars) the spread shrinks to about 2 to Competitive.

Trading in the Forex Market Mechanism of the Forex market is very simple:

For instance, at 11 a.m. the US dollar rate to the Swiss franc was USD/CHF 1.6217 - 1.6222. If you believe that the Swiss franc at present is undervalued against the US dollar, and the rate USD/CHF is going to move down, you order to sell 100,000 US dollars for 162,170 (100,000*1.6217) Swiss francs. From there, you have two options:

Alternative 1. At 3 p.m. your forecast came true and the USD/CHF rate changed to 1.6049/1.6054. You can close the position by offsetting mutual obligations and buy 100,000 US dollars for 160,540 Swiss francs. After such transaction, the US dollar liabilities on your balance are equal to zero (-100,000 + 100,000 = 0), and your profit is 1,630 Swiss francs (+162,170 – 160,540 = 1,630), or roughly 1,015 US dollars. This is a profit you earned from the transaction.

Alternative 2. At 3 p.m. the USD/CHF rate changed up to 1.6283/1.6288 contrary to your forecast. You can decide to close the position by offsetting mutual debts and to buy 100,000 US dollars for 162,880 Swiss francs. After this transaction, the US dollar liabilities on your balance are equal to zero (-100,000 + 100,000 = 0), and a your loss is -710 Swiss francs (+162,170-162,880 = - 710), or roughly –436 US dollars. That is, you owe 436 US dollars and it is deducted from your account. This is your loss from the transaction.

Overall, to make easier computations a following rule can be applied: value of one pip in the transaction worth 100,000 units of the base currency (that on the left side of the currency pair) is equal to 10 units of the counter-currency (that on the right side of the currency pair). Say, in a buy transaction worth 100,000 USD/CHF one pip values 10 CHF; in a sell transaction worth 100’000 EUR/USD one pip values 10 USD, and so on. Once the transaction is completed, profit or loss denominated in the second currency is immediately transferred to US dollars at the current market rate.

• Leverage

The minimum lot for trading in the Forex market is 100,000 units of a currency. This doesn’t mean you have to have this amount in your account with Trendoks IMG. All you need in your account is just a fraction of the sum (e.g. $2,000), while Trendoks IMG will loan the rest to you. If you open and close your position within one day, this loan will be free of interest charges. The loan is not credited into your account and you can only use it for trading in the Forex market. The ratio of the sum you are using for trading (including the loan) to the security amount required by the dealer is called Leverage. In the foregoing example, when you are trading the lot of 100,000 USD/CHF, the dealer requires a security deposit of $2,000 and your Leverage would be (100,000/2,000) = 50. This deposit required to enter a trade is called Margin.

• Balance and Equity

Balance is an amount held on the Customer’s account, which can be changed depending on the Customer’s performance on the market. Amendments are reflected on the balance only after a transaction is completed. Thus, the profit and loss open positions are not included in the balance.

Equity is the current condition (net-worth) of the Customer’s account. It includes all customer’s trades and transactions made in the account, whether they are closed or still in open position. In general, a computation formula can be represented as follows:

EQUITY = BALANCE + FLOATING PROFIT/LOSS and plus or minus Rollover Points,

where the FLOATING PROFIT/LOSS are the current unrealized profits and losses in the open positions.

• Margin

Margin is a performance bond in the form of cash or other collateral deposited by a client trader to ensure that he will honor his trading commitments. This performance bond must be deposited into a margin account before a trading account can be opened. The margin account will be needed to perform transactions and maintain open positions.
For instance, if you performed a transaction to "buy 100,000 USD/CHF" with a 50:1 leverage, you would need to have $2,000 US dollars available in your current balance. This security deposit is called Margin and is always calculated in US dollars no matter what the base currency is in this transaction. For instance if you sold 200,000 Euros against GB pounds at 20:1 leverage and the rate EUR/USD=0.95, you would need the deposit of (200,000/20*0.95=9,500) 9,500 US dollars.

It is self-evident that to enter into more trades, you will need to have more funds in your margin account in addition to the Used Margin. These additional funds are called Free Margin. The Free Margin is the positive difference between your current Equity and Used Margin if the Equity is less than your account balance, and you have some unrealized losses that are currently outstanding in the open positions. When your Equity is larger than the balance, the Free Margin equals the positive difference between the balance and Used Margin. If you do not have enough margin to enter into a new trade, no more positions will be opened. For example, you have 9,500 US dollars in your margin account and you bought 300,000 US dollars against Japanese yen at 50:1 leverage. Your Used Margin equals 6,000 dollars (300,000/50) and the Free Margin is 3,500 dollars (9,500-6,000). You may want to sell e.g. 200,000 dollars against Swiss franc, but you will not be allowed to do so, since your Free Margin is less than what you need (200,000/50=4,000). However, you can sell 100,000 USD/CHF using $2,000 of the Free Margin. In that instance your Used Margin will be $8,000 (6,000+2,000) and the Free Margin $1,500 (9,500-8,000). With closing of any open position your Used Margin will be decreased by the amount of the margin used for keeping this position.

• Short Margin

The Short Margin is the condition when the current Equity becomes lower than the stated percentage (specified in the agreement) of the Used Margin. When this occurs the dealer will close some (or all) positions and the Customer might be asked to deposit more cash.

• Commission

Commission is a charge by a broker to execute a transaction. The commission amount varies and depends on the size, number of transactions and on other broker’s terms. Trendoks IMG does not charge a commission to execute a customer trade.

• Rollovers

The standard settlement of a Forex trade is two business days for delivery of currency. If a client trader desires not to take immediate delivery but rather to maintain his market exposure, a rollover is required. In this case, counter transactions encompassing the same currency pair, for the same amounts, settled on a spot basis, are needed where one transaction closes the position for the "old" value date, and simultaneously opens the position for the new value date. Because the dealer has extended margin credit to trade, the dealer may charge or pay interest to the client trader for these position rollovers. Whether a fee will be charged or a payment made depends upon the short-term interest rates in the countries of the currencies in the pair.

For example, you sold 100,000 EUR/USD. It means that you effectively borrowed 100,000 Euro from the dealer, in this case Trendoks IMG, against the current interest rate on Euro, you sold Euros and earned a corresponding amount in US dollars, which Trendoks IMG is now "holding" for you. Trendoks IMG pays you for the US dollars you placed with it at the current interest rate on US dollars. You pay the interest rate that currently can be earned on EUR investments. If USD investments pay more than EUR investments, you will receive payment. If EUR interest rates are higher you will be charged interest. Positions are usually carried-over to the next business day from 23:00 till 01:00 GMT. The value date of transactions entered into on Thursday will be the next Monday.

When rolling the value date of the position from Wednesday to Thursday, rollover pips will be multiplied by 3, as the weekend will be considered in the computation. In the case of holidays in the country of the given currency, rollover pips will be also multiplied by a corresponding number of days.

For example, if you bought 100,000 USD and sold 162,220 CHF at 1.6222, the position is carried over to the next day, and you will gain 1.2 points or 12 Swiss francs ($7.40). That means, on the next day, you will have USD/CHF long open position at 1.62208 rate, which is 1.2 points better than the day before. If you do the opposite trade, i.e. sell 100,000 USD and buy francs at the rate of 1.6217, then in carrying over the position to the next day, the broker will charge your account 2.2 points or 22 francs ($13.57). That means on the next day you will have USD/CHF short position at 1.62148 rate, which is 2.2 points worse than the day before. We have established a new method to show the value dates of all deals done, which will accurately display the "rolling over" of all open positions.

At the end of the trading day, all open positions are marked to market.

Each open position is closed for the existing value date and reopened for the new value date.

Clients who have an open position will have their profit (loss) revalued against the closing price added (subtracted) to their balance.

If an original position is held open past the close of the day, the icon text will appear green with a red dot. From that point, all deals related to this original deal will appear with green text and a red dot.

Waiting orders in the trade terminal will have an icon that depicts a page with a folded corner.

• Types of Orders

An Order is an instruction for transactions at a pre-established price. There are a number of different orders that can be created to fit your interest. By and large, all orders can be grouped into several core types. Orders are chiefly of two types: Stop and Limit.

The Limit (Buy Limit/Sell Limit) order is executed only when the market reaches the price specified in the order or at best price possible. The Buy Limit order is placed below the market, and the Sell Limit order is placed over the market.

The Stop (Buy Stop/Sell Stop) order is executed only when the market reaches the price specified in the order or at the worse price. The Buy Stop order is placed over the market, whereas the Sell Stop order is placed below the market.

By using orders your risk of losses can be mitigated, and a profit can be earned at a pre-established price. The orders are also used for the automatic opening of a new position, when the market reaches a price level specified by a trader. There is only one restriction in placing orders sometimes: they cannot be placed too close to the current price level as they can be immediately triggered.

In addition, in placing orders you should specify maturity:

The "GTC" (Good Till Cancelled) term is valid until it is executed or cancelled by the client trader.

As Forex is the OTC market functioning around the clock (without trading sessions), Stop and Limit orders are usually GTC orders if not otherwise specified in the broker-client agreement.

When two "related" OCO (One Cancels Other) orders are placed, the execution of one of them by the broker leads to a immediate cancellation of the other order.

• Statements

A statement on the condition of the account is submitted by the Trendoks IMG to the client trader. It includes the full list of transactions conducted by the client trader. These include depositing funds to, and withdrawals from the account and trading on FX. Frequency of statements delivery is spelled out in an agreement concluded between the Trendoks IMG and the client.

SuccessThroughTeamwork uses GoDaddy for all our domain needs.
We proudly recommend BlueHost for all your webhosting needs.
© Copyright 2006 SuccessThroughTeamwork
Graphics ©  KindWoman Graphics, All rights reserved.
Contact:
Contact: