Tuesday, February 20, 2007
Forex Trading
| What is forex trading? Forex, short for foreign exchange, is trading where the commodity is not stocks or shares, but currency. The return for the investor is not in the value of the currency per se, but rather the relative exchange value of one currency against another currency. therefore forex trading is always expressed in currency pairs such as us dollars and uk sterling or us dollars and euros. by simultaneously buying and selling pairs of currencies, the investor/speculator hopes to cash in on favorable exchange rate fluctuations. like the interaction of gravity and airborne objects, though, exchange rates go down as well as up. the trick in the black art that is forex trading is accurately forecasting the direction of the fluctuation between two currencies. change is frequently rapid and influenced by world events and a multitude of other factors such as oil prices, interest rates and economic climates. The objective of any forex trader, naturally, is to make a profit when the value of the currencies changes in favor of the investor. plenty people certainly think that’s the case; the forex market is daily worth on average in excess of $1 trillion. this staggering volume of buying and selling of currency makes forex trading around 50 times larger than all the futures markets combined! so how do you make money in this massive marketplace? For example, suppose you had $100 and bought euros when the exchange rate was two euros to the dollar. you would then have 200 euros. if the value of euros against the us dollar increased then you would sell (exchange) your euros for dollars and have more dollars than you started with. this scenario, simple as it is, is the nub of forex trading – buying and selling currency when exchange rates move in the right direction. Now, all this sound fine and dandy, but what are the risks? Surprisingly, compared with other money market trades, the sheer scale of the forex market ensures greater price stability and better leverage. with built-in protection in the form of automatic limits for buying and selling, safety margins and other risk protection measures the likelihood of ending up in the red even when the forex market is volatile is infinitely reduced. but all forex traders should note that the market is one of the most liquid around and subject to strong currency trends. while leverage figures of 100:1 are often times quoted, without adequate risk protection in place the pendulum swing between profit and loss can be stark. even veteran forex traders can be caught out and take large hits from time to time. with this type of investor speculation, the golden rule must be: don’t risk what you can’t afford to lose. |
Saturday, February 10, 2007
What is FOREX
| The Foreign Exchange (FOREX) market is a cash (or "spot") interbank market established in 1971 when floating exchange rates began to materialize. This market is the arena in which the currency of one country is exchanged for those of another and where settlements for international business are made. The FOREX is a group of approximately 4500 currency trading institutions, including international banks, government central banks and commercial companies. Payments for exports and imports flow through the Foreign Exchange Market, as well as payments for purchases and sales of assets. This is called the "consumer" foreign exchange market. There is also a "speculator" segment in the FOREX Companies, which have large financial exposures to overseas economies participate in the FOREX to offset the risks of international investing. Historically, the FOREX interbrain market was not available for small speculators. With a previous minimum transaction size and often-stringent financial requirements, the small trader was excluded from participation in this market. But today market maker brokers are allowed to break down the large interbank units and offer small traders the opportunity to buy or sell any number of these smaller units (lots). Commercial banks play two roles in the FOREX market: (1) They facilitate transactions between two parties, such as companies wishing to exchange currencies (consumers), and (2) They speculate by buying and selling currencies. The banks take positions in certain currencies because they believe they will be worth more (if “buying long”) or less (if “selling short”) in the future. It has been estimated that international banks generate up to 70% of their revenues from currency speculation. Other speculators include many of the worlds’ most successful traders, such as George Soros. (3) The third category of the FOREX includes various countries’ central banks, like the U.S. Federal Reserve. They participate in the FOREX to serve the financial interests of their country. When a central bank buys and sells its or a foreign currency the purpose is to stabilize their own currency’s value. The FOREX is so large and is composed of so many participants, that no one player, even the government central banks, can control the market. In comparison to the daily trading volume averages of the $300 billion in the U.S. Treasury Bond market and the approximately $100 billion exchanged in the U.S. stock markets, the FOREX is huge, and has grown in excess of $1.5 trillion daily. The word “market” is a slight misnomer in describing FOREX trading. There is no centralized location for trading activity (“pit”) as there is in the currency futures (and many other) markets. Trading occurs over the phone and through the computer terminals at hundreds of locations worldwide. The bulk of the trading is between approximately 300 large international banks, which process transactions for large companies, governments and for their own accounts. These banks are continually providing prices (“bid” to buy and “ask” to sell) for each other and the broader market. The most recent quotation from one of these banks is considered the market’s current price for that currency. Various private data reporting services provide this “live” price information via the Internet. |