Forex Trading|How to trade foreign currencies
Oct
21
Filed Under (Finance) by admin
Trading opportunities in the forex market deserve serious consideration as a diversification strategy for your portfolio.
While online equities and futures trading have enjoyed exponential growth and widespread notoriety over the past few years, online foreign exchange trading is only now gaining popularity among seasoned active traders, commodity trading advisors (CTAs), and other professional money managers.
Until recently, large international banks dominated the foreign exchange market, only allowing access via telephone trading to a select few such as Fortune 1000 companies, large funds, high-net worth individuals, and so on. But now, the tide has turned and finally there are established online trading firms that provide individual investors with direct access to the largest, most liquid financial market in the world.
In this market you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless.
Here are an example of how forex trading works. Say, a trader purchases 10,000 euros in the beginning of 2004 at the EUR/USD rate was .9600. In May of 2006 the trader exchanges his 10,000 euro back into US dollar at the market rate of 1.1800. In this example, the trader earned a gross profit of $2,200.
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the ‘basis’ for the buy or the sell. For example, if you BUY EUR/USD you have bought euros (simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar.
EUR/USD
In this example euro is the base currency and thus the ‘basis’ for the buy/sell. If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate versus the US dollar.
GBP/USD
In this example the GBP is the base currency and thus the ‘basis’ for the buy/sell. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the ‘basis’ for the buy/sell. If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
USD/CHF
In this example the CHF is the base currency and thus the ‘basis’ for the buy/sell. If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.
By: Martin Chandra
While online equities and futures trading have enjoyed exponential growth and widespread notoriety over the past few years, online foreign exchange trading is only now gaining popularity among seasoned active traders, commodity trading advisors (CTAs), and other professional money managers.
Until recently, large international banks dominated the foreign exchange market, only allowing access via telephone trading to a select few such as Fortune 1000 companies, large funds, high-net worth individuals, and so on. But now, the tide has turned and finally there are established online trading firms that provide individual investors with direct access to the largest, most liquid financial market in the world.
In this market you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless.
Here are an example of how forex trading works. Say, a trader purchases 10,000 euros in the beginning of 2004 at the EUR/USD rate was .9600. In May of 2006 the trader exchanges his 10,000 euro back into US dollar at the market rate of 1.1800. In this example, the trader earned a gross profit of $2,200.
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the ‘basis’ for the buy or the sell. For example, if you BUY EUR/USD you have bought euros (simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar.
EUR/USD
In this example euro is the base currency and thus the ‘basis’ for the buy/sell. If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate versus the US dollar.
GBP/USD
In this example the GBP is the base currency and thus the ‘basis’ for the buy/sell. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the ‘basis’ for the buy/sell. If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
USD/CHF
In this example the CHF is the base currency and thus the ‘basis’ for the buy/sell. If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.
By: Martin Chandra
Oct
18
Filed Under (Finance) by admin
The objective of currency trading is to exchange one currency for another with the expectation that the market rate or price will change such that the currency pair you have bought has appreciated in value relative to the currency you have sold.
If the currency you have bought appreciates in value and you close your open position by selling this currency, or effectively buying the currency that you originally sold, then you are locking in a profit. If the currency depreciates in value and you close your open position by selling this currency, or effectively buying the currency you have sold, then you are realizing a loss.
Cardinal Rule: All trades result in the buying of one currency and the selling of another, simultaneously.
Basic Entry & Exit Rules:
1) Buying a currency is equivalent with taking a long position in that currency.
2) Selling a currency is equivalent with selling short that currency.
OPEN TRADE: An open trade or position is one in which a trader has either bought or sold one currency pair and has not sold or bought back an adequate amount of that currency pair to effectively close the trade. When a trader has an open trade or position, he/she stands to profit or lose from fluctuations in the price of that currency pair.
CURRENY SPREAD & DEALING RATES:
A currency exchange rate is always quoted for a currency pair. For example, EUR/USD refers to two currencies: the Euro Dollar and the US Dollar.
EXCHANGE RATE: An exchange rate is simply the ratio of one currency valued against another. The first currency is referred to as the base currency and the second as the counter or quote currency. If buying, an exchange rate specifies how much you have to pay in the counter or quote currency to obtain one unit of the base currency. If selling, the exchange rate specifies how much you get in the counter or quote currency when selling one unit of the base currency.
A currency exchange rate is typically given as a bid price and an ask price. The bid price is always lower than the ask price. The bid price represents what will be obtained in the quote currency when selling one unit of the base currency. The ask price represents what has to be paid in the quote currency to obtain one unit of the base currency. The following EUR/USD price quote is an example of bid/ask notation:
EUR/USD: .9726 / .9731
The first component (before the slash) refers to the BID price (what you obtain in USD when you sell EUR). In this example, the BID price is .9726. The second component (after the slash) is used to obtain the ASK price (what you have to pay in EUR if you buy USD). In this example, the ASK price is .9731.
SPREAD: The difference between the bid and the ask price is referred to as the spread. In the example above, the spread is .05 or 5 pips. Unlike the EUR/USD, some currency pair quotes are carried out to the 2nd decimal place (i.e. USD/JPY may be quoted at 119.45/50), in which case 5 pips represents a difference of .05. Although a pip may seem small, a movement of one pip in either direction can translate into thousands of dollars in gains or losses in the inter-bank market.
DIRECT RATES: Most currencies are traded directly against the US Dollar. The market rates that are expressed for such currency pairs are called direct rates. In most cases, the US Dollar is the base currency pair whereby the quote currency is expressed as a certain number of units per 1 US Dollar. For example, the following rate USD/CAD=1.4500 indicates that 1 USD (US Dollars)= 1.4500 CAD (Canadian Dollars).
INDIRECT RATES: For some currency pairs, the US Dollar is not the base currency but the counter or quote currency. The market rates that are expressed for such currency pairs are called indirect rates. This is the case with GBP (British Pound or “Cable”), NZD (New Zealand Dollar), EUR (Eurodollar), and AUD (Australian Dollar). For example, the following rate GBP/USD=1.5800 indicates that 1 GBP (British Pound)= 1.5800 USD (US Dollars).
CROSS RATES: When one currency is traded against any currency other than the USD, the market rate for this currency pair is called a cross rate. Cross rate is the exchange rate between two currencies not involving the US Dollar. Although the US dollar rates do not appear in the final cross rate, they are usually used in the calculation and so must be known. Trading between two non-US Dollar currencies usually occurs by first trading one against the US Dollar and then trading the US Dollar against the second non-US Dollar currency. There are a few non-US Dollar currencies that are traded directly, such as GBP/EUR or EUR/CHF.
BASE CURRENCY: The base currency for the following currency pairs is the Euro (EUR): EUR/GBP, EUR/JPG, EUR/CHF, EUR/CAD. The base currency used when GBP is traded against the JPY (Japanese Yen) is GBP, hence the quotation GBP/JPY.
Spot Deal / Market
A spot deal consists of a bilateral contract between a party delivering a specified amount of a given currency to a counter party and receiving a specified amount of another currency in return, based on an agreed upon exchange rate. Delivery for spot deals occurs within two business days of the deal date, which is referred to as the settlement date. (The settlement date for USD/CAD is one business day after the deal date.)
Market Orders:
Market orders are orders that are executed immediately at the market rate.
Limit Orders:
Limit orders are orders that a trade should be executed (in the future) when certain market conditions occur. There are three types of limit orders:
1) New Positions:
Limit orders: specify that a currency pair should be traded when it reaches a certain exchange rate. Applied when entering into a trade or position, limit orders do not offset a current position.
2) Current / Open Positions:
Take-Profit orders: are used to clear a position by buying (or selling) the currency pair of the position when the exchange rate reaches a specified level. Take- Profit orders are typically used to lock in a profit. For instance, if you are long USD/JPY at 117.42 and believe the price will continue to rise until it reaches 120.00 but are unsure what it will do past 120.00, placing a take-profit at 120.00 will automatically close your position allowing you to lock in your profit.
Stop-Loss orders: are used to clear a position by buying (or selling) the currency pair of the position when the exchange rate reaches a specified level. Stop-Loss orders are typically used to limit any losses that might occur. For instance, it you are long USD/JPY at 117.42 and set a stop-loss at 117.32, your position will automatically be closed at 117.32 and you will be protected from a further price decline. Stop-Loss orders are particularly beneficial because they allow you insurance comfort when leaving a position open while you are no longer actively following the markets allowing you to do other things than watch your computer monitor all day or night.
Now let’s put this terms we can all understand and absorb. Suppose you turn on the television or read the newspaper and you read or see that there is some political unrest in Japan due to the lack of strong leadership in that country. If you believe that the Yen will depreciate as a result of this turmoil, you will have the following bias:
You will be analyzing your real time charts with the bias that you are looking for and uptrend in the USD and a downtrend in the JPY. Therefore you will be bullish the US Dollar and Bearish the Japanese Yen.
Remember this is just added sentiment to help you put the trading odds in your favor. We do not believe in basing all of our entry and exit decisions on purely Fundamental analysis. After all, the charts do not lie and any instability or negative reaction to a specific currency will be shown on the chart thru price and volume.
By: Martin Chandra
If the currency you have bought appreciates in value and you close your open position by selling this currency, or effectively buying the currency that you originally sold, then you are locking in a profit. If the currency depreciates in value and you close your open position by selling this currency, or effectively buying the currency you have sold, then you are realizing a loss.
Cardinal Rule: All trades result in the buying of one currency and the selling of another, simultaneously.
Basic Entry & Exit Rules:
1) Buying a currency is equivalent with taking a long position in that currency.
2) Selling a currency is equivalent with selling short that currency.
OPEN TRADE: An open trade or position is one in which a trader has either bought or sold one currency pair and has not sold or bought back an adequate amount of that currency pair to effectively close the trade. When a trader has an open trade or position, he/she stands to profit or lose from fluctuations in the price of that currency pair.
CURRENY SPREAD & DEALING RATES:
A currency exchange rate is always quoted for a currency pair. For example, EUR/USD refers to two currencies: the Euro Dollar and the US Dollar.
EXCHANGE RATE: An exchange rate is simply the ratio of one currency valued against another. The first currency is referred to as the base currency and the second as the counter or quote currency. If buying, an exchange rate specifies how much you have to pay in the counter or quote currency to obtain one unit of the base currency. If selling, the exchange rate specifies how much you get in the counter or quote currency when selling one unit of the base currency.
A currency exchange rate is typically given as a bid price and an ask price. The bid price is always lower than the ask price. The bid price represents what will be obtained in the quote currency when selling one unit of the base currency. The ask price represents what has to be paid in the quote currency to obtain one unit of the base currency. The following EUR/USD price quote is an example of bid/ask notation:
EUR/USD: .9726 / .9731
The first component (before the slash) refers to the BID price (what you obtain in USD when you sell EUR). In this example, the BID price is .9726. The second component (after the slash) is used to obtain the ASK price (what you have to pay in EUR if you buy USD). In this example, the ASK price is .9731.
SPREAD: The difference between the bid and the ask price is referred to as the spread. In the example above, the spread is .05 or 5 pips. Unlike the EUR/USD, some currency pair quotes are carried out to the 2nd decimal place (i.e. USD/JPY may be quoted at 119.45/50), in which case 5 pips represents a difference of .05. Although a pip may seem small, a movement of one pip in either direction can translate into thousands of dollars in gains or losses in the inter-bank market.
DIRECT RATES: Most currencies are traded directly against the US Dollar. The market rates that are expressed for such currency pairs are called direct rates. In most cases, the US Dollar is the base currency pair whereby the quote currency is expressed as a certain number of units per 1 US Dollar. For example, the following rate USD/CAD=1.4500 indicates that 1 USD (US Dollars)= 1.4500 CAD (Canadian Dollars).
INDIRECT RATES: For some currency pairs, the US Dollar is not the base currency but the counter or quote currency. The market rates that are expressed for such currency pairs are called indirect rates. This is the case with GBP (British Pound or “Cable”), NZD (New Zealand Dollar), EUR (Eurodollar), and AUD (Australian Dollar). For example, the following rate GBP/USD=1.5800 indicates that 1 GBP (British Pound)= 1.5800 USD (US Dollars).
CROSS RATES: When one currency is traded against any currency other than the USD, the market rate for this currency pair is called a cross rate. Cross rate is the exchange rate between two currencies not involving the US Dollar. Although the US dollar rates do not appear in the final cross rate, they are usually used in the calculation and so must be known. Trading between two non-US Dollar currencies usually occurs by first trading one against the US Dollar and then trading the US Dollar against the second non-US Dollar currency. There are a few non-US Dollar currencies that are traded directly, such as GBP/EUR or EUR/CHF.
BASE CURRENCY: The base currency for the following currency pairs is the Euro (EUR): EUR/GBP, EUR/JPG, EUR/CHF, EUR/CAD. The base currency used when GBP is traded against the JPY (Japanese Yen) is GBP, hence the quotation GBP/JPY.
Spot Deal / Market
A spot deal consists of a bilateral contract between a party delivering a specified amount of a given currency to a counter party and receiving a specified amount of another currency in return, based on an agreed upon exchange rate. Delivery for spot deals occurs within two business days of the deal date, which is referred to as the settlement date. (The settlement date for USD/CAD is one business day after the deal date.)
Market Orders:
Market orders are orders that are executed immediately at the market rate.
Limit Orders:
Limit orders are orders that a trade should be executed (in the future) when certain market conditions occur. There are three types of limit orders:
1) New Positions:
Limit orders: specify that a currency pair should be traded when it reaches a certain exchange rate. Applied when entering into a trade or position, limit orders do not offset a current position.
2) Current / Open Positions:
Take-Profit orders: are used to clear a position by buying (or selling) the currency pair of the position when the exchange rate reaches a specified level. Take- Profit orders are typically used to lock in a profit. For instance, if you are long USD/JPY at 117.42 and believe the price will continue to rise until it reaches 120.00 but are unsure what it will do past 120.00, placing a take-profit at 120.00 will automatically close your position allowing you to lock in your profit.
Stop-Loss orders: are used to clear a position by buying (or selling) the currency pair of the position when the exchange rate reaches a specified level. Stop-Loss orders are typically used to limit any losses that might occur. For instance, it you are long USD/JPY at 117.42 and set a stop-loss at 117.32, your position will automatically be closed at 117.32 and you will be protected from a further price decline. Stop-Loss orders are particularly beneficial because they allow you insurance comfort when leaving a position open while you are no longer actively following the markets allowing you to do other things than watch your computer monitor all day or night.
Now let’s put this terms we can all understand and absorb. Suppose you turn on the television or read the newspaper and you read or see that there is some political unrest in Japan due to the lack of strong leadership in that country. If you believe that the Yen will depreciate as a result of this turmoil, you will have the following bias:
You will be analyzing your real time charts with the bias that you are looking for and uptrend in the USD and a downtrend in the JPY. Therefore you will be bullish the US Dollar and Bearish the Japanese Yen.
Remember this is just added sentiment to help you put the trading odds in your favor. We do not believe in basing all of our entry and exit decisions on purely Fundamental analysis. After all, the charts do not lie and any instability or negative reaction to a specific currency will be shown on the chart thru price and volume.
By: Martin Chandra
Aug
20
Filed Under (Finance) by admin
Investors and traders around the world are looking to the Forex market as a new speculation opportunity. But, how are transactions conducted in the Forex market? Or, what are the basics of Forex Trading? Before adventuring in the Forex market we need to make sure we understand the basics, otherwise we will find ourselves lost where we less expected. This is what this article is aimed to, to understand the basics of currency trading.
By: Raul Lopez
What is traded in the Forex market?
The instrument traded by Forex traders and investors are currency pairs. A currency pair is the exchange rate of one currency over another. The most traded currency pairs are:
EUR/USD: Euro
GBP/USD: Pound
USD/CAD: Canadian dollar
USD/JPY: Yen
USD/CHF: Swiss franc
AUD/USD: Aussie
These currency pairs generate up to 85% of the overall volume generated in the Forex market.
So, for instance, if a trader goes long or buys the Euro, she or he is simultaneously buying the EUR and selling the USD. If the same trader goes short or sells the Aussie, she or he is simultaneously selling the AUD and buying the USD.
The first currency of each currency pair is referred as the base currency, while second currency is referred as the counter or quote currency.
Each currency pair is expressed in units of the counter currency needed to get one unit of the base currency.
If the price or quote of the EUR/USD is 1.2545, it means that 1.2545 US dollars are needed to get one EUR.
Bid/Ask Spread
All currency pairs are commonly quoted with a bid and ask price. The bid (always lower than the ask) is the price your broker is willing to buy at, thus the trader should sell at this price. The ask is the price your broker is willing to sell at, thus the trader should buy at this price.
EUR/USD 1.2545/48 or 1.2545/8
The bid price is 1.2545
The ask price is 1.2548
A Pip
A pip is the minimum incremental move a currency pair can make. A pip stands for price interest point. A move in the EUR/USD from 1.2545 to 1.2560 equals 15 pips. And a move in the USD/JPY from 112.05 to 113.10 equals 105 pips.
Margin Trading (leverage)
In contrast with other financial markets where you require the full deposit of the amount traded, in the Forex market you require only a margin deposit. The rest will be granted by your broker.
The leverage provided by some brokers goes up to 400:1. This means that you require only 1/400 or .25% in balance to open a position (plus the floating gains/losses.) Most brokers offer 100:1, where every trader requires 1% in balance to open a position.
The standard lot size in the Forex market is $100,000 USD.
For instance, a trader wants to get long one lot in EUR/USD and he or she is using 100:1 leverage.
To open such position, he or she requires 1% in balance or $1,000 USD.
Of course it is not advisable to open a position with such limited funds in our trading balance. If the trade goes against our trader, the position is to be closed by the broker. This takes us to our next important term.
Margin Call
A margin call occurs when the balance of the trading account falls below the maintenance margin (capital required to open one position, 1% when the leverage used is 100:1, 2% when leverage used is 50:1, and so on.) At this moment, the broker sells off (or buys back in the case of short positions) all your trades, leaving the trader “theoretically” with the maintenance margin.
Most of the time margin calls occur when money management is not properly applied.
How are the mechanics of a Forex trade?
The trader, after an extensive analysis, decides there is a higher probability of the British pound to go up. He or she decides to go long risking 30 pips and having a target (reward) of 60 pips. If the market goes against our trader he/she will lose 30 pips, on the other hand, if the market goes in the intended way, he or she will gain 60 pips. The actual quote for the pound is 1.8524/27, 4 pips spread. Our trader gets long at 1.8530 (ask). By the time the market gets to either our target (called take profit order) or our risk point (called stop loss level) we will have to sell it at the bid price (the price our broker is willing to buy our position back.) In order to make 40 pips, our take profit level should be placed at 1.8590 (bid price.) If our target gets hit, the market ran 64 pips (60 pips plus the 4 pip spread.) If our stop loss level is hit, the market ran 30 pips against us.
It’s very important to understand every aspect of trading. Start first from the very basic concepts, then move on to more complex issues such as Forex trading systems, trading psychology, trade and risk management, and so on. And make sure you master every single aspect before adventuring in a live trading account.
By: Raul Lopez
Jun
30
Filed Under (Finance) by admin
The foreign exchange market exists wherever one currency is traded for another. This is an international exchange market where simultaneous buying of one currency and selling of another is done. Currencies are traded in pairs, for example Euro/US Dollars (EUR/USD) or US Dollars/Japanese Yen (USD/JPY). It is by far the largest market in the world, in terms of cash value traded and includes trading between large banks, central banks, multinational corporations, governments and other financial market and institutions.
The foreign exchange market is unique because of its trading volume, the extreme liquidity of the market (i.e. price stability even with the fastest buying or selling), the large number and variety of traders in the market, its geographical dispersion, its long trading hours (24 hours a day – except weekends) and the variety of factors that affect exchange rates.
The minimum trading size in this market is usually $1 million, with an overall trading volume of about $1.9 trillion per day worldwide. Buying and Selling of currencies is basically for two reasons. 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 mostly for profit. In fact, this market has the potential to earn almost $100,000 with an initial capital of only $500!
The ten most active traders account for almost 73% of trading volume. These are Deutsche Bank (17%), UBS (12.5%), Citigroup (7.5%), HSBC (6.4%), Barclays (5.9%), Merrill Lynch (5.7%), J.P. Morgan Chase (5.3%), Goldman Sachs (4.4%), ABN AMRO (4.2%), Morgan Stanley (3.9%). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell (”ask”, or “offer”) and the price at which a market-maker will buy (”bid”) from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 1-3 pips. One pip is the smallest measure of price move used in forex trading and refers to 1/10,000 of the bid/ask spread. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 (i.e. 3 pips difference).
Although the banks get the least and most stable bid/ask spread they never offer the same rates to their customers, since their key purpose of participating in this market is for profit.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar. According to April 2004’s BIS (Bank for International Settlement) study, the most heavily traded products were: EUR/USD (28 %), USD/JPY (17 %) GBP/USD (14 %). The US currency was involved in 89% of transactions, followed by the euro (37%), the yen (20%) and sterling (17%) – (Note that volume percentages should add up to 200% – 100% for all the sellers, and 100% for all the buyers). Although trading in the euro has grown considerably since the currency’s creation in January 1999, the foreign exchange market is thus still largely dollar-centred. For instance, trading the euro versus a non-European currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The only exception to this is EUR/JPY, which is an established traded currency pair in the inter-bank market.
According to the BIS study, 53% of transactions were strictly inter-dealer (i.e. inter-bank), 33% involved a dealer (i.e. a bank) and a fund manager or some other non-bank financial institution, and only 14% were between a dealer and a non-financial company. The inter-bank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank’s own account.
On the other hand, retail forex brokers handle a minute fraction of the total volume of the foreign exchange market, estimated at $25-50 billion daily, which is about 2% of the whole market. In the retail forex industry market makers more often than not run two separate trading desks- one that they use to actually trade foreign exchange (essentially serving as a proprietary trading desk or “non-dealing desk”) and one that is set up for the expressed purpose of off-exchange trading with retail customers (called the “dealing desk” or “trading desk”). The dealing desk operates much like the currency exchange counter at a bank. Inter-bank exchange rates, those coming in from the inter-bank system and displayed at the non-dealing desk, are adjusted to incorporate spreads that safeguard the bank’s (in this instance the market maker’s) profit before they are displayed in the lobby (at the dealing desk) to the retail customer. Dealing desk pricing is, therefore, not a direct reflection of the currency exchange but artificial pricing created and controlled by the originating broker.
Forex Brokers tend to provide better exchange rates compared to the banks also trading in the forex market as well as companies such as Western Union or MoneyGram in order to keep up their competition against them. Hence dealing with specialist international forex brokering companies is a suitable way to transfer money overseas both in large and small amounts.
By: Ali Jamalan
The foreign exchange market is unique because of its trading volume, the extreme liquidity of the market (i.e. price stability even with the fastest buying or selling), the large number and variety of traders in the market, its geographical dispersion, its long trading hours (24 hours a day – except weekends) and the variety of factors that affect exchange rates.
The minimum trading size in this market is usually $1 million, with an overall trading volume of about $1.9 trillion per day worldwide. Buying and Selling of currencies is basically for two reasons. 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 mostly for profit. In fact, this market has the potential to earn almost $100,000 with an initial capital of only $500!
The ten most active traders account for almost 73% of trading volume. These are Deutsche Bank (17%), UBS (12.5%), Citigroup (7.5%), HSBC (6.4%), Barclays (5.9%), Merrill Lynch (5.7%), J.P. Morgan Chase (5.3%), Goldman Sachs (4.4%), ABN AMRO (4.2%), Morgan Stanley (3.9%). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell (”ask”, or “offer”) and the price at which a market-maker will buy (”bid”) from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 1-3 pips. One pip is the smallest measure of price move used in forex trading and refers to 1/10,000 of the bid/ask spread. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 (i.e. 3 pips difference).
Although the banks get the least and most stable bid/ask spread they never offer the same rates to their customers, since their key purpose of participating in this market is for profit.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar. According to April 2004’s BIS (Bank for International Settlement) study, the most heavily traded products were: EUR/USD (28 %), USD/JPY (17 %) GBP/USD (14 %). The US currency was involved in 89% of transactions, followed by the euro (37%), the yen (20%) and sterling (17%) – (Note that volume percentages should add up to 200% – 100% for all the sellers, and 100% for all the buyers). Although trading in the euro has grown considerably since the currency’s creation in January 1999, the foreign exchange market is thus still largely dollar-centred. For instance, trading the euro versus a non-European currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The only exception to this is EUR/JPY, which is an established traded currency pair in the inter-bank market.
According to the BIS study, 53% of transactions were strictly inter-dealer (i.e. inter-bank), 33% involved a dealer (i.e. a bank) and a fund manager or some other non-bank financial institution, and only 14% were between a dealer and a non-financial company. The inter-bank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank’s own account.
On the other hand, retail forex brokers handle a minute fraction of the total volume of the foreign exchange market, estimated at $25-50 billion daily, which is about 2% of the whole market. In the retail forex industry market makers more often than not run two separate trading desks- one that they use to actually trade foreign exchange (essentially serving as a proprietary trading desk or “non-dealing desk”) and one that is set up for the expressed purpose of off-exchange trading with retail customers (called the “dealing desk” or “trading desk”). The dealing desk operates much like the currency exchange counter at a bank. Inter-bank exchange rates, those coming in from the inter-bank system and displayed at the non-dealing desk, are adjusted to incorporate spreads that safeguard the bank’s (in this instance the market maker’s) profit before they are displayed in the lobby (at the dealing desk) to the retail customer. Dealing desk pricing is, therefore, not a direct reflection of the currency exchange but artificial pricing created and controlled by the originating broker.
Forex Brokers tend to provide better exchange rates compared to the banks also trading in the forex market as well as companies such as Western Union or MoneyGram in order to keep up their competition against them. Hence dealing with specialist international forex brokering companies is a suitable way to transfer money overseas both in large and small amounts.
By: Ali Jamalan
Jun
23
Filed Under (Finance) by admin
Trading opportunities in the forex market deserve serious consideration as a diversification strategy for your portfolio.
While online equities and futures trading have enjoyed exponential growth and widespread notoriety over the past few years, online foreign exchange trading is only now gaining popularity among seasoned active traders, commodity trading advisors (CTAs), and other professional money managers.
Until recently, large international banks dominated the foreign exchange market, only allowing access via telephone trading to a select few such as Fortune 1000 companies, large funds, high-net worth individuals, and so on. But now, the tide has turned and finally there are established online trading firms that provide individual investors with direct access to the largest, most liquid financial market in the world.
In this market you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless.
Here are an example of how forex trading works. Say, a trader purchases 10,000 euros in the beginning of 2004 at the EUR/USD rate was .9600. In May of 2006 the trader exchanges his 10,000 euro back into US dollar at the market rate of 1.1800. In this example, the trader earned a gross profit of $2,200.
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the “basis” for the buy or the sell. For example, if you BUY EUR/USD you have bought euros (simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar.
EUR/USD
In this example euro is the base currency and thus the “basis” for the buy/sell. If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate versus the US dollar.
GBP/USD
In this example the GBP is the base currency and thus the “basis” for the buy/sell. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the “basis” for the buy/sell. If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
USD/CHF
In this example the CHF is the base currency and thus the “basis” for the buy/sell. If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.
By: Nofie Iman
While online equities and futures trading have enjoyed exponential growth and widespread notoriety over the past few years, online foreign exchange trading is only now gaining popularity among seasoned active traders, commodity trading advisors (CTAs), and other professional money managers.
Until recently, large international banks dominated the foreign exchange market, only allowing access via telephone trading to a select few such as Fortune 1000 companies, large funds, high-net worth individuals, and so on. But now, the tide has turned and finally there are established online trading firms that provide individual investors with direct access to the largest, most liquid financial market in the world.
In this market you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless.
Here are an example of how forex trading works. Say, a trader purchases 10,000 euros in the beginning of 2004 at the EUR/USD rate was .9600. In May of 2006 the trader exchanges his 10,000 euro back into US dollar at the market rate of 1.1800. In this example, the trader earned a gross profit of $2,200.
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the “basis” for the buy or the sell. For example, if you BUY EUR/USD you have bought euros (simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar.
EUR/USD
In this example euro is the base currency and thus the “basis” for the buy/sell. If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate versus the US dollar.
GBP/USD
In this example the GBP is the base currency and thus the “basis” for the buy/sell. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the “basis” for the buy/sell. If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
USD/CHF
In this example the CHF is the base currency and thus the “basis” for the buy/sell. If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.
By: Nofie Iman
