FX Trading
The Forex Market
Foreign Exchange (Forex) is the simultaneous buying of one currency, and selling of another currency. The objective of currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased in value relative to the one you sold.
The term FOREX is derived from the words FOReign EXchange. Forex institutions include banks, government banks and commercial companies including brokers. There is an estimated 12 million trader’s worldwide. It does not exist in one place like a stock exchange, it is a network.
The Market operates 24 hours a day 5 days a week and is bigger than all the other financial markets combined and trades between $1.5 trillion and $3 trillion US dollars per day. Because of its size no government or organisation can control it. Also, because of its size, it has liquidity which means there are always buyers and sellers no matter how large the trade. Even with central bank intervention worth billions, it will only be affected for a short time.
Another advantage of the Forex market is you can trade both ways on a currency. In a ranging market you can BUY or SELL a currency against others several times an hour or day and make profits provided you pick the right direction at that time.
The Forex Market Is Divided Into Three Groups:
1. Consumer Market
This is mainly concerned with the payments for imports and exports as well as payments for assets purchases and sales.
2. Speculator Market
As its name implies, it is for institutions to speculate and profit from variations in currency markets or to hedge against these fluctuations where they maybe exposed through large investments in foreign countries.
3. Central Banks
These are the central banks of various countries such as the US Federal Reserve Bank or the Bank of Japan (BOJ) who influence the market in the interests of their own country. An example of this is where the BPJ will prop up the US dollar buying several billion dollars worth in a very short time span so that the Yen (Japanese currency) will devaluate against it and help its own exporters.
The commercial banks also play a role in the Forex market as they facilitate transactions between two parties, such as companies wishing to exchange currencies and also speculate by buying and selling currencies. Up to 65% of an international commercial banks profits may be generated through speculation. Approximately 300 large international banks or clearing houses handle the bulk of the trading and provide the bid and buy prices, which vary according to demand.
The Forex market has not until recently been available to small speculators because of the minimum transaction sizes. Brokers however are now able to break down the large inter-bank trades and offer small traders the opportunity to participate. This is normally done through lots or contract worth approximately $100,000 USD although some brokers allow you to trade lots of $10,000 USD. To enable smaller players to speculate these amounts are levered, normally at about 100:1 so the trader will put $1,000 USD as the margin and the broker will provide $100,000 USD. If the trade carries on overnight, small interest charges are made. In some circumstances interest is paid on that amount depending on which way the broker is hedging.
Technology has been the other key factor in being able to trade. Within a second or two, a trade can be activated via an internet signal. The better brokers have no one between you and the clearing house and can guarantee the price that is on the screen will be the price you will receive either buying or selling. Some smaller brokers have a trader between you and the clearing house and may take some time if they are busy to action a trade, often resulting in losses or slippage of price. Technology also allows traders to see the latest prices, charts and news events which may influence the markets. It is also possible to set orders up that will execute when they reach a price you want to execute a trade at.
