NEVER A 'BEAR' MARKET:
Another advantage of the FOREX market is that there is no 'bear' market, per se. Currencies are traded in pairs, for example US dollar vs. yen or US dollar vs. Swiss franc. Every position involves the selling of one currency and the buying of another. If one believes the Swiss franc will appreciate against the dollar, one can sell dollars and buy Swiss francs. Or if one holds the opposite belief, one can buy dollars for Swiss francs. The potential for profit exists as long as there is movement in the exchange rate or price. One side of the pair is always gaining, and provided the investor picks the right side, a potential for profit ALWAYS exists.
FREE AND FAIR FLOW OF INFORMATION:
Ever notice in the stock market that a certain stock is suddenly down 5% or more but you have absolutely no idea what caused such a quick spike? Usually, it's not until the next morning when you read it in the newspaper that you find out that earnings forecasts have been revised downward; or that an insider at a particular company has resigned; or that some other influential piece of information was released that you were not privy to. Imagine how much money you could have saved had you known this vital information at the same time as all other market 'insiders.' - Or how much you could even have earned in profit by acting in a timely manner… Imagine a market where there is little or no 'inside information' and all pertinent, market-moving news is released publicly to everybody in the world at the same time… Welcome to the foreign exchange market.
Cash FX vs. Currency Futures
As an investor it is important for you to understand the differences between cash FOREX and currency futures. In currency futures, the contract size is predetermined.
With FOREX (SPOT FX), you may trade any desired amount typically above $100,000 USD The futures market closes at the end of the business day (similar to the stock market) If important data is released overseas while the U.S. futures markets is closed, the next day's opening might sustain large gaps with potential for large losses if the direction of the move is against your position.
The Spot FOREX market runs continuously on a 24-hour basis from 7:00 am New Zealand time Monday morning to 5:00 pm New York Time Friday evening. Dealers in every major FX trading center (Sydney, Tokyo, Hong Kong/Singapore, London, Geneva and New York/Toronto) ensure a smooth transition as liquidity migrates from one time zone to the next. Furthermore, currency futures trade in non-USD denominated currency amounts only whereas in spot FOREX, an investor can trade either in currency denominations, or in the more conventionally quoted USD amounts.
The currency futures pit, even during Regular IMM (International Money Market) hours suffers from sporadic lulls in liquidity and constant price gaps. The spot FOREX market offers constant liquidity and market depth much more consistently than Futures. With IMM futures one is limited in the currency pairs he can trade - Most currency futures are traded only versus the USD - With spot forex, (as with MoneyTec Trader) one may trade foreign currencies vs. USD or vs. each other on a 'cross' basis as well - ex: EURJPY, GBPJPY, CHFJPY, EURGBP and AUDNZD.
Who Are Forex Market Participants?
The interbank market caters for both the majority of commercial turnover as well as enormous amounts of speculative trading every day. It is not uncommon for a large bank to trade billions of dollars on a daily basis. Some of this trading activity is undertaken on behalf of customers, but a large amount of trading is also conducted by proprietary desks, where dealers are trading to make the bank profits. The interbank market has become increasingly competitive in the last couple of years and the god-like status of top foreign exchange traders has suffered as the equity guys are back in charge again. A large part of the banks' trading with each other is taking place on electronic brooking systems that have negatively affected the traditional foreign exchange brokers.
Until recently, the foreign exchange brokers were doing large amounts of business, facilitating interbank trading and matching anonymous counterparts for comparatively small fees. Today, however, a lot of this business is moving onto more efficient electronic systems that are functioning as a closed circuit for banks only. Still, the broker box providing the opportunity to listen in on the ongoing interbank trading is seen in most trading rooms, but turnover is noticeably smaller than just a year or two ago.
For many commercial and private clients, there is a need to receive specialised foreign exchange services. There is a fair amount of non-banks offering dealing services, analysis and strategic advice to such clients. Many banks do not undertake trading for private clients at all, and do not have the necessary resources or inclination to support medium sized commercial clients adequately. The services of such brokers are more similar in nature to other investment brokers and typically provide a service-orientated approach to their clients.
Investors and Speculators
As in all other efficient markets, the speculator performs an important role taking over the risks that commercial participants do not wish to be exposed to. The boundaries of speculation are unclear, however, as many of the above mentioned participants also have speculative interests, even some of the central banks. The foreign exchange markets are popular with investors due to the large amount of leverage that can be obtained and the ease with which positions can be entered and exited 24 hours a day. Trading in a currency might be the "purest" way of taking a view on an overall local market expectation, much simpler than investing in illiquid emerging stock markets. Taking advantage of interest rate differentials is another popular strategy that can be efficiently undertaken in a market with high leverage.
The commercial companies' international trade exposure is the backbone of the foreign exchange markets. Protection against unfavourable moves is an important reason why these markets are in existence, although it sometimes appears to be a chicken and egg situation - which came first and which produces the other? Commercial companies often trade in sizes that are insignificant to short term market moves, however, as the main currency markets can quite easily absorb hundreds of millions of dollars without any big impact. But it also clear that one of the decisive factors determining the long-term direction of a currency's exchange rate is the overall trade flow. Some multinational companies can have an unpredictable impact when very large positions are covered, however, due to exposures that are not commonly known to the majority of market participants.
The national central banks play an important role in the foreign exchange markets. Ultimately, the central banks seek to control the money supply and often have official or unofficial target rates for their currencies. As many central banks have very substantial foreign exchange reserves, the intervention power is significant. Among the most important responsibilities of a central bank is the restoration of an orderly market in times of excessive exchange rate volatility and the control of the inflationary impact of a weakening currency.
Frequently, the mere expectation of central bank intervention is sufficient to stabilise a currency, but in case of aggressive intervention the actual impact on the short term supply/demand balance can lead to the desired moves in exchange rates. It is by no means always that a central bank achieves its objectives, however. If the market participants really wants to take on a central bank, the combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse and in more recent times South East Asia.
Hedge funds have gained a reputation for aggressive currency speculation in recent years. There is no doubt that with the increasing amount of money some of these investment vehicles have under management, the size and liquidity of foreign exchange markets is very appealing. The leverage available in these market allow such fund to speculate with tens of billions at a time and the herd instinct that is very apparent in hedge fund circles means that getting Soros and friends on your back is less than pleasant for a weak currency and economy. It is unlikely, however, that such investments would be successful if the underlying investment strategy was not sound and therefore it is argued that hedge funds actually perform a beneficial service by exploiting and exposing unsustainable financial weaknesses, forcing realignment to more realistic levels.
What Influences the Market?
The primary factors that influence exchange rates are the balance of international payments for goods and services, the state of the economy, political developments as well as various other psychological factors. In addition, fundamental economic forces such as inflation and interest rates will constantly influence currency prices. In addition Central banks sometimes participate in the FOREX market by buying extremely large sums of one currency for another - this is referred to as Central Bank intervention.
Central banks can also influence currency prices by changing their country's short-term interest rate to make it relatively more or less attractive to foreigners. Any of these broad-based economic conditions can cause sudden and dramatic currency price swings. The fastest moves, however, occur usually when information is released that is unexpected by the market at large. This is a key concept because what drives the currency market in many cases is the anticipation of an economic condition rather than the condition itself.
Activities by professional currency managers, generally on behalf of a pool of funds, have also become a factor moving the market. While professional managers may behave independently and view the market from a unique perspective, most, if not all, are at least aware of important technical chart points in each major currency. As the market approaches major 'support' or 'resistance' levels, price-action becomes more technically oriented and the reactions of many managers are often predictable and similar.
These market periods may also result in sudden and dramatic price swings. Traders make decisions on both technical factors and economic fundamentals. Technical traders use charts to identify trading opportunities whereas fundamentalists predict movements in exchange rates by interpreting a wide variety of data, which range from breaking news to economic reports.
The History of FOREX Trading
Many centuries ago, the value of goods were expressed in terms of other goods. This sort of economics was based on the barter system between individuals. The obvious limitations of such a system encouraged establishing more generally accepted mediums of exchange. It was important that a common base of value could be established. In some economies, items such as teeth, feathers even stones served this purpose, but soon various metals, in particular gold and silver, established themselves as an accepted means of payment as well as a reliable storage of value. Coins were initially minted from the preferred metal and in stable political regimes, the introduction of a paper form of governmental I.O.U. during the Middle Ages also gained acceptance. This type of I.O.U. was introduced more successfully through force than through persuasion and is now the basis of today’s modern currencies.
Before the first World war, most Central banks supported their currencies with convertibility to gold. Paper money could always be exchanged for gold. However, for this type of gold exchange, there was not necessarily a Centrals bank need for full coverage of the government's currency reserves. This did not occur very often, however when a group mindset fostered this disastrous notion of converting back to gold in mass, panic resulted in so-called "Run on banks " The combination of a greater supply of paper money without the gold to cover led to devastating inflation and resulting political instability. In order to protect local national interests, increased foreign exchange controls were introduced to prevent market forces from punishing monetary irresponsibility.
Near the end of WWII, The Bretton Woods agreement was reached on the initiative of the USA in July 1944. The conference held in Bretton Woods, New Hampshire rejected John Maynard Keynes suggestion for a new world reserve currency in favor of a system built on the US Dollar. International institutions such as the IMF, The World Bank and GATT were created in the same period as the emerging victors of WWII searched for a way to avoid the destabilizing monetary crises leading to the war. The Bretton Woods agreement resulted in a system of fixed exchange rates that reinstated The Gold Standard partly, fixing the US Dollar at 35.00 per ounce of Gold and fixing the other main currencies to the dollar, initially intended to be on a permanent basis.
The Bretton Woods system came under increasing pressure as national economies moved in different directions during the 1960’s. A number of realignments held the system alive for a long time but eventually Bretton Woods collapsed in the early 1970’s following president Nixon's suspension of the gold convertibility in August 1971. The dollar was not any longer suited as the sole international currency at a time when it was under severe pressure from increasing US budget and trade deficits.
The last few decades have seen foreign exchange trading develop into the worlds largest global market. Restrictions on capital flows have been removed in most countries, leaving the market forces free to adjust foreign exchange rates according to their perceived values. In Europe, the idea of fixed exchange rates had by no means died. The European Economic Community introduced a new system of fixed exchange rates in 1979, the European Monetary System.
This attempt to fix exchange rates met with near extinction in 1992-93, when built-up economic pressures forced devaluations of a number of weak European currencies. The quest continued in Europe for currency stability with the 1991 signing of The Maastricht treaty. This was to not only fix exchange rates but also actually replace many of them with the Euro in 2002. Today, Europe is currently in the Euros third and final stage, where exchange rates are fixed in the 12 participating Euro countries but still use their existing currencies for commercial transactions.
The physical introduction of the Euro will be between January 1, 2002 and July 1, 2002. At that point the old countries currencies will be obsolete. In Asia, the lack of sustainability of fixed foreign exchange rates has gained new relevance with the events in South East Asia in the latter part of 1997, where currency after currency was devalued against the US dollar, leaving other fixed exchange rates in particular in South America also looking very vulnerable.
While commercial companies have had to face a much more volatile currency environment in recent years, investors and financial institutions have discovered a new playground. The size of the FOREX market now dwarfs any other investment market. It is estimated that more than USD 1,600 Billion are traded every day, that is the same amount as almost 40 times the daily USD volume on the American NASDAQ market.
:: LEARN FOREX TRADING
Forex trading online, the process of trading foreign currencies via the internet, though a relatively new form of investing, has quickly become one of today's largest growing investment markets. Due to its high level of liquidity, simple execution, low transaction fees, and the fact that it is open year-round, 24 hours a day, the foreign currency trading market, otherwise known as forex trading, is extremely attractive to investors. Free of barriers to trade, forex trading offers the most equitable trading arena for all levels of customer. As you begin forex trading it is important to understand that, like all other forms of trading, there is risk involved with investments.
Forex Trading Basics.
Foreign Exchange trading, better known as Forex trading, is the concurrent buying of one currency while selling another. Forex trading is based on the movements of a set of currencies that are sold in currency pairs, where one currency is the base and one is the counter or quote currency. It also puts the currencies in terms of one currency's supply compared to the other currency’s demand. The gains or loss on a trade are based on the relative movements of the currencies within each currency pair. Pips or points are the numerical way in which the movements of currencies are quoted, positive movements being gains, negative movements reflecting losses. There are countless tools, and strategies associated with currency trading, and when first beginning, it is important to understand these tools before implementing any of them in trading strategies. Here is a list of the more popularly used Forex Trading Tools.
Technical and Fundamental Analysis.
In basic terms, there are two ways to analyze a currency trade. Reading and being well acquainted with political and financial news in terms of interest rate adjustments, international trade, and the general economic welfare of countries (GDP), are associated with what is called fundamental analysis, and are something for all traders to consider. The second type of trading is the technical analysis approach, which incorporates mathematical time charts and graphs that utilize historical currency movements to make predictions in the future.
After determining whether fundamental trading, technical trading, or a combination of the two is appropriate, novice traders should test them on a forex demo account. This allow you to see the results of your strategies without risking your investments. From there it is easier to determine how risk-adverse a trader you are, and where you should place your stop/limit orders. Stops and limit orders are prearranged prices indicating positions, maximums and minimums, when traders would want to exit the markets, to hedge against massive losses. But above all, traders must realize that what they are willing to risk should also be what they are willing to lose.
The Establishment of Exchange Rates
Developing global currency values and the rates that they are traded are a result of many events, both concrete and psychological. Speculative foreign exchange in the 1970’s made up only 20% of total global foreign exchange transactions. Today it represents over 95% of current transactions. Currency trading has lead to huge amounts of money being changing hands on a daily basis as investors buy and sell currencies against each other. Many factors affect the value of a country’s currency including business cycles, political events, governmental and central bank monetary policies, stock market fluctuations, and international investment patterns.
Online Currency Trading
Since Forex trading is easily done through several means of communication, on-line trading being the most popular to date, it makes for lower transaction costs compared to other forms of trading such as equities or futures. Forex prices are also extremely transparent, due largely to the creation of the online trading platform. Both the transparency and low transaction fees make for even greater profit opportunities in currency trading.
Traders have the ability to jump in and out of the forex market with great ease and large amounts of capital are not required to start forex trading. Currency prices are also not as volatile and usually move in strong trends thus reducing the risk that investors bear. Its size, liquidity, reliability, and tendency to move in strong trends make risk management easy for forex traders, enticing more and more people to trade currency. To trade forex you need an FX Trading Platform. Use an established and regulated company to make your trades with.
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