Managed forex accounts

Forex Managed Accounts - financial safeguards to ensure that clearing members (usually companies or corporations) perform on their customers' open futures and options contracts. Clearing margins are distinct from customer margins that individual buyers and sellers of futures and options contracts are required to deposit with brokers. Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfilling of contract obligations. FCMs are responsible for overseeing customer margin accounts. Margins are determined on the basis of market risk and contract value. Also referred to as performance-bond margin. Self-trading in the currency markets can be a difficult proposition. To be successful, a currency trader must follow market movements 24 hours a day, six days a week. Many Forex investors do not have the time, experience or desire to self trade, but seek the diversification and profit potential that foreign exchange trading offers. Forex Managed Accounts were created for investors with risk capital who chose to have a professional trade on their behalf. In a Forex Managed Account, the positions are held in the investors account, independent of other investors. Unlike mutual funds or hedge funds, which commingle your funds with other investors, a Forex Managed Account is an account held exclusively in your name and all or part of your funds can be redeemed within one day. There is no lock up period and no withdrawal fees. The field of forex trading requires much expertise and knowledge without which the trader may incur great losses. The forex trading field is very vast where the trader is required to have knowledge regarding the factors concerned with bringing about the fluctuations in the currency prices. These factors may be analyzed fundamentally or technically but without the proper analysis of these factors it does not possible to derive profits from forex trading. To gain knowledge in the field of forex trading requires time and turns out to be quite expensive. So the trader who wants to avoid all this goes in for something called managed forex with which the trader is not needed to have any knowledge regarding this field. All the work is done by professional people have been into this field for a long time and are experienced analyze the forex market for the forex traders and then invest the traders money into the forex market to provide him with financial profits. There are two types of managed forex accounts: first which uses robots and the second which makes use of the professional experienced people in the field of forex trading. Both of these include the complete study and analysis of the forex market and the factors related with the currency fluctuations. The emotional factor is excluded and robots and they work according to the analysis of the live data using all the indicators and the results derived from this are used for taking decisions regarding forex trading. The other type of managed forex account involves a forex dealer who trades for the forex trader after analyzing the market data using different indicators and then takes trading decisions for the traders. The trading account remains in the name of the forex trader but the trading is done by the forex dealer after analyzing the market. The forex trader is free to utilize the money in his forex trading account according to his own wish. The managed forex in addition to providing profit to the novice forex trader also gives him the benefit of learning the forex trading. It also provides benefit to the experienced traders as they get opportunity of fine tuning their forex trading skills and get a deeper understanding of the movement of the forex market. The choice of managed forex is very difficult to make due to existence of several managed forex systems in the market for. There are managed forex systems which try to make several smaller trades which may prove dangerous for the forex traders as this may lead to loss of money. The forex traders should make sure that the managed forex has been back tested using real time forex data to avoid losses. With a managed currency account an investor who cannot watch the market 24 hours a day can still participate in the dynamic world of currency trading. An investor who wishes to have his funds professionally managed might also be a good candidate for managed currency accounts. Studies of professionally managed currency funds have shown returns that are not related to the performance of the stock market. Thus, a great way to enhance an existing portfolio regardless of what the stock market does, is to allocate a portion of the funds to an FX managed account. Advantages of forex managed accounts Acquiring managed Forex makes a good deal sense given the vagaries of international trading schemas. The increasing pace of political change has crafted a strange new environment. Even Forex trading mavens are concerned about the direction of events. Protect yourself against unseen market forces by employing consultants to assist you. You will quickly discover that this relationship will pay off - big-time! And the good news is that the education you'll receive during the process will last a lifetime. A managed Forex account relieves you from much of the stress associated with Forex trading. The solicitation of outside services enables you to go about your day without worrying about every single vagary of the market. However, just because you have a managed Forex account doesn't mean you can completely ignore the international arena. Constantly be on the lookout for viable tips on your particular market niche. Slacking on your commitment to your investments will inevitably cause a decline in your ultimate return. Such a lax attitude can also interfere with your relationship with your investment manager. Actually, the best way to get an account managed by someone else is to always communicate with the person who will be managing your account. This method is advisable due to the fact where a lot of trust needs to be put onto the person managing your account as normally, FOREX trading involves a very big risk and a huge sum of circulating funds. By communicating frequently with the person managing your account, you can gain a better understanding about him and therefore in return, builds up a better trust between the two parties. Lastly, regardless of who is managing the account, one must always acknowledge the fact where FOREX trading is not child's play and all the risk involved in FOREX trading must always be well assessed.

Forex hedging

Hedger is an individual or company owning or planning to own a cash commodity, corn, notes, bills etc. and concerned that the cost of the commodity may change before either buying or selling it in the cash market. A hedger achieves protection against changing cash prices by purchasing (selling) futures contracts of the same or similar commodity and later offsetting that position by selling (purchasing) futures contracts of the same quantity and type as the initial transaction.

Currency hedging refers to a strategy that strives to minimize the exposure to exchange rate fluctuations, thereby minimizing the uncertainty of future transactions denominated in a foreign currency and providing some stability to earnings and cash flow. This is typically accomplished through the use of options or futures contracts.

Forward contracts can also be used to hedge currency risk. However, while forward contracts are superior to futures in terms of their overall risk reduction, there is no central market for forward contracts, which contributes to higher transaction costs and lower liquidity, as well as counterparty risk (i.e. the risk that the contract will not be honoured at expiration).

When a business chooses to hedge its exposure to foreign currency, the objective is to minimize uncertainty, not to maximize profit from currency speculation. A hedged position will therefore not produce the benefit of a favourable exchange rate movement, but at the same time will not expose the hedger to the loss potential of an unfavourable exchange rate movement.

The underlying principle of a hedging strategy is to construct a portfolio consisting of a long position in the foreign currency asset and a short position in a foreign currency asset such that gains on one offset losses on the other. This is achieved by using derivatives whose price movements are highly correlated with movements in the spot market.

Ideally, the derivative being used to hedge will have the same underlying currency as the foreign currency asset being hedged, since the price movements of the two assets would be highly similar.

Forward contracts give you a fixed cost for your foreign currency and therefore for your foreign currency purchasing. If the interest rates in the foreign country are higher than they are in the US, the forward rate is at a discount to the spot rate, and this reduces the dollar cost still more.

Forward contracts also have the advantage of being suitable for internal transactions. If your company exports to the country you are buying in, and wants to sell in local currency, purchasing in local currency reduces the company's currency exposure. The purchasing flow of funds offsets the sales office flow of funds. If an internal forward agreement is made between the two departments, only the difference between the two flows needs to be hedged at banks.

Options allow a buyer to take advantage of an increase in the value of the US dollar but protect against a decrease. Unfortunately, they are expensive. A six month option on a volatile currency typically costs about 5% and most people choose not to buy them. An added difficulty is that option prices for the European style options that buyers need are not well listed in financial newspapers.

Hedging does involve some risks, but they are limited and can be controlled with simple attention to the fundamentals. Risk arises from forecast inaccuracy, and can lead to unexpected price variations, either up or down. If a company over forecasts purchases and hedges with forwards, there will be larger profit or loss on the hedge than the variance on part cost.

With over forecasts, there will be a loss on forward contracts if the dollar strengthens and a gain if the dollar weakens. The total unexpected gain or loss will be approximately the percent over forecasted times the percent that the dollar changed. For example, a 20 % over forecast and a 15% currency strengthening will result in a 3% (15% of 20%) extra cost of the parts.

With under forecasts, some of the parts must be purchased at the spot rate without an offsetting hedge. If the dollar weakens, they will be more expensive and if it strengthens, they will be cheaper.

The biggest gains in currency management will come from choosing the right currency. A good negotiator should be able to get an initial price reduction of 5% or more against a volatile currency like the yen or the mark. The next most consequential decision is whether or not to hedge. Not hedging opens the buyer to dollar price swings that are often 20% in six months. This uncertainty is unacceptable to most companies.

The third decision is to choose a hedging strategy. A recent article in the International Journal of Purchasing and Materials Management showed the benefits of actively choosing a hedge strategy based on a Bayesian statistical analysis of probable outcomes. Over a five year period, actively choosing a hedge strategy would have saved 3.6 percent compared to paying in the supplier's currency (yen) without hedging, and 1.8 percent compared to always hedging with forwards. The authors did not consider options as a potential hedge strategy.

If buying in the supplier's currency without hedging is unacceptably risky, and buying in dollars is excessively expensive, the choice is between hedging with forwards and hedging with options.

If options were free, they would be the ideal choice, because they permit taking advantage of a stronger dollar and protect against a weaker dollar. However, options are not free, and almost always will be more expensive than forwards.

If you actively analyze probabilities of currency changes as the authors in the Journal recommend, and believe that the dollar will weaken, you should use forward contracts. They will give the same results as an option but at a lower cost. If you see no clear trend, make the choice based on relative costs. During two one-year periods when the dollar had no net change against the yen, options would have saved an average of 3.5% compared to forwards, before the costs of either.

If the difference in costs between an option and a forward contract is less than 3.5% and you predict no increase or decrease, consider buying an option.

If you predict a strengthening dollar, an option is the better choice. During a one year period of a strengthening dollar, options would have saved 7.71% compared to forward contracts.

Forex signals

One of the disadvantages of FOREX trading is the time investment needed to monitor the markets for advantageous entry and exit points. It's possible to sit in front of a computer monitor for hours watching the markets.

Of course, you can use automated orders such as limits and stops. These allow you to walk away from your computer with the knowledge that your losses will be kept to a minimum, but by doing so, you may miss out on potential profits because your limit order kicks in too soon.

Forex Trading Signals maintain trading logs regularly to show you trends over a period. Best way to learn and form your own trading signals of Forex market is to start with a demo Forex trading account. You can get such an account through Forex brokers and practice trading through these accounts for certain time. This provides you with a feel of the market. You can then form your own signals and implement them in your trading activities to understand their implications. Thereafter you can invest little money and slowly develop your trading in Forex markets.

Forex trading strategy

Forex trading strategy begins with fundamental and technical analysis. The following explains why this analysis is vital to building a solid forex trading strategy:

Fundamental Analysis

Fundamental analysis is mainly used to better understand long-term trends in the currency market. There are a number of factors that determine the value of a country's currency.

The overall political, economic, and social climates of a specific country are the primary issues measured in fundamental analysis. As you can imagine, it can be difficult measure how these issues affect one another.

Every trader should be aware of the affects of political events, central bank news, non-farm payrolls, consumer price index, imports, exports etc. on the value of currency before forex trading.

Technical Analysis

Technical analysis produces charts and graphs subsequent to scrutinizing past data on volume and price. One of the latest buzzwords in this approach to currency trading analysis is "Fibonacci retracement." Fibonacci was a 12th century, Italian mathematician whose contribution to a modern forex trading strategy consists of his arcs, fans, and retracements. The lines in these mathematical studies are currently used to anticipate a trend change as prices near the lines created by these arcs, fans, and retracements. So some of the more popular forms of technical analysis used in forex are Candlestick Formations, Fibonacci Sequence, Financial Breakouts and Trend Lines.

Traders who are profitable will develop a personal forex trading strategy and perfect it over time. Some people will focus a specific study or calculation, while others use broad spectrum analysis as a means of determining their trades.

Most experts suggest that you try using a combination of both fundamental and technical analysis, with which you can make long-term projections and also determine entry and exit points. Whatever you finally decide, the fact remains that trading is a discipline that requires preparation and hard work.

Your overall personal forex trading strategy should include three vital ingredients; the currency pair you decide to trade, what technical indicators you use for entry/exit plans and sound money management.

Strategy 1 - Simple Moving Average

Successful trading is often described as optimizing your risk with respect to your reward, or upside. Any trading strategy should have a disciplined method of limiting risk while making the most out of favorable market moves. We will illustrate one decision making model which uses a Simple Moving Average ("SMA") technical study, based on a 12-period SMA, where each period is 15 minutes. This is one example of a trading decision making strategy, and we encourage any trader to research other strategies as thoroughly as possible.

We will use a simple algorithm: when the price of the currency crosses above the 12-period SMA, it will be taken as a signal to buy at the market. When the currency price crosses below the 12-period SMA, it will be a signal to "Stop and Reverse" ("SAR"). In other words, a long position will be liquidated and a short position will be established, both with market orders.

Thus this system will keep the traders "always in" the market - he will always have either a long or short position after the first signal. In the chart below, the white line represents the price of USDJPY, the purple line represents the 12-period SMA of USDJPY, and the red line indicates where USDJPY crosses above the SMA, generating a buy signal at approximately 129.90:

This is a simple example of technical analysis applied to trading. Many strategies used by professional traders make use of moving averages along with other indicators or "filters". Note that the moving average method has an element of risk control built in: a long position will be stopped out fairly quickly in a falling market because the price will drop below the SMA, generating a stop-and-reverse signal. The same holds true for a sell signal in a rising market. Note that the SMA is generated automatically by GCI's integrated charting application.

Strategy 2 - Support and Resistance Levels

One use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.

For example, in chart below EURUSD has established a resistance level at approximately .9015. In other words, EURUSD has risen up to .9015 repeatedly, but has been unable to move beyond that point:

The trading strategy would then be to sell EURUSD the next time it gets close to .9015, with a stop placed just above .9015, say at .9025. This would have indeed been a good trade as EURUSD proceeded to fall sharply, without breaking the .9015 resistance. Hence a substantial upside can be achieved while only risking 10 or 15 pips (.0010 or .0015 in EURUSD).

Rules of good trading strategy

1. Trading is an investment not an income

It is important to have a realistic expectation of what you can achieve through forex trading. The nature of trading is such that you may make a good return on your initial capital over an annual period, but during that period you may have a number of consecutive losing months, with only a few bumper months inbetween.

2. You can't predict the forex markets

The forex markets are influenced by billions of traders, economic and political events. You simply cannot predict the direction and manner in which the markets will move. Technical and fundamental analysis does much to provide a more educated guess than a simple coin toss but it is important to realise that each of these techniques will have a large failure rate. You will lose a large percentage of the time. Sometimes you will lose on more trades than you gain on.

3. Let profits ride and cut your losses

The only way to make money from forex trading (or any form of trading) is by making enough money on your winning trades to cover your losses and to gain additional profit to grow your capital. It is harder to put into practice than it sounds as psycologically it is much easier to "marry" your losing trades in the hope that the market will turn in your favour and grabbing your profit too soon when you see your hard earned gains slipping away as the market temporarily turns against you.

4. Trade according to a tried and tested system

This is one of the most important forex principles. The only way to cut out emotion in trading and adopt a more business-like and informed approach is to use a system of rules that have been developed and tested on market data. In this way, all the trade decisions have already been made before you even enter the forex market. This is a much less time consuming and less stressful way to trade for a living.

Forex trading system

Trading Forex works remarkably easy. But you have to make your own trading system.

A trading system is created by generating signals, setting up a decision making procedure, and incorporating risk management into the system. A trading system is supposed to be objective and mechanical. The analyst combines a set of objective trading rules (usually in a formula or algorithm). As a general rule, good technical analysis indicators are the building blocks of good trading systems. However, as previously mentioned, even good technical analysis indicators can lose their validity when combined in a trading system. Therefore, it is important to not only back-test your system but to also forward-test your system in real time.

Pitfalls of Trading Systems

Trading systems are supposed to be objective and mechanical. They take the intuition out of trading. Buy when the system tells you to and sell when the system tells you to. The problem is that there are not a lot of good trading systems out there. However, some are created for certain institutions to take advantage of arbitrage opportunities, or tricky derivative strategies. They are not at all suitable for the average trader.

Traders tend to lose objectivity when using technical analysis indicators. The trader is not able to remain objective and the subjectivity of using the indicator overwhelms him.

Traders have a tendency to test their trading systems and technical analysis indicators on an insufficient amount of data. Analysts need to test trading systems and technical analysis indicators on a wide array of data in different types of trading markets.

Additionally, many traders and analysts don't forward test their trading systems and technical analysis indicators in real time. They rush to trade based on insufficient back-testing and forward-testing. Thus, they are trading on not a sound, valid basis. Many traders fail to incorporate sound risk management techniques in their trading systems. Additionally, many traders fail to incorporate stop loss orders with their initial orders when using technical analysis indicators only.

Traders also tend to over-optimize their trading systems. They start asking the what-if question and back-test the trading system with different parameters. They are always trying to trade with the parameters which generate the highest amount of wins. However, in real time these over-optimized systems rarely perform well. Another trap traders fall into is to use too many technical analysis indicators. Find the few that work consistently well for you and go with them.

There are basically two types of Forex trading systems, mechanical and discretionary systems. The trading signals that come out of mechanical systems are mainly based off technical analysis applied in a systematic way. On the other hand, discretionary systems use experience, intuition or judgment on entries and exits.

We will first analyze the advantages and disadvantages of each system.

Advantages	Disadvantages
Mechanical systems
This kind of system can be automated and backtested efficiently. It has very rigid rules. Either, there is a trade or there isn’t. Mechanical traders are less susceptible to emotions than discretionary traders.	Most traders backtest Forex trading systems incorrectly. In order to produce accurate results you need tick data. The Forex market is always changing. The Forex market (and all markets) has a random component. The market conditions may look similar, but they are never the same. A system that worked successfully the past year doesn’t necessary mean it will work this year.
Discretionary systems
Discretionary systems are easily adaptable to new market conditions. Trading decisions are based on experience. Traders learn to see which trading signals have higher probability of success.	They cannot be backtested or automated, since there is always a thought decision to be made. It takes time to develop the experience required to trade successfully and track trades in a discretionary way. At early stages this can be dangerous.

Now, which approach is better for Forex traders? The one that fits better your personality. For instance, if you are a trader that finds it hard to follow your trading signals, then you are better off using a mechanical system, where your judgment won’t play an important role in your system. You only take the trades that your system signals.

Your objectives and goals have to be very specific to you, but they must also include the following characteristics if they are going to be useful. They should be measurable within the allotted time frame and be worth the time and effort involved.

Here is a quick outline of a few actual objectives.

1. Create two new positive-expectancy trading systems each and every year.

2. Strive to make fewer errors implementing the trading systems each year.

3. Work to achieve a maximum return of (specific percentage).

4. Take 2 weeks vacation from trading during the year.

Forex rules

We would like to present you some advice for successful forex trading. You buy a trading system and learn the rules You study and learn the skills of trading, in theory Trade with a Disciplined Plan You try the new skills you've learned on a demo account You experience the "beginners luck". You make some winning trades. You're psyched Good Execution Good Anticipation (while we are trading, whether the last trade we did was profitable or not is definitely not important. There is no point drawing conclusions on the outcome of just one –or even a few-trades. We can only access our anticipation skills when we have made a reasonable number of trades and see the longer-term result of our action. It is so important that when we are trading, our goal should be focus on executing our trades with ruthless efficiency and to judge only that. If you consider the ways that you lose money trading, you will find that it is down to poor execution, rather than poor anticipation) You continue trading but start experiencing losses. The confidence you experienced in the beginning has made you a little over confident. You think that this period of losses is temporary. You continue to trade, mounting up more losses Cut Your Losses Early and Let Your Profits Run Do Not Over Trade (do not bet on the farm. One of the most common mistakes that traders make is leveraging their account too high by trading much larger sizes than their account should prudently trade) After losing all of your money or a serious chunk of your trading capital you start look for answers You do some research and decide to get someone to help you. You hire an expert to teach you the skills of trading from someone who has been there This mentor shows you the skills you need to become a successful trader. They teach you to handle the bad times with the good. They strive to develop you mentally, physically, emotionally, and spiritually After mentoring for a certain amount of time you start out on your own. At this time it is important to seek people who are your peers. You add like minded individuals to your group of friends or co-workers. You learn from each other. You talk to each other, compare notes, and create a buddy system that helps you through the lonely times that trading will inevitably bring You continue to learn by trial and error. You may decide to seek out more mentoring because there are "levels" of trading success that require new skill sets. For instance, trading one contract and winning or losing a dollar is different than trading a hundred contracts and managing thousands of dollars at a time Do Not Marry Your Trades

Forex positions

There are such important terms in forex as "long position", "short position", "close position", "open position".

Position - The amount of currency or security owned or owed by a forex trader or investor.

Long (Position) - A position that was obtained by buying in anticipation of an increase in price.

Open:

Each open position has four major characteristics: You're trading a particular currency pair, you're either long or short the market (you've bought or sold, respectively), the size of the position in increments of 100,000 of the base currency, and an exchange rate at which the position was opened. For example a "EUR/USD, 500, S, 0.9220", means the trader Sold 500,000 Euros for U.S. Dollars at an exchange rate of 0.9220.

Close:

The close rate is the current exchange rate at which the trader can exit the position using a market order. If you're long the market, the current bid will be shown as the close rate. If you're short, the close will reflect the current FX market ask price.

Going short – going long

When you buy a currency, you are said to be “long” in that currency. Long positions are entered into at the offer price. Thus if you are buying one GBP/USD lot quoted at 1.5847/52, then you will buy 100,000 GBP at 1.5852 USD.

When you sell a currency, you are said to be “short” in that currency. Short positions are entered into at the bid price, which is 1.5847 USD in our example.

Because of the symmetry of currency transactions, you are always simultaneously long in one currency and short in another. For example if you exchange 100,000 GBP for USD you are short in sterling and long in US dollars.

Closing out

An open position is one that is live and ongoing. As long as the position is open, its value will fluctuate in accordance with the exchange rate in the market. Any profits and losses will exist on paper only and will be reflected in your margin account.

To close out your position, you conduct an equal and opposite trade in the same currency pair. For example, if you have gone long in one lot of GBP/USD (at the prevailing offer price) you can close out that position by subsequently going short in one GBP/USD lot (at the prevailing bid price).

Your opening and closing trades must the conducted through the same intermediary. You cannot open a GBP/USD position with Broker A and close it out through Broker B.

Forex spread

one of the main forex terms is forex spread.

As with other financial commodities, there is a buying (“offer” or “ask”) and a selling (“bid”) exchange rate. The difference is known as the “bid-offer spread” or “the spread”.

The forex spread is written in a particular format. For example, GBP/USD = 1.5545/50 means that the bid price of GBP is 1.5545 USD and the offer price is 1.5550 USD. The spread in this case is 5 points.

Every purchase of the base currency implies a sale of the secondary currency. Likewise, sale of the base currency implies the simultaneous purchase of the secondary currency. For example, when I sell GBP/USD, I am selling GBP and buying USD. Similarly, when I buy GBP I am simultaneously selling USD.

We can express this equivalence by inverting the GBP/USD exchange rate and rotating the bid and offer reciprocals to derive the USD/GBP rate. For example, if GBP/USD = 1.5545/50 then

USD/GBP = 1/1.5550 (bid)/(1/1.5545 (offer) = 0.6431/33

The basic unit of trading for private investors is known as a “lot” which represents 100,000 units of the base currency. Some brokers permit trading in mini-lots.

• The purchase of a single lot of GBP/USD at 1.5852 implies 100,000 GBP bought at 158,520 USD.

• The sale of a single lot of GBP/USD at 1.5847 entails the sale of 100,000 for 158,470 USD.

The spot forex trading spread is how brokers make their money. Wider spreads will result in a higher asking price and a lower bid price. The end result is that you have to pay more when you buy and get less when you sell, which makes it more difficult to realize a profit.

Brokers generally don't earn the full spread, especially when they hedge client positions. The spread helps to compensate for the market maker for taking on risk from the time it starts a client trade to when the broker's net exposure is hedged (which could possibly be at a different price).

Spot forex trading spreads are important because they affect the return on your trading strategy in a big way. As a trader, your sole interest is buying low and selling high (like futures and commodities trading). Wider spreads means buying higher and having to sell lower. A half-pip lower spread doesn't necessarily sound like much, but it can easily mean the difference between a profitable trading strategy and one that isn't profitable.

The tighter the spread is the better things are going to be for you. However tight spreads are only meaningful when they are paired up with good execution. Quality of execution will decide whether you actually receive tight spreads. A good example of this is when your screen shows a tight spread, but your trade is filled a few pips to your disadvantage or is mysteriously rejected.

Spread policies change a great deal from broker to broker, and the policies are often difficult to see through. This certainly makes comparing brokers much more difficult. Some brokers actually offer fixed spreads that are guaranteed to remain the same regardless of market liquidity. But since fixed spreads are traditionally higher than average variable spreads, you are paying an insurance premium during most of the trading day so that you can get protection from short-term volatility.

Other brokers offer traders variable spreads depending on market liquidity. Spreads are tighter when there is good market liquidity but they will widen as liquidity dries up. When it comes to choosing between fixed and variable rates, the choice depends on your individual trading pattern. If you trade primarily on news announcements that you hear, you may be better off with fixed spreads. But only if quality of execution is good.

Some brokers have different spreads for different clients based on their accounts. For example; those clients that have larger accounts or those who make larger trades may receive tighter spreads, while the clients that are referred by an introducing broker might receive wider spreads in order to cover the costs of the referral. Some offer the same spreads to everyone.

Problems can come up when you are trying to learn about a company's spread policy because this information, along with information on trade execution and order-book depth is rather difficult to get. Because of this, many traders get caught up in all of the promises they hear, and take a broker's words at face value. This can be dangerous. The only real way to find out is to try out various brokers or talk to those who have.

In summary, the spread is the difference between the price that you can sell currency at ( Bid ) and the price you can buy currency at ( Ask ). The spread on majors is usually 5 pips under normal market conditions.

A pip is the smallest unit by which a cross price quote changes. When trading forex you will often hear that there is a 5-pip spread when you trade the majors. This spread is revealed when you compare the bid and the ask price, for example EURUSD is quoted at a bid price of 0.9875 and an ask price of 0.9880. The difference is USD 0.0005, which is equal to 5 "pips".

On a contract or position, the value of a pip can easily be calculated. You know that the EURUSD is quoted with four decimals, so all you have to do is the cancel-out the four zeros on the amount you trade and you will have one pip. Thus, on a EURUSD 100,000 contract, one pip is USD 10. On a USDJPY 100,000 contract, one pip is equal to 1000 yen, because USDJPY is quoted with only two decimals.

Forex quotes

We know that the FX market is the largest in the world and that your broker or institution that you are trading with is collecting quotes from a centralized feed or individual quotes comprising of interbank rates.

So how are these forex quotes made up? Well, as we previously mentioned currencies are traded in pairs and are each assigned a symbol. For the Japanese Yen it is JPY, for the Pounds Sterling it is GBP, for Euro it is EUR and for the Swiss Frank it is CHF. So, EUR/USD would be Euro-Dollar pair. GBP/USD would be pounds Sterling-Dollar pair and USD/CHF would be Dollar-Swiss Franc pair and so on.

You will always see the USD quoted first with few exceptions such as Pounds Sterling, Euro Dollar, Australia Dollar and New Zealand Dollar. The first currency quoted is called the base currency.

When you see forex quotes you will actually see two numbers. The first number is called the bid and the second number is called the offer (sometimes called the ASK).

If we use the EUR/USD as an example you might see 0.9950/0.9955 the first number 0.9950 is the bid price and is the price traders are prepared to buy Euros against the USD Dollar. The second number 0.9955 is the offer price and is the price traders are prepared to sell the Euro against the US Dollar.

These quotes are sometimes abbreviated to the last two digits of the currency such as 50/55. Each broker has its own convention and some will quote the full number and others will show only the last two.

You will also notice that there is a difference between the bid and the offer price and that is called the spread. For the four major currencies the spread is normally 5 give or take a pip.

To carry on from the symbol conventions and using our previous EUR quote of 0.9950 bid, that means that 1 Euro = 0.9950 US Dollars. In another example if we used the USD/CAD 1.4500 that would mean that 1 US Dollar = 1.4500 Canadian Dollars.

The most common increment of currencies is the PIP.

Currencies in the FOREX market are traded on a price interest point (pip) system. Each currency pair has its own pip value.

Since we have a currency PAIR such as EUR/USD, we need a way to talk about its price value. Whenever you see a FOREX price quote, you will see something listed along the lines of the following:

USD/JPY: 112.46 - Seconds later - 112.51

The first part before the first dash refers to the bid price. In other words it's what you obtain in JPY when you sell USD. In example above, the bid price is 112.46. The second component, which comes after both dashes and usually occurs minutes or seconds later, is used to obtain the ask price, this is what you have to pay in JPY if you buy USD.

In this example, the ask price is 112.51. The difference between the bid and the ask price is called the spread. In the example above, the spread is .05 or 5 pips.

USD/JPY: 123.50

When you see a Forex currency pair price quote, like the one above, just remember that that last digit of the price (after the decimal point) is referred to as the pip. So if you see a quote (118.50) and then a qu.ote in one minute of (118.51), then you should automatically know that the price rose by 1 pip.

Similarly, if you see a price quote of 118.58 and then after 5 minutes it's 118.50, the price dropped by 8 pips. The pip is always the last decimal place of the currency price quote.

In the FOREX market your main objective is to capture as many profitable pips as possible!

In the "Majors", this would include USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the other currency quoted in the pair such as JPY.

In the example above, a quote of USD/JPY 123.50 means that one U.S. dollar is equal to 123.50 Japanese yen.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated (become stronger) in value and the other currency has deppreciated (become weaker). If the USD/JPY quote increases to 124.01, the dollar is now much stronger than the JPY because with that same $1 USD you will be able to buy more yen than you could earlier.

Of course there are exceptions to this rule and these are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.4366, indicating that one British pound equals 1.4366 U.S. dollars. These currency pairs are like this because they are stronger than the USD in value.

With these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means that the USD is weakening, because it now takes more U.S. dollars to equal one pound, euro or Australian dollar.

To sum up this point, if a currency quote goes up then it increases the value of the base currency. A lower quote means that the base currency is weakening.

There are some currency pairs that do not involve the U.S. dollar. These currencies are called cross currencies, but the idea is exactly the same. For example, a quote of GBP/JPY 210.95 signifies that one GBP is equal to 210.95 Japanese yen.

Nearly all the brokers you will deal with will work all this out for you. They may have slightly different conventions, but it is all done automatically. It is good however for you to know how they work it out. In the next section we will be discussing how these seemingly insignificant amounts can add up.

In summary, currency traders must become familiar also with the way currencies are quoted. The first currency in the pair is considered the base currency; and the second is the counter or quote currency. Most of the time, U.S. dollar is considered the base currency, and quotes are expressed in units of US$1 per counter currency (for example, USD/JPY or USD/CAD). The only exceptions to this convention are quotes in relation to the euro, the pound sterling and the Australian dollar - these three are quoted as dollars per foreign currency.

Forex quotes always include a bid and an ask price. The bid is the price at which the market maker is willing to buy the base currency in exchange for the counter currency. The ask price is the price at which the market maker is willing to sell the base currency in exchange for the counter currency. The difference between the bid and the ask prices is referred to as the spread.

The cost of establishing a position is determined by the spread, and prices are always quoted using five numbers (for example, 134.85), the final digit of which is referred to as a point or a pip.

Forex exchange rate

A forex rate of exchange is the price of one currency in terms of another currency. It is the means by which banks are able to trade foreign currencies in exchange for Australian dollars. Banks quote prices at which they will buy and sell foreign currency. These prices are based on prices that are quoted in the major wholesale foreign exchange markets and can change constantly throughout the day, depending on market forces. Every currency has a unique three-character International Standardization Organization (ISO) code. The ISO codes are based on the 2-letter country code, plus a third character derived from the name of the currency (e.g. GBP represents the Great Britain Pound and USD the United States Dollar) Every currency pair is expressed as two ISO codes separated by a division symbol (e.g. GBP/USD), the first representing the "base” currency and the second the "quote” currency (also known as "counter" or "secondary" currency). GBP/USD Base Currency/Quote Currency The exchange rate is usually displayed to the right of the currency pair GBP/USD = 1.6545 This denotes that one unit of the British Pound (the base currency) can be exchanged for 1.6545 US dollars (the quote currency). If you are buying the base currency, it specifies how much you have to pay in the quote currency to obtain one unit of the base currency. If you are selling the base currency, the exchange rate is telling you how much you get in the quote currency for one unit of the base currency. The smallest increment by which a currency can move is called a “pip” (similar to “point” in equity trading). The last two decimal places measure the pip movement of a currency. For instance, in the example above, 45 represents the pips. If, in the same example, the GBP/USD appreciated to 1.6560, you would say it moved up (or rose) 15 pips. Or, if it depreciated to 1.6541 you would say is fell (or moved down) 4 pips. There are 3 major groups of factors that influence on exchange rate development: 1) Fundamental Factors Fundamental trading strategies consist of macro-economic strategic assessments; these criteria often include the economic condition of the currency’s country of origin, the country’s monetary policy, and other "fundamental" elements. Typically, on the world markets, the US economy has the greatest influence. Fully 80% of financial operations conducted in world markets are transacted in dollars. This causes the dollar rise or fall against all other currencies. The fundamental factors affecting world markets are: Gross national product The level of real percentage The level of unemployment Inflation An index of industrial production Therefore, the common rule for a trader is to orient to the expectations and moods of the majority of investors in the market. Exchange rate movement tendency can be analyzed by reading publications, studying reviews of market situation in information systems such as Reuters, Bridge (Dow Jones), and CQG. Following the publication of the leading economic indicators, the market will inevitably begin to move. A trader’s primary task is to participate in such movement, which invariably will be lead by the majority in the market. The axiom is - “don’t miss the boat”. 2) Technical Factors Technical analysis is a field of market analysis, which supposes that market has a memory and consists primarily of a variety of technical aspects, each of which can be interpreted to generate buy and sell signals or to predict market direction. During the past few years, in response to rapid growth of electronic analytical devices such as those offered by Reuters, Bridge (Dow Jones), CQG and others, greater numbers of traders make their decisions according to the technical analysis, which regularly increases its influence on any real rate movement. Technical analysis is a method for price forecasting based on historical market movement studies. For the last 30 years, studies in the field of technical analysis have proven themselves a science with its own philosophical system and set of operative axioms. 3) Aside from the fundamental and technical factors Insuperable circumstances – acts of nature (earthquakes, a tsunami, a typhoon, flooding, etc.) Political events – war, political scandals, terrorist acts, etc Political speeches Currency interventions by central banks.

Forex currency (currencies)

There are 7 most traded currencies in forex market. Currencies are traded in dollar amounts called "lots". One lot is equal to $1,000, which controls $100,000 in currency. This is what is known as the "margin". You can control $100,000 worth of currency for only 1,000 dollars. This is what is called "High Leverage". Currencies are always traded in pairs in the FOREX. Here are some of the common symbols used in the Forex: USD - The US Dollar EUR - The currency of the European Union "EURO" GBP - The British Pound JPN - The Japanese Yen CHF - The Swiss Franc AUD - The Australian Dollar CAD - The Canadian Dollar A currency can never be traded by itself. So you can not ever trade a EUR by itself. You always need to compare one currency with another currency to make a trade possible. Some of the common PAIRS are: EUR/USD Euro / US Dollar "Euro" USD/JPY US Dollar / Japanese Yen "Dollar Yen" GBP/USD British Pound / US Dollar "Cable" USD/CAD US Dollar / Canadian Dollar "Dollar Canada" AUD/USD Australian Dollar/US Dollar "Aussie Dollar" USD/CHF US Dollar / Swiss Franc "Swissy" EUR/JPY Euro / Japanese Yen "Euro Yen" Although forex currency pairs can be quoted with either currency as the base currency, there are generally recognized standards of which currency will be identified as the base currency in any given pair. The Euro is the dominant base currency against all other global currencies. Thus, currencies paired with the EUR will always be identified with the EUR acronym first in the sequence. The British Pound is next in the hierarchy of currency name domination and usually USD after that. (Aside from the EUR and GBP, the only case where the USD is not the base currency of a pair is with the Australian & New Zealand dollars). Every foreign exchange transaction is an exchange between two currencies, each denoted by a unique three-letter code. Currency pairings are expressed as two codes usually separated by a division symbol (e.g. GBP/USD), the first representing the “base currency” and the other the “secondary currency”. The base currency is the one that you are buying or selling. The exchange rate is the price of one currency in terms of another. For example GBP/USD = 1.5545 denotes that one unit of sterling (the base currency) can be exchanged for 1.5545 US dollars (the secondary currency). Pairings with the US dollar are known as the “majors”. The “big four” majors are: EUR/USD: euro/US dollar GBP/USD: sterling/US dollar (known as “cable”) USD/JPY: US dollar /Japanese yen USD/CHF: US dollar/Swiss franc Pairings of non-U.S. Dollar currencies from the aforementioned major pairings are known as crosses. EUR/GBP EUR/JPY GBP/CAD GBP/CHF AUD/CAD CHF/JPY EUR/CHF EUR/AUD GBP/JPY AUD/JPY AUD/NZD CHF/NZD Exotic pairings involve currencies not included in the eight major currencies. There are hundreds of currencies around the world, most of which are not easily traded on the open market. There are a few exotics some speculators will venture into; however, the spreads on these currencies tend to be very wide and the degree of risk makes them generally unattractive to most traders. The seven categories of forex currencies: Top currency This rarified rank is reserved only for the most esteemed of international currencies - those whose use dominates for most if not all types of cross-border purposes and whose popularity is more or less universal, not limited to any particular geographic region. During the era of territorial money, just two currencies could truly be said to have qualified for this exalted status: Britain's pound sterling before World War I and the U.S. dollar after World War II. Patrician currency Just below the top rank we find currencies whose use for various cross-border purposes, while substantial, is something less than dominant and/or whose popularity, while widespread, is something less than universal. Obviously included in this category today would be the euro, as natural successor to the DM; most observers would still also include the yen, despite some recent loss of popularity. Both are patricians among the world's currencies. Elite currency In this category belong currencies of sufficient attractiveness to qualify for some degree of international use but of insufficient weight to carry much direct influence beyond their own national frontiers. Here we find the more peripheral of the international currencies, a list that today would include inter alia Britain's pound (no longer a Top Currency or even Patrician Currency), the Swiss franc, and the Australian dollar. Plebian currency One step further down from the elite category are Plebian Currencies - more modest monies of very limited international use. Here we find the currencies of the smaller industrial states, such as Norway or Sweden, along with some middle-income emerging-market economies (e.g., Israel, South Korea, and Taiwan) and the wealthier oil-exporters (e.g., Kuwait, Saudi Arabia, and the United Arab Emirates). Internally, Plebian Currencies retain a more or less exclusive claim to all the traditional functions of money, but externally they carry little weight (like the plebs, or common folk, of ancient Rome). They tend to attract little cross-border use except perhaps for a certain amount of trade invoicing. Permeated currency Included in this category are monies whose competitiveness is effectively compromised even at home, through currency substitution. Although nominal monetary sovereignty continues to reside with the issuing government, foreign currency supersedes the domestic alternative as a store of value, accentuating the local money's degree of inferiority. Permeated Currencies confront what amounts to a competitive invasion from abroad. Judging from available evidence, it appears that the range of Permeated Currencies today is in fact quite broad, encompassing perhaps a majority of the economies of the developing world, particularly in Latin America, the former Soviet bloc, and Southeast Asia. Quasi-currency One step further down are currencies that are superseded not only as a store of value but, to a significant extent, as a unit of account and medium of exchange, as well. Quasi-Currencies are monies that retain nominal sovereignty but are largely rejected in practice for most purposes. Their domain is more juridical than empirical. Available evidence suggests that some approximation of this intensified degree of inferiority has indeed been reached in a number of fragile economies around the globe, including the likes of Azerbaijan, Bolivia, Cambodia, Laos, and Peru. Pseudo-currency Finally, we come to the bottom rank of the pyramid, where currencies exist in name only - Pseudo-Currencies. The most obvious examples of Pseudo-Currencies are token monies like the Panamanian balboa, found in countries where a stronger foreign currency such as the dollar is the preferred legal tender.

Forex market advantages

There are many benefits and advantages to trading Forex. Here are just a few reasons why so many people are choosing this market as a profitable business opportunity: 1. Powerful forex leverage In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make extraordinary profits and at the same time keep risk capital to a minimum. 2. Liquidity Because the Forex Market is so large, it is also extremely liquid. This means that with a click of a mouse you can instantaneously buy and sell at will. You are never 'stuck' in a trade. You can even set the online trading platform to automatically close your position at your desired profit level (limit order), and/or close a trade if a trade is going against you (stop order). 3. Forex trading online is instant. The FX market is fast. Orders are executed, filled and confirmed usually within 1-2 seconds. Since this is all done electronically with no humans involved, there is little to slow it down! 4. Zero forex commissions Because you access the market directly through electronic online forex trading you pay zero commissions or exchange fees. 5. Limited risk Your risk is strictly limited. You can never lose more than you have in your forex account. This means you can never have a negative equity balance. You can also define and limit your risk with stop-loss orders, which are guaranteed by stocks on all forex orders up to $1 million in size. 6. Guaranteed prices and Instantaneous Fills You get instantaneous execution and total price certainty on all orders up to $1 million in size. This allows you to trade forex with confidence off real-time, two-way quotes. And this price guarantee applies to stop-loss and limit orders as well. 7. 24-hour market Forex is a 24-hour-a-day market that literally follows the sun around the world, from the U.S. to Australia and New Zealand to Hong Kong, the Far East, Europe and then back again to the U.S. The huge number and diversity of forex investors involved make it difficult even for governments to control the direction of the forex market. The unmatched liquidity, and around-the-clock global activity make forex the ideal market to trade. 8. Free 'demo' accounts, news, charts and analysis Most Online Forex firms offer free 'Demo' accounts to practice trading, along with breaking Forex news and charting services. These are very valuable resources for traders who would like to hone their trading skills with 'virtual' money before opening a live trading account. 9. 'Mini' trading One might think that getting started as a currency trader would cost a lot of money. The fact is, it doesn't. Some Forex firms now offer 'mini' trading accounts with a minimum account deposit of only $200 with no commission trading. This makes Forex much more accessible to the average individual, without large, start-up capital.

Forex Derivatives

Derivatives play an important and useful role in the economy, but they also pose several dangers to the stability of financial markets and the overall economy. Derivatives are often employed for the useful purpose of hedging and risk management, and this role becomes more important as financial markets grow more volatile. Derivatives are also used to commit fraud and to manipulate markets. Derivatives are powerful tools that can be used to hedge the risks normally associated with production, commerce and finance. Derivatives facilitate risk management by allowing a person to reduce his exposure to certain kinds of risk by transferring those risks to another person that is more willing and able to bear such risks. Today, derivatives are traded in most parts of the world, and the size of these markets is enormous. Data for 2002 by the Bank of International Settlements puts the amount of outstanding derivatives in excess of $151 trillion and the trading volume on organized derivatives exchanges at $694 trillion. By comparison, the IMF’s figure for worldwide output, or GDP, is $32.1 trillion. A derivative is a financial contract whose value is linked to the price of an underlying commodity, asset, rate, index or the occurrence or magnitude of an event. The term derivative refers to how the price of these contracts is derived from the price the underlying item. Typical examples of derivatives include futures, forwards, swaps and options, and these can be combined with traditional securities and loans in order to create structured securities which are also known as hybrid instruments. Forward deals are a form of insurance against the risk that exchange rates will change between now and the delivery date of the contract. A forward is a simple kind of a derivative - a financial instrument whose price is based on another underlying asset. The price in a forward contract is known as the delivery price and allows the investor to lock in the current exchange rate and thus avoid subsequent forex fluctuations. Futures contracts are like forwards, except that they are highly standardized. The futures contracts traded on most organized exchanges are so standardized that they are fungible - meaning that they are substitutable one for another. This fungibility facilitates trading and results in greater trading volume and greater market liquidity. While futures and forward contracts are both a contract to trade on a future date, key differences include: Futures are always traded on an exchange, whereas forwards always trade over-the-counter Futures are highly standardized, whereas each forward is unique The price at which the contract is finally settled is different: Futures are settled at the settlement price fixed on the last trading date of the contract (i.e. at the end) Forwards are settled at the forward price agreed on the trade date (i.e. at the start) The credit risk of futures is much lower than that of forwards: The profit or loss on a futures position is exchanged in cash every day. After this the credit exposure is again zero. The profit or loss on a forward contract is only realised at the time of settlement, so the credit exposure can keep increasing In case of physical delivery, the forward contract specifies to whom to make the delivery. The counterparty on a futures contract is chosen randomly by the exchange. In a forward there are no cash flows until delivery, whereas in futures there are margin requirements and periodic margin calls. Foreign currency swaps can be defined as a financial foreign currency contract whereby the buyer and seller exchange equal initial principal amounts of two different currencies at the spot rate. It is worth mentioning in this regard that the buyer and seller exchange fixed or floating rate interest payments in there respective swapped currencies over the term of the contract. According to experts upon the maturity, the principal amount is effectively re-swapped at a predetermined exchange rate so that the parties end up with their original currencies. Foreign currency swaps are more often than not been used by commercials as a foreign currency-hedging vehicle rather than by retail forex traders. Options allow investors even greater flexibility. Although more expensive than futures contracts, options are valued because they allow investors to choose whether to exercise a futures contract or not. The option-holder is under no obligation to buy or sell the underlying asset. Call options give an investor the right, but not the obligation, to purchase the indicated asset at a specified (strike) price by a certain date. An investor who buys a call option is hoping, or betting, that the price of the asset will rise above the strike price. Put options give the option-holder the right, but not the obligation, to sell the security by a certain date. The purchaser of a put option is hoping or betting that the price of the asset will fall below the contract’s strike price. An option contract gives the its holder the “option” (or the right) to buy (or sell) the underlying item at a specific price at a specific time period in the future. There are two kinds of options. Buying a call option provides an investor the right to buy an asset while a put option gives the investor the right to sell the asset.

Spot market

A Spot Contract is the most common type of foreign currency contract. It is the real time currency price at any given time. The price is fixed although it takes two days for settlement. On receipt of cleared funds (usually BACS or CHAPS) the currency is then ready for immediate delivery (usually by Electronic Fund Transfer).

Spot contract along with forward contract are the most basic tools of foreign exchange risk management. These are contracts between end users and financial institutions which specify the terms of an exchange of two currencies. In any foreign exchange contract there are a number of variables which need to be agreed upon, including:

• Which currency is being bought and which currency is being sold
• The amounts of currency to be bought/sold
• The date on which the foreign exchange contract will mature (expire)
• The rate at which the exchange of currencies will occur.

With a foreign exchange spot contract, the transaction will proceed on the basis of the agreed exchange rate, and the payments occurring within two business days after that day.

This means that in a spot transaction, the currency which is bought will be receivable within two days, or the currency which is sold will be payable within two days. This will apply to all major currencies.

A Spot Exchange Contract is a bilateral contract between two counterparties, and therefore each party is responsible for assessing the credit standing and capacity of the other party, before entering into a transaction.

There are some differencies between spot and forward. All forex deals are agreements to buy or sell a currency at a specific rate against another currency (price) and apply to a specific date. That date can be off in the distant future, in which case the transaction is known as a forward deal. Typically, forward transactions are not more than a year ahead. Deals beyond five years are very rare.

Spot transactions are more immediate. A spot deal is an agreement to buy/sell a currency at the current exchange rate and will typically be completed within the following two business days. You will often hear references to the bid - the price a dealer is willing to pay for a currency - and the ask price, the price at which a currency is being offered for sale. The bid-ask spread, is the amount by which the ask price exceeds the bid price. A wide spread indicates illiquid trading conditions.

Major forex participants

The major participants of a Forex market are:

• Commercial banks
• Exchange markets
• Central banks
• Firms that conduct foreign trade transactions
• Investment funds
• Broker companies
• Private persons

Commercial banks conduct the main volume of exchange transactions. Other participants of the market have their accounts at the banks, conducting necessary conversion transactions. Banks accumulate (through transactions with the clients) the combined needs of the market in exchange conversions as well as in calling and distributing money, breaking with it into new banks.

Exchange markets. Contrary to stock markets and markets for terminal exchange dealings, exchange markets do not work in a definite building and they do not have definite business hours. Thanks to the development of telecommunications most of the leading financial institutions of the world use services of exchange markets directly and via mediators 24 hours a day.

Central banks control currency reserves, realize interventions that influence the exchange rate, and regulate the interest investment rate in the national currency. National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves, to stabilize the market.

Firms that conduct foreign trade transactions. Companies participating in international trade have a stable demand for foreign currency (importers) and supply (exporters).

Investment funds. These companies, represented by various international investment, pension, and mutual funds, insurance companies, and trusts, realize the policy of diversified management of portfolio of assets by placing there money in securities of the governments and corporations of different countries.

Broker companies bring together a buyer and a seller of foreign currency and conduct a conversion dealing between them. Their function includes meeting of the buyer and the seller of a foreign currency and realization between them conversion or credit-depositary operation. For the intermediary broker firms raise the broker commission in the form of percent from the sum of the transaction. Broker companies take a broker's fee. As a rule, in the FOREX market there is no fee as a per cent from the sum of a transaction, or as a sum agreed in advance. Usually the dealers of broker companies quote currency with a spread, that includes their fee.

Private persons (also known as speculators). Natural persons realize a wide range of non-commercial transactions in the sphere of foreign tourism, transfers of salaries, pensions, royalties, buying and selling foreign currency. In modern conditions practically all financial transactions in the market are speculative by their nature. The international exchange system functioning in the world at the moment develops among people dealing with exchange and financial transactions: the so-called speculative psychology. In the world where exchange rates fluctuate for some per cent every week, where currencies, that are considered to be stable can lose 20 to 30 per cent of their cost during a few months, it's absolutely clear that the manager of a fund, trying to compensate for inevitable losses, has to use speculative operations.

Forex history

Forex dates back to ancient times, when traders first began exchanging coins from different countries and groups. However, the foreign exchange industry itself is the newest of the financial markets.

In the last hundred years, the foreign exchange market has undergone some dramatic transformations. In 1944, the postwar foreign exchange system was established as a result of a multinational conference held at Bretton Woods, New Hampshire. That system remained intact until the early 1970’s.

At this conference, representatives from 45 nations met together to discuss the future exchange system. The conference resulted in the formation of the International Monetary Fund (IMF). It also produced an agreement that fixed currencies in an exchange-rate system would tolerate one percent currency fluctuations to gold values, or to the U.S. Dollar, which was established previously as the “gold standard.” The system of connecting the currency’s value to gold or the U.S. Dollar was called pegging.

In 1967, a Chicago bank refused a college professor by the name of Milton Friedman a loan in pound sterling because he had intended to use the funds to short the British currency. Friedman, who had perceived sterling to be priced too high against the dollar, wanted to sell the currency, then later buy it back to repay the bank after the currency declined, thus pocketing a quick profit. The bank's refusal to grant the loan was due to the Bretton Woods Agreement, established twenty years earlier, which fixed national currencies against the dollar, and set the dollar at a rate of $35 per ounce of gold.

The history of the FOREX Market as it exists today begins before 1971 when the FOREX market departed from The Bretton Woods Accord to reflect a radical change in Universal fixed exchange rates. After World War Two, the Bretton Woods Accord was introduced to the FOREX market to stabilize the devastated world economy.

The Agreement was finally abandoned in 1971 and the US dollar would no longer be convertible into gold.

After the Bretton Woods Accord came the Smithsonian agreement in December of 1971. This agreement was similar to the Bretton Woods Accord but allowed for greater fluctuation band for the currencies. In 1972, the European community tried to move away from their dependency on the dollar. The European Joint Float was established by West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. This agreement was similar to the Bretton Woods Accord, but allowed a greater range of fluctuation in the currency values.

Both agreements made mistakes similar to the Bretton Woods Accord and, by 1973, collapsed. The collapse of the Smithsonian agreement and the European Joint Float in 1973 signified the official switch to the free-floating system. This occurred by default as there were no new agreements to take their place. Governments were now free to peg their currencies, semi-peg or allow them to freely float. In 1978, the free-floating system was officially mandated.

Europe tried, in a final effort to gain independence from the dollar, by creating the European Monetary System in July of 1978. This, like all of the earlier agreements, failed in 1993.

Important milestones in the history of Forex

The Gold Standard

Money was invented when barter was no longer an adequate means of trade, seeing that actual goods could quickly lose value, were subject to value discrepancies, and could many times not easily be divided (Morris, 4). Money, on the other hand, could function as a medium of exchange, a unit of accounting, and a store of value (Ethier, 402). The original form of money was typically something that had value in itself, such a precious metal. The metal itself, usually gold or silver (Eichengreen, 9), was valuable, both because of its scarcity and its inherent usefulness.

By the nineteenth century, both coins and paper money were in popular use. Under the famous "Gold Standard," currencies were not directly valued in terms of each other. Instead, each currency had a certain, the rate at which the currency could be exchanged for gold. This in turn produced an effective exchange rate between any two currencies.

In 1900, for example, the mint parity for the U.S. dollar was $20.67, while that of the British pound was 3 pounds, 17 shillings, 10½ pence. To exchange U.S. dollars for British pounds, one would divide $20.67 by 3.17.10½, which produces $4.86 per pound after adjusting for the fact that U.S. gold coins had a somewhat greater gold content than did British coins (Aliber, 34).

Paper money could then be used in place of the precious metal. A citizen could carry paper money while the central bank would, in which more money left the country than came in, there would be less U.S. dollars in circulation.

Because central banks have large control over the interest rates, the rates at which banks borrow and lend money, they soon found that they did not have to passively wait for gold flows to be restored. In a trade deficit scenario, with gold supplies leaving the country, a central bank could raise interest rates which would make domestic savings more attractive.

Floating Exchanges Systems

Under a floating exchange system, on the other hand, currencies are not valued in terms of gold - they are valued in terms of other currencies.

In the early 20th century, two world wars brought about social upheavals, rapid inflation, and the destruction of the setting which made the gold standard operable. Between the wars, many countries elected to temporarily abandon the gold standard and opt for floating exchange systems until their economies returned to the point at which in light of the fact that, if a currency drifted too far outside its band and could not be contained by central bank intervention, the country was allowed to adjust its peg by setting a new exchange price.

There were three aspects of the system that were in conflict: constant exchange rates, autonomous domestic economic policies, and increasing international capital mobility. The existence of Bretton Woods did not stop states from using domestic economic policy (manipulating interest rates, for example, as under the gold standard) for domestic reasons, whatever their long-term effects on the exchange rate. Capital mobility simply makes the effects of domestic economic policies on the exchange rate happen sooner than they otherwise would.

With the instability brought about by the Vietnam War, central banks finally began to convert their dollars to gold. To halt the loss of gold, in 1971 Nixon "closed the gold window" by refusing to provide gold to foreign dollar holders (Eichengreen, 133). In 1974 the Bretton Woods System of adjustable pegs was officially abandoned and the Jamaica Agreement basically allowed the presence of any exchange system a country chooses (Aliber, 52).

Exchange Systems Today

There are several exchange systems a country can currently choose from. A free floating exchange system, as mentioned earlier, would simply allow the market to determine the price of a currency. Trade surpluses and deficits, domestic investments versus foreign investments, and domestic taxation policies, to name a few factors affecting the exchange rate, would all be allowed to occur whatever their effects on the currency.

A pegged exchange rate, on the other hand, would function exactly as the gold standard did a century beforehand, except that a country would its currency to the price of another currency, usually the U.S. dollar. If there is a balance of payments deficit, for example the central bank will buy the appropriate amount of the domestic currency in exchange for its foreign currency reserves, thereby returning the price of the currency to its peg but at the same time depleting the size of its reserves.

Some countries practice by, while remaining officially free-floating, sometimes intervening in their currency rates in order to suite domestic interests - increasing (revaluing) their exchange rate before an oil shipment, for example (Luca, 17). Other countries, for example Brazil before its turn to a free floating system, peg their currencies to the U.S. dollar or some other currency but allow the rate to float within a certain band similar to the Bretton Woods adjustable peg system.

The FOREX Market, often considered to be the playground of governmental institutions operating under the agency of central banks, expanded its horizons in recent years to include corporations, hedge funds, and speculators and most recently with the dot com boom and the expansion of the world wide web, now the private investors have been afforded the lucrative opportunity to be a part of the action.

The appeal of The FOREX Market is one of non-stop, twenty four hour a day trading for the five business days of the week. The first tentative steps towards a global economy have created a fast moving liquid market facilitating a wide variety of transaction options. Combine this with the ability to make money in both winning and losing markets and you will see why The FOREX Market is considered by some to be the fastest developing most lucrative business opportunity open to the savvy investor who has the skill, intelligence, acumen and backing to create substantial profits.

The FOREX Market provides a number of ways for investors to get in on the global high stakes action. From the spot market to spread betting, options, contracts for difference and futures, these are just some of the ways FOREX can turn a modest portfolio with moderate potential, into a heavy hitting enterprise totaling far in excess of what it once was. The BIS or Bank of International Settlements estimated in a recent survey that over $1,200,000,000.00 is exchanged everyday on The FOREX Market. Currently industry analysts think the market is not living up to its 1978 potential of $1,490,000,000.00 and still view this as an attainable goal for the FOREX Market of the future.

About forex

FOREX (FOReign EXchange market) is an international foreign exchange market, where money is sold and bought freely. In its present condition FOREX was launched in the 1970s, when free exchange rates were introduced, and only the participants of the market determine the price of one currency against the other proceeding from supply and demand. As far as the freedom from any external control and free competition are concerned, FOREX is a perfect market. The FOREX is made up of about 5000 trading institutions such as international banks, central government banks (such as the US Federal Reserve), and commercial companies and brokers for all types of foreign currency exchange. There is no centralized location of FOREX: major trading centers are located in New York, Tokyo, London, Hong Kong, Singapore, Paris, and Frankfurt, and all trading is by telephone or over the Internet. Businesses use the market to buy and sell products in other countries, but most of the activity on the FOREX is from currency traders who use it to generate profits from small movements in the market. Today, forex trading can be done from home on a computer. The foreign exchange market (FOREX) has several advantages over the futures market. FOREX is a more liquid market as the largest financial market in the world it dwarfs the futures market in daily exchanges. This means that stop orders can be executed more easily and with less slippage in the FOREX. The FOREX is open 24 hours a day, 5 days a week. Most futures exchanges are open 7 hours a day. This makes FOREX more liquid and allows FOREX traders to take advantage of trading opportunities as they arise rather than waiting for the market to open. FOREX transactions are commission-free. Brokers earn money by setting a spread the difference between what a currency can be bought at and what it can be sold at. In contrast, traders must pay a commission or brokerage fee for each futures transaction they enter into. A FOREX broker needs to be associated with a large financial institution such as a bank in order to provide the funds necessary for margin trading. In the United States a broker should be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) as protection against fraud and abusive trade practices. Before trading FOREX you need to set up an account with a FOREX broker. You may feel overwhelmed by the number of brokers who offer their services online. Deciding on a broker requires a little bit of research on your part, but the time spent will give you insight into the services that are available and fees charged by various brokers. The best advertising is word-of-mouth advertising, and this is just as valid in FOREX trading as it is for any other type of business. Talk to friends and associates to see who they are dealing with and find if they have any complaints or difficulties in dealing with a particular broker. You could try selecting a few online brokers and contact their Internet help desks to see how quickly they respond to enquiries and whether or not they answer questions to your satisfaction. Keep in mind, however, that pre-sales service may be better than after sales service. This can be true for any online business, not just FOREX brokers. Customer satisfaction and safety are just part of the story. You want to find a broker who executes orders quickly and with minimum slippage. All online brokers should offer automatic execution and have clear policies regarding slippage. They should be able to tell you how much slippage can be expected in both normal and fast-moving markets. Next you want to know the fees involved. What is the spread? Is spread fixed or variable according to the type of account? Are mini accounts subject to wider spreads? Are there any other charges? Smaller spreads mean more profit for the trader, but there may be a trade-off between spread and service. Look at the overall picture before deciding to go with a particular broker. Margin accounts are the lifeblood of FOREX trading, so be sure you understand the broker's margin terms before setting up an account. You need to know the margin requirements and how margin is calculated. Does margin change according to the currency traded? Is it the same every day of the week? Some brokers may offer different margins for mini and standard accounts. Trading software is very important for the online FOREX trader. Get a feel for the options that are available by trying out a demo account at a few online brokers. Above all, you are looking for reliability and the ability to perform well in fast-moving markets. The software should offer automatic trading and may have special features such as trailing stops and trading from the chart. Some features may only be available at an extra cost, so be sure you understand what your trading needs are and how much the broker charges to provide them. The primary purpose of the forex market is to provide the mechanism for making cross-border payments and determining exchange rates between currencies. Major components that make up forex are the spot market (37 percent) used by traders and speculators, swaps (43 percent) and finally options and forwards (20 percent). A forex trade is executed through the simultaneous buying of one currency and selling another (currency pair), and while most currencies are tradable, five currencies (four currency pairs) represent the majority of trading volume - the euro (EUR/USD), Japanese yen (USD/JPY), British pound or cable (GBP/USD), and Swiss franc (USD/CHF). A major difference between forex and other financial markets is that the former is open 24 hours per day. The trading day begins in Sydney, Australia, on Monday while it is still Sunday in North America and Europe and ends in New York on Friday. There are no commissions, only point spreads measured in pips - with one pip being equal to one-tenth of one percent. Because the point spread in pips represents the cost of entry, it is desirable to keep it to a minimum. This is why major currency pairs are most popular; they experience the tightest spreads, often as low as three to four pips. Spot trading lots typically are worth $5 million to $10 million, with the minimum contract size being $500,000. Amounts smaller may be traded with some firms offering minimum investments of as little as a few hundred dollars on margin far exceeding 100:1, so beware of the risk with this type of leverage. Currency futures and options contracts also may be traded for much smaller initial margin amounts, and those firms handling FX futures trades just as for all futures contract generally charge commissions. The idea of marginal trading stems from the fact that in FOREX speculative interests can be satisfied without a real money supply. This decreases overhead expenses for transferring money and gives an opportunity to open positions with a small account in US dollars, buying and selling a lot of other currencies. That is, on can conduct transactions very quickly, getting a big profit, when the exchange rates go up or down. Many speculative transactions in the international financial markets are made on the principles of marginal trading. Margin trading is trading with a borrowed capital. Marginal trading in an exchange market uses lots. 1 lot equals approximately $100,000, but to open it it is necessary to have only from 0.5% to 4% of the sum. For example, you have analyzed the situation in the market and come to the conclusion that the pound will go up against the dollar. You open 1 lot for buying the pound (GBP) with the margin 1% (1:1000 leverage) at the price of 1.49889 and wait for the exchange rate to go up. Some time later your expectations become true. You close the position at 1.5050 and earn 61 pips (about $ 405). Everyday fluctuations of currencies constitute about 100 to 150 pips, giving FX traders an opportunity to make money on these changes. In FOREX, it's not obligatory to buy some currency first in order to sell it later. It's possible to open positions for buying and selling any currency without actually having it. Usually Internet-brokers establish the minimum deposit such as $ 2000, for working in the FOREX market, and grant a leverage of 1:100. That is, opening the position at $100,000, a trader invests $1,000 and receives $99.000 as a credit. The major currencies traded in FOREX, are Euro (EUR), Japanese yen (JPY), British Pound (GBP), and Swiss Franc (CHF). All of them are traded against the US dollar (USD). In order to assess the situation in the market a trader has to be able to use fundamental and/or technical analysis, as well as to make decisions in the constantly changing current of information about political and economic character. Most small and medium players in financial markets use technical analysis. Technical analysis presupposes that all the information about the market and its further fluctuations is contained in the price chain. Any factor, that has some influence on the price, be it economic, political or psychological, has already been considered by the market and included in the price. The initial data for a technical analysis are prices: the highest and the lowest prices, the price of opening and closing within a certain period of time, and the volume of transactions. While some people view the forex market as a place to see what their exchange rate will be when they travel abroad, others view it as an opportunity to make great gains in their financial planning and future.