Currency Trading
For those not accustomed with the term, FOREX (Foreign exchange market), refers to an international exchange market where currencies are bought and sold. The Foreign Exchange Market that we have at the present juncture began in the 1970s, when free exchange rates and floating currencies was introduced.
In such an environment only participants in the market judge the price of one currency against another, based upon supply and demand for that currency.
Forex is a somewhat unique market for a plenty of reasons. First and foremost, it is one of the few markets in which it can be said with very few qualifications that it is free of external controls and that it cannot be manipulated. In addition it is also the largest liquid financial market, with trade reaching between 1 and 1.5 trillion US dollars a day.
With this much , it is clear why a single investor would find it near impossible to significantly affect the price of a major currency. Furthermore, the liquidity of the market clearly emphasizes that unlike some rarely traded stock, traders are able to open and close positions within a few seconds as there are always willing buyers and sellers. Another somewhat unique feature of the FOREX money market is the variance of its participants.
Investors find a plenty of reasons for entering the market, some as longer term hedge investors, while others utilize massive credit lines to seek large short term gains. Interestingly, unlike blue-chip stocks, which are normally most attractive only to the long term investor, the combination of rather constant but small daily fluctuations in currency prices, create an environment which attracts investors with a broad range of strategies.
How FOREX Works: Remember transactions in foreign currencies are not centralized on an exchange, unlike say the NYSE, and thus take place all over the world via telecommunications. Most importantly trade is open 24 hours a day from Sunday afternoon until Friday afternoon (00:00 GMT on Monday to 10:00 pm GMT on Friday). In almost every time zone around the world, there are dealers who will quote all types of currencies.
After deciding what currency the investor would like to
buy, he or she does so via one of these dealers (some of which can be found online). Furthermore it is quite common practice for investors to speculate on currency prices by getting a credit line (which are available to those with capital as small as $500), and vastly increase their potential gains and losses. This is called marginal trading.
Marginal trading is just the term used for trading with borrowed capital. It is appealing in nature because of the fact that in FOREX investments can be made without a real money supply. This more often allows investors to invest much more money with fewer money transfer costs, and open bigger positions with a much smaller amount of actual capital. That's why, one can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital. On the other side of the coin Marginal trading in an exchange market is quantified in lots.
The term "lot" more or less refers to approximately $100,000, an amount which can be obtained by putting up as little as 0.5% or $500. E.g: You are of the view that signals in the market are indicating that the British Pound will go up against the US Dollar. In that case you open 1 lot for buying the Pound with a 1% margin at the price of 1.49889 and wait for the exchange rate to climb.
At some point in the near future, your predictions come true and you decide to sell. After that you close the position at 1.5050 and earn 61 pips or about $405. Therefore, on an initial capital investment of $1,000, you have made over 40% in profits. (Just as an instance of how exchange rates change in the course of a day, an average daily change of the Euro (in Dollars) is about 70 to 100 pips.)Generally speaking when you decide to close a position, the deposit sum that you originally made is returned to you and a calculation of your profits or losses is done. Next this profit or loss is then credited to your account.
Investment Strategies: Technical Analysis and Fundamental AnalysisThe two fundamental routines in investing in FOREX are Technical Analysis or Fundamental Analysis. Majority of small and medium sized investors in financial markets use Technical Analysis. This strategy stems from the assumption that all information about the market and a particular currencys future fluctuations is found in the price chain. That is to say, that all parameters, which have an effect on the price, have already been considered by the market and are thus reflected in the price.
Essentially then, what this kind of investor does is based on his/her investments upon three fundamental suppositions.
These are: The movement of the market considers all parameters, the movement of prices is purposeful in nature and directly tied to these events, and that history repeats itself. It is worthwhile pointing that someone utilizing technical analysis looks at the highest and lowest prices of a currency, the prices of opening and closing, and the volume of transactions.
This investor does not try to outsmart the market, or even predict major long run trends, but just looks at what has happened to that currency in the recent past, and predicts that the small fluctuations will generally continue just as they have before. A fundamental analysis on the other hand is one which analyzes the current situations in the country of the currency, including such things as its economy, its political situation, and other related rumors.
According to experts by the numbers, a country's economy depends on a number of quantifiable measurements such as its Central Banks interest rate, the national unemployment level, tax policy and the rate of inflation. In addition an investor can also anticipate that less quantifiable occurrences, such as political unrest or transition will also have an effect on the market. Before basing all predictions on the parameters alone, however, it is important to remember that investors must also keep in mind the expectations and anticipations of market participants.
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