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. It is also the biggest liquid financial
market. According to various assessments, money masses in the market constitute
from 1 to 1.5 trillion US dollars a day. (It is impossible to determine
an absolutely exact number because trading is not centralized on an exchange.)
Transactions are conducted all over the world via telecommunications 24
hours a day from 00:00 GMT on Monday to 10:00 pm GMT on Friday. Practically
in every time zone (that is, in Frankfurt-on-Main, London, New York, Tokyo,
Hong Kong, etc.) there are dealers who will quote currencies.
FOREX is a more objective market, because if some of its participants
would like to change prices, for some manipulative purpose, they would
have to operate with tens of billions dollars. That is why any influence
by a single participants in the market is practically out of the question.
The superior liquidity allows the traders to open and/or close positions
within a few seconds. The time of keeping a position is arbitrary and
has no limits: from several seconds to many years. It depends only on
your trading strategies. Although the daily fluctuations of currencies
are rather insignificant, you may use the credit lines, that are accessible
even to currency speculators with small capitals ($ 1,000 - 5,000), where
the profit may be impressive. (You can learn more about it in the section:
The main principles of trading.)
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 $200,000, but
to open it it is necessary to have only from 1% 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). For the calculation of 1 pip click here.
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.
A technical analysis is founded on three suppositions:
• Movement of the market considers everything;
• Movement of prices is purposeful;
• History repeats itself.
That is, technical analysis is a statistical and mathematical analysis
of previous quotes and a prognosis of coming prices.
A number of technical indicators have been installed into the trading
system. Analyzing the indicators one can come to the conclusion about
further movements of the quoted currencies. For a more detailed description
of the indicators, analyzing price charts and volumes of trading, click
here.
Fundamental analysis is an analysis of current situations in the country
of the currency, such as its economy, political events, and rumors. The
country's economy depends on the rate of inflation and unemployment, on
the interest rate of its Central Bank, and on tax policy. Political stability
also influences the exchange rate. Policy of the Central Bank has a special
role, as concentrated interventions or refusal from them greatly influence
the exchange rate.
At the same time one should not consider fundamental analysis just as
an analysis of the economic situation in the country itself. A far bigger
role in the FOREX market belongs to the expectations of the market participants
and their assessment of these expectations. Various prognoses and bulletins,
issued by the participants, have a strong influence on the expectations.
Very often an effect of the so-called self-filfilling prophecy occurs
when market players raise or lower the exchange rates according to the
prognosis. But a deep and thorough fundamental analysis is available only
for big banks with a staff of professional analysts and constant access
to a wide field of information.
In spite of these different approaches, both forms of analyses complement
one another. Traders who act on the basis of a fundamental analysis, have
to consider some technical characteristics of the market (the main rates
of support, such as resistance and resale), and supporters of the technical
approach to the market must track the main news (interest rates, important
political events).
The main merits of the FOREX market are:
• The biggest number of participants and the largest volumes of transactions;
• Superior liquidity and speed of the market: transactions are conducted
within a few seconds according to online quotes;
• The market works 20 hours a day, every working days;
• A trader can open a position for any period of time he wants;
• Low fees, except for the difference between buying and selling prices;
• An opportunity to get a bigger profit that the invested sum;
• Qualified work in the FOREX market can become your main professional
activity;
• You can make deals any time you like.