Financial Floating Manager

Posts Tagged ‘Forex’

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The foreign exchange (currency or FX) market is where currency trading takes place. FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The Foreign Exchange Market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971. Today FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global forex and related markets is continuously growing. Traditional daily turnover was reported to be over US$ 3.2 trillion in April 2007 by the Bank for International Settlements. The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, etc, and the need for trading in such currencies.

The foreign currency exchange gives a platform for the exchange of money from one countrys currency to that of another. As the market with the worlds highest daily turnover with more than $2 trillion being traded by the market, the currency traders in the world out-trade the US stock market, the world’s largest equity market.
A huge contrast to the aforementioned US stock market, is that the forex market relatively unregulated. There is simply no centralized exchange and from the start of the New Zealand open on a Sunday night through to the close of the US session on Friday, the forex market moves 24 hours a day, over 5 days per week.
For the retail trader, deals can be executed through telephone transactions with a forex broker or via the internet – hence “online currency trading”. As a worldwide system made up of banks, institutions (eg conglomerate enterprises) the trading takes place in real time, with transfer of funds approx 2 days later aka the Spot value. The different times of the markets functioning eg. US session, Asia session gives the market a different “personality” – volatility and volume traded during the UK session will be different to that of the Asia session normally.
The Evolution of the Currency Markets (FX)
In earlier times, individual retail investors in the forex market could only gain access through banks using large amounts of capital and would take place for business and investment purposes. The banks would do the business for the client. As time has gone on, trading volumes have dramatically risen, particularly after free floating of exchange rates.
A key commodity, foreign exchange allows enterprises to buy and sell goods with overseas country businesses and services, making a supply and demand component which creates a true market. The bank will try to get the best deal for the business client and so a form of bartering takes place of one currency for another. Trading for speculation also exists within banks, institutions and of course, the retail trader forex market. Any individual can take part in the currency market, provided he or she has some resources and has put time in to learn how to trade and recognise the fine points of trading the currency markets.
As with any investment there are pros and cons. High risk means that, again, like with most investments, you can lose all you invest, and this needs to be taken on board so that money traded is that which can be afforded. There is a lot of talk about forex scam brokerages, (forex scams) and because of the lack of regulation of the forex market, there is an open platform for forex scams in various forms.
There are also advantages such as that a retail trader can learn to trade from an already successful trader through a mentoring program, there are also several good books on online currency trading. It is easy to set up an account with a forex broker, who will normally offer leverage meaning a fraction of what is being traded is actually required as a margin deposit to secure any potential losses on the part of the trader.
To make an income, there must be a variation in the exchange rates between a pair of currencies. The market is liquid and can be volatile. Currencies continuously change against each other in response to world events, financial announcements, professional investor behavior and historical market performance. This happens regardless of the economic conditions in individual countries since each currency affects another. The forex market has been described as the supreme marketplace and is without doubt recession proof.

First what is Forex: The FOREX or Foreign Exchange market is the largest financial market in the world, with an volume of more than $1.5 trillion daily, dealing in currencies. Unlike other financial markets, the Forex market has no physical location, no central exchange. It operates through an electronic network of banks, corporations and individuals trading one currency for another.

The Forex, or foreign currency exchange, is all about money. Money from all over the world is bought, sold and traded. On the Forex, anyone can buy and sell currency and with possibly come out ahead in the end. When dealing with the foreign currency exchange, it is possible to buy the currency of one country, sell it and make a profit. For example, a broker might buy a Japanese yen when the yen to dollar ratio increases, then sell the yens and buy back American dollars for a profit.

Prices of currency are influenced by a number of factors such as political and economic conditions in the issuing country. Interest rates, inflation and political stability are all factors in the prices of a currency. Governments try to control their currency prices by lowering the price (flooding the market), or by raising the price and buying on a large-scale. Although the volume of Forex is sizable, it’s still impossible to have any control of a market for any length time and because market forces normally prevail in the long run, Forex has become one of the fairest investment opportunities available.

Each currency in the Forex market is given its own three letter code that is used in the Forex quotes. The most common and widely used currencies used in the Forex market are USD (U.S. dollars), GBP (United Kingdom pounds), JPY (Japanese yen), CAD (Canadian dollars), EUR (European euros), AUD (Australian dollars) and CHF (Swiss francs). These currencies are the top foreign currencies to watch in the Forex trading game. The prices of the foreign currency exchanges are specified in pairs by the forex quotes. By using a currency pair of U.S. dollars and European euros in the example below, the first currency is called the base (which is always at 1) and the second currency is called the quote (which shows how much it costs to buy one unit of the USD, or base currency):
USD/EUR = 0.8419. When reversed, this is the cost of USD to buy one euro: EUR/USD = 1.1882.

The base currency is growing stronger when the price of the quote currency goes up, therefore only one unit of the base currency can buy more of the quote currency. However, if the quote currency begins to fall then the base currency will become weaker. All forex quotes are perceived as a “ask” or a “bid” price. The ask price is what sellers will sell the base currency at, while at the same time be buying the quote currency. The bid price is what the buyers will pay for the base currency, also while selling the quote currency. For example, a symbol bid ask of:USD/CAD 1.2392 1.2397. This shows that you can buy one U.S. dollar for 1.2397 Canadian dollars, or you can also sell one U.S. dollar for 1.2392 Canadian dollars. You can find the exchange rates in cross country charts that list numerous types of currencies with their values against one another. There are also currency conversion calculators, all of which are readily available online.

Along with the U.S. dollar, United Kingdom pound, Japanese yen, Canadian dollars, European euros, Australian dollars and Swiss francs as some of the top currencies to watch in the forex trading game; some new currencies have been emerging. Be sure to keep an eye out on these emerging currencies: CNY (China yuan), CZK (Czech koruna), HKD (Hong Kong dollar), HUF (Hungarian Forint), INR (Indian Rupee), KRW (Korean Won), MXN (Mexican Peso), PLN (Polish Zloty), SGD (Singapore dollar), ZAR (South African Rand), and THB (Thai Baht). These currencies may not be one of the top currencies now, but they can make for some good investments. Taking two examples out of all of the emerging currencies:

The Czech koruna is a convertible, yet free floating currency that has been floating around since May 1997. All foreign investors have unrestricted access to these local markets. London banks continue to be very active in currency trading and accounts for nearly 60% of the daily turnover. This market is liquid for about five years. The Interest Rate Swaps, or the IRS, is mainly driven by offshore banks.

The China yuan is only limited to financial institutions and onshore companies and is not liquid. Currently the USD/CNY rate is about 8.2770 and is being closely managed by the central bank (PBOC). The Chinese government has resisted all calls for them to revalue their currency; but as the Chinese government continues to strengthen their banking systems and make reforms in their economic policies, there is likely to be a possible call for opening spot trading. The interbank money market does not go beyond four months.

Knowing the top currencies to watch in Forex trading will get you in the game.