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Benefits of Trading the Forex Market
rading the Forex market has become very popular in the last years. Why is it that traders around the world see the Forex market as an investment opportunity? We will try to answer this question in this article. Also we will discuss come differences between the Forex market, the stocks market and the futures market.
Some of the benefits of trading the Forex market are:
Superior liquidity.
Liquidity is what really makes the Forex market different from other markets. The Forex market is by far the most liquid financial market in the world with nearly 2 trillion dollars traded everyday. This ensures price stability and better trade execution. Allowing traders to open and close transactions with ease. Also such a tremendous volume makes it hard to manipulate the market in an extended manner.
24hr Market.
This one is also one of the greatest advantages of trading Forex. It is an around the click market, the market opens on Sunday at 3:00 pm EST when New Zealand begins operations, and closes on Friday at 5:00 pm EST when San Francisco terminates operations. There are transactions in practically every time zone, allowing active traders to choose at what time to trade.
Leverage trading.
Trading the Forex Market offers a greater buying power than many other markets. Some Forex brokers offer leverage up to 400:1, allowing traders to have only 0.25% in margin of the total investment. For instance, a trader using 100:1 means that to have a US$100,000 position, only US$1,000 are needed on margin to be able to open that position.
Low Transaction costs.
Almost all brokers offer commission free trading. The only cost traders incur in any transaction is the spread (difference between the buy and sell price of each currency pair). This spread could be as low as 1 pip (the minimum increment in any currency pair) in some pairs.
Low minimum investment.
The Forex market requires less capital to start trading than any other markets. The initial investment could go as low as $300 USD, depending on leverage offered by the broker. This is a great advantage since Forex traders are able to keep their risk investment to the lowest level.
Specialized trading.
The liquidity of the market allows us to focus on just a few instruments (or currency pairs) as our main investments (85% of all trading transactions are made on the seven major currencies). Allowing us to monitor, and at the end get to know each instrument better. Trading from anywhere.
If you do a lot of traveling, you can trade from anywhere in the world just having an internet connection.
Some of the most important differences between the Forex market and other markets are explained below.
Forex market vs. Equity markets
Liquidity
FX market: Near two trillion dollars of daily volume. Equity market: Around 200 billion on a daily basis.
Trading hours
FX market: 24hr market, 5.5 days a week. Equity market: Monday through Friday from 8:30 EST to 5:00 EST.
Profit potential
FX market: In both, rising and falling markets. Equity market: Most traders/investor profit only from rising markets.
Transaction costs
FX market: Commission free and tight spreads. Equity market: High Commissions and transaction fees.
Buying power
FX market: Leverage up to 400:1. Equity market: Leverage from 2:1 to 4:1.
Specialization
FX market: most volume (85%) is made on major currencies (USD, EUR, JPY, GBP, CHF, CAD and AUD.) Equity market: More than 40,000 stocks to choose from.
Forex market vs. Futures market
Liquidity
FX Market: Near two trillion dollars of daily volume. Futures market: Around 400 billion dollars on a daily basis.
Transaction costs
FX market: Commission free and tight spreads. Futures market: High commissions fees.
Margin
FX market: Fixed rate of margin on every position. Futures market: Different levels of margin on overnight positions than day time positions.
Trade execution
FX market: Instantaneous execution. Futures market: Inconsistent execution.
All this makes the Forex market very attractive to investors and traders. But I need to make something clear, although the benefits of trading the Forex market are notorious; it is still difficult to make a successful career trading the Forex market. It requires a lot of education, discipline, commitment and patience, as any other marke
Some of the benefits of trading the Forex market are:
Superior liquidity.
Liquidity is what really makes the Forex market different from other markets. The Forex market is by far the most liquid financial market in the world with nearly 2 trillion dollars traded everyday. This ensures price stability and better trade execution. Allowing traders to open and close transactions with ease. Also such a tremendous volume makes it hard to manipulate the market in an extended manner.
24hr Market.
This one is also one of the greatest advantages of trading Forex. It is an around the click market, the market opens on Sunday at 3:00 pm EST when New Zealand begins operations, and closes on Friday at 5:00 pm EST when San Francisco terminates operations. There are transactions in practically every time zone, allowing active traders to choose at what time to trade.
Leverage trading.
Trading the Forex Market offers a greater buying power than many other markets. Some Forex brokers offer leverage up to 400:1, allowing traders to have only 0.25% in margin of the total investment. For instance, a trader using 100:1 means that to have a US$100,000 position, only US$1,000 are needed on margin to be able to open that position.
Low Transaction costs.
Almost all brokers offer commission free trading. The only cost traders incur in any transaction is the spread (difference between the buy and sell price of each currency pair). This spread could be as low as 1 pip (the minimum increment in any currency pair) in some pairs.
Low minimum investment.
The Forex market requires less capital to start trading than any other markets. The initial investment could go as low as $300 USD, depending on leverage offered by the broker. This is a great advantage since Forex traders are able to keep their risk investment to the lowest level.
Specialized trading.
The liquidity of the market allows us to focus on just a few instruments (or currency pairs) as our main investments (85% of all trading transactions are made on the seven major currencies). Allowing us to monitor, and at the end get to know each instrument better. Trading from anywhere.
If you do a lot of traveling, you can trade from anywhere in the world just having an internet connection.
Some of the most important differences between the Forex market and other markets are explained below.
Forex market vs. Equity markets
Liquidity
FX market: Near two trillion dollars of daily volume. Equity market: Around 200 billion on a daily basis.
Trading hours
FX market: 24hr market, 5.5 days a week. Equity market: Monday through Friday from 8:30 EST to 5:00 EST.
Profit potential
FX market: In both, rising and falling markets. Equity market: Most traders/investor profit only from rising markets.
Transaction costs
FX market: Commission free and tight spreads. Equity market: High Commissions and transaction fees.
Buying power
FX market: Leverage up to 400:1. Equity market: Leverage from 2:1 to 4:1.
Specialization
FX market: most volume (85%) is made on major currencies (USD, EUR, JPY, GBP, CHF, CAD and AUD.) Equity market: More than 40,000 stocks to choose from.
Forex market vs. Futures market
Liquidity
FX Market: Near two trillion dollars of daily volume. Futures market: Around 400 billion dollars on a daily basis.
Transaction costs
FX market: Commission free and tight spreads. Futures market: High commissions fees.
Margin
FX market: Fixed rate of margin on every position. Futures market: Different levels of margin on overnight positions than day time positions.
Trade execution
FX market: Instantaneous execution. Futures market: Inconsistent execution.
All this makes the Forex market very attractive to investors and traders. But I need to make something clear, although the benefits of trading the Forex market are notorious; it is still difficult to make a successful career trading the Forex market. It requires a lot of education, discipline, commitment and patience, as any other marke
Forex Broker Scam – How to Recognize and Spot Them? By Wasif
If you do an internet search on forex broker scams, the number of results returned is staggering. While the forex market is slowly becoming more regulated, there are many unscrupulous brokers who should not be in business. Fortunately, they eventually get weaned out.However, when you’re looking to trade forex, it’s important to know which brokers are reliable and viable, and to avoid the ones that aren’t. In order to sort out the strong brokers from the weak, and the reputable ones from those with shady dealings, we must go through a series of steps before depositing a large amount of capital with a broker. Trading is hard enough in itself, but when a broker is implementing practices that work against the trader, making a profit can be nearly impossible.
Separating Fact from Fiction
When faced with all sorts of forums posts, articles and disgruntled comments about a broker, we must remember that many traders fail and never make a profit. Many of these disgruntled traders then post content online that blames the broker (or some other outside influence) for their own failed trading strategies. Thus, when researching a potential forex broker, traders must learn to separate fact from fiction.
When faced with all sorts of forums posts, articles and disgruntled comments about a broker, we must remember that many traders fail and never make a profit. Many of these disgruntled traders then post content online that blames the broker (or some other outside influence) for their own failed trading strategies. Thus, when researching a potential forex broker, traders must learn to separate fact from fiction.
In many cases, it may seem to a trader that a broker was intentionally trying to cause a loss. Complaints such as: “As soon as I placed the trade, the direction of the market reversed;” “The broker stop hunted my positions;” or “I always had slippage on my orders, and never in my favor” are not uncommon. These types of experiences are common to all traders, and it is quite possible that the broker is not at fault.
New forex traders often fail to trade with a tested strategy or trading plan. Instead, they make trades when psychology dictates they should. If a trader feels the market has to move in one direction or the other, there is a 50% chance he or she will be correct. When the rookie trader enters a position, often he or she is entering right at a time when their emotions are waning; experienced traders are aware of these junior tendencies and step in, taking the trade the other way. This befuddles new traders and leaves them feeling that the market – or their brokers – are out to get them and take their individual profits. Most of the time this is not the case, it is simply a failure by the trader to understand market dynamics.
On occasion, losses are the broker’s fault. This can occur when a broker attempts to rack up trading commissions at the client’s expense. There have been reports of brokers arbitrarily moving quoted rates to trigger stop orders when other brokers’ rates have not gone to that price. Luckily for traders, this is not likely to occur. One must remember that trading is usually not a zero-sum game, and brokers primarily make commissions with increased trading volumes. Overall, it is in the best interest of brokers to have long-term clients who trade regularly and thus sustain capital or make a profit.
The slippage issue can often be attributed to a psychological phenomenon. It is common practice for inexperienced traders to panic; they fear missing a move, so they hit their buy key; or they fear losing more and so they hit the sell key. In volatile exchange rate environments, the broker cannot ensure that an order will be executed at the desired price. This results in sharp movements and often slippage. The same is true for stop or limit orders. Some brokers guarantee stop and limit order fills, while others do not. Even in more transparent markets, slippage occurs, markets move and we don’t always get the price we want.Therefore, often what is perceived as a scam is just the trader not understanding the market he or she is trading.
The Real Problem
Real problems can begin to develop when communication between a trader and his or her broker begins to break down. If a trader does not get email responses from his or her broker, the broker fails to answer the phone, or provides vague answers to a trader’s questions, these are red flags that a broker may not be looking out for the client’s best interest.
Real problems can begin to develop when communication between a trader and his or her broker begins to break down. If a trader does not get email responses from his or her broker, the broker fails to answer the phone, or provides vague answers to a trader’s questions, these are red flags that a broker may not be looking out for the client’s best interest.
Any arising issues should be resolved and explained to the trader and the broker should also be helpful and display good customer relations. One of the most detrimental issues that may arise between a broker and a trader in this case is the trader’s inability to withdraw money from a trading account.
Protecting Yourself
Protecting yourself from unscrupulous brokers in the first place is ideal. The following steps should help:
Protecting yourself from unscrupulous brokers in the first place is ideal. The following steps should help:
- Do an online search for reviews of the broker. Take what is said and filter it based on what was said in the first section; could this be just a disgruntled trader? In the same search, find if there are outstanding legal actions against the broker.
- Make sure there are no complaints about not being able to withdraw funds. If there are, contact the user if possible and ask them about their experience.
- Read through all the fine print of the documents when opening an account. Incentives to open account can often be used against the trader when attempting to withdraw funds. For instance, if a trader deposits $10,000 and gets a $2,000 bonus, and then the trader loses money and attempts to withdraw some remaining funds, the broker may say he or she cannot withdraw because the bonus cannot be withdrawn. Read the fine print and make sure to understand all contingencies in regards to withdrawals and whether incentives impact withdrawals.
- If you are satisfied with your research on a particular broker, open a mini account or an account with a small amount of capital. Trade it for a month or more and then attempt a withdrawal. If everything has gone well, it should be relatively safe to deposit more funds. If you have problems, attempt to discuss them with the broker. If that fails, move on and post a detailed account of your experience online so others can learn from your experience.
Note: It should be pointed out that a broker’s size cannot be used to determine the level of risk involved. While big brokers get big by providing a certain standard of service, the 2008-2009 financial crisis taught us that a big or popular firm isn’t always safe.
What If You’re Already Stuck With a Bad Broker?
Unfortunately, options are very limited at this stage, however, there are a few things you can do:
Unfortunately, options are very limited at this stage, however, there are a few things you can do:
- Read through all documents to make sure that your broker is actually in the wrong. If you have missed something or failed to read the documents you signed, you may have only yourself to blame.
- Be stern with your broker, but not rude. Point out the course of action you will take if he or she does not adequately answer your questions or provide a withdrawal.
The spot forex market is said to trade at over $1 trillion a day. Combine that with currency options and futures contracts, and the amounts could literally be another couple trillion traded on any given day.
Historically Speaking
In its 2009 report, the Foreign Exchange Committee at the Bank of International Settlements estimated the total numbers of forex related transactions to be $3.2 trillion. With this type of money floating around an unregulated spot market that trades over the counter with no accountability, forex scams can only increase with the lure of earning fortunes in limited amounts of time. Many of the old popular scams have ceased, due to serious enforcement actions by the Commodity Futures Trading Commision and the 1982 formation of the self regulatory National Futures Association. However, many scams still exist, and new ones keep arising.
In its 2009 report, the Foreign Exchange Committee at the Bank of International Settlements estimated the total numbers of forex related transactions to be $3.2 trillion. With this type of money floating around an unregulated spot market that trades over the counter with no accountability, forex scams can only increase with the lure of earning fortunes in limited amounts of time. Many of the old popular scams have ceased, due to serious enforcement actions by the Commodity Futures Trading Commision and the 1982 formation of the self regulatory National Futures Association. However, many scams still exist, and new ones keep arising.
The old forex scam was found based on computer manipulation of bid/ask spreads. The point spread between the bid and ask basically reflects the commission of a back and forth transaction processed through a broker. These spreads typically differ between currency pairs. The scam occurs when those point spreads widely differ among brokers. Brokers often do not offer the normal two- to three-point spread in the EUR/USD, for example, but spreads of seven pips or more. Factor four or more pips on every million dollar trade, and any potential gains resulting from a good investment are eaten away by commissions. This scam has quieted down over the last 10 years, but be careful of those offshore retail brokers who are not regulated by the CFTC, NFA or their nation of origin. These tendencies still exist and it’s quite easy for firms to pack up and disappear with the money when confronted with actions. Many saw a jail cell for these computer manipulations. But the majority violators have historically been U.S.-based companies, not the offshore ones.
Signaling the ScamA popular modern-day scam is the signal sellers. These are people who may be a retail firm, pooled asset manager, managed accounts company or individual trader who promises to trade based on professional recommendations that will make anyone wealthy. They tout their long experience and trading abilities with backing by people who will practically testify in court on how great a trader and friend the person is, and the vast wealth that this person earned for them. All the unsuspecting trader has to do is hand over X amount of dollars for the privilege of trade recommendations. Many of these people simply collect money from a certain amount of traders and disappear. Some will recommend a good trade now and then, to allow the signal money to perpetuate. While this new scam is slowly becoming a wider problem, many signal sellers are honest and perform trade functions as intended.
Scamming in Today’s Market
A persistent scam, old and new, presents itself in some types of forex-developed trading systems. These people tout their system’s ability to generate automatic trades that, even while you sleep, earn vast wealth. Today, the new terminology is “robot,” because of the ability to work automatically. Either way, many of these systems have not been submitted and tested by an independent source for formal review. Examination factors must include the testing of a trading system’s parameters and optimization codes. If the parameters and optimization codes are invalid, the system will generate random buy and sell signals. This will cause unsuspecting traders to do nothing more than gamble. Although tested systems exist on the market, potential forex traders should research the system they wish to implement into their trading strategy.
A persistent scam, old and new, presents itself in some types of forex-developed trading systems. These people tout their system’s ability to generate automatic trades that, even while you sleep, earn vast wealth. Today, the new terminology is “robot,” because of the ability to work automatically. Either way, many of these systems have not been submitted and tested by an independent source for formal review. Examination factors must include the testing of a trading system’s parameters and optimization codes. If the parameters and optimization codes are invalid, the system will generate random buy and sell signals. This will cause unsuspecting traders to do nothing more than gamble. Although tested systems exist on the market, potential forex traders should research the system they wish to implement into their trading strategy.
Other Factors to Consider
Many trading systems traditionally have been quite costly. Just a few short years ago, $5,000 was not much to pay for a system. This can be viewed as a scam in itself. No trader should pay more than a few hundred dollars for a proper system. Be especially careful of system sellers that offer programs at exorbitant prices justified by guaranteeing phenomenal results. Although many crooks exist that sell systems, plenty exist that are decent and legitimate and have systems that have been properly tested to potentially earn substantial income.
Many trading systems traditionally have been quite costly. Just a few short years ago, $5,000 was not much to pay for a system. This can be viewed as a scam in itself. No trader should pay more than a few hundred dollars for a proper system. Be especially careful of system sellers that offer programs at exorbitant prices justified by guaranteeing phenomenal results. Although many crooks exist that sell systems, plenty exist that are decent and legitimate and have systems that have been properly tested to potentially earn substantial income.
Another persistent problem is the commingling of funds. Without a record of segregated accounts (A type of pool investment that is similar to a mutual fund, but is considered an insurance product. Proceeds received by the insurance company are used to purchase underlying assets, and then shares of the segregated funds are sold to investors.) , individuals cannot track the exact performance of their investments. As a result, many principles of retail firms are able to pay themselves exorbitant salaries, buy themselves houses, cars and planes or just disappear with a customer’s money. The allure for some is too great to perform their proper roles and duties. Section 4D of the Commodity Futures Modernization Act of 2000 addressed the issue of segregation. This act introduced strong regulating toward segregated brokerage accounts, allowing clients to opt out of such investment strategies. What occurs in other nations is a separate issue.
Warning Signs
Other scams and warning signs exist when brokers won’t allow withdrawal of monies from investor accounts or when problems exist within the trading station. Can you enter or exit a trade during an economic announcement that is not in line with expectations? If you can’t withdraw money, warning signs should flash. If the trade station doesn’t operate to your liquidity expectations, warning signs should again flash. An important factor to always consider when choosing a broker or a trading system to satisfy your personal goals is to be skeptical of promises or promotional material that guarantees a high level of performance.
Other scams and warning signs exist when brokers won’t allow withdrawal of monies from investor accounts or when problems exist within the trading station. Can you enter or exit a trade during an economic announcement that is not in line with expectations? If you can’t withdraw money, warning signs should flash. If the trade station doesn’t operate to your liquidity expectations, warning signs should again flash. An important factor to always consider when choosing a broker or a trading system to satisfy your personal goals is to be skeptical of promises or promotional material that guarantees a high level of performance.
Of the 193 cases filed with the NFA in 2008 for rules and law violations, 166 were settled within nine months, but only 23% received lost funds. Therefore, similar to the circumstances that present themselves in a Ponzi scheme (A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. These schemes usually collapse on themselves when the new investments stop.) , even when those who deliberately engage in forex scams are brought to justice, investor reimbursement is not guaranteed.
Summary
Supposed scams are often nothing more than traders not understanding the markets they are trading, and then blaming the broker for their losses. But there are times when brokers are at fault. A trader needs to be thorough and do research on a broker before opening an account. If the research looks good, then a small deposit should be made, followed by a few trades and then a withdrawal. If this goes well, then another deposit can be made. If you are already in a problematic situation, you should verify that the broker is doing something illegal, attempt to have our questions answered and if all else fails, report the person to the regulatory body.
Supposed scams are often nothing more than traders not understanding the markets they are trading, and then blaming the broker for their losses. But there are times when brokers are at fault. A trader needs to be thorough and do research on a broker before opening an account. If the research looks good, then a small deposit should be made, followed by a few trades and then a withdrawal. If this goes well, then another deposit can be made. If you are already in a problematic situation, you should verify that the broker is doing something illegal, attempt to have our questions answered and if all else fails, report the person to the regulatory body.
Forex Market Background By Wasif
The global marketplace has changed dramatically over the past several years. New investment strategies are becoming more important in order to minimize risk, as well as to maintain high portfolio returns. Among the most rewarding of the markets opening up to traders is the Foreign Exchange market. Identifiable trading patterns, as well as comparatively low margin requirements, have rewarding trading opportunities for many.
In contrast to the world’s stock markets, foreign exchange is traded without the constraints of a central physical exchange. Transactions are instead conducted via telephone or online. With this transaction structure as its foundation, the Foreign Exchange Market has become by far the largest marketplace in the world. Average volume in foreign exchange exceeds $1.5 trillion per day versus only $25 billion per day traded on the New York Stock Exchange. This high volume is advantageous from a trading standpoint because transactions can be executed quickly and with low transaction costs (i.e., a small bid/ask spread).
As a result, foreign exchange trading has long been recognized as a superior investment opportunity by major banks, multinational corporations and other institutions.
Spot foreign exchange is always traded as one currency in relation to another. So a trader who believes that the dollar will rise in relation to the Euro, would sell EURUSD. That is, sell Euros and buy US dollars. Forex-Training.com has compiled the following guide for quoting conventions:
Symbol Currency Pair Trading Terminology
GBPUSD British Pound / US Dollar "Cable"
EURUSD Euro / US Dollar "Euro"
USDJPY US Dollar / Japanese Yen "Dollar Yen"
USDCHF US Dollar / Swiss Franc "Dollar Swiss", or "Swissy"
USDCAD US Dollar / Canadian Dollar "Dollar Canada"
AUDUSD Australian Dollar / US Dollar "Aussie Dollar"
EURGBP Euro / British Pound "Euro Sterling"
EURJPY Euro / Japanese Yen "Euro Yen"
EURCHF Euro / Swiss Franc "Euro Swiss"
GBPCHF British Pound / Swiss Franc "Sterling Swiss"
GBPJPY British Pound / Japanese Yen "Sterling Yen"
CHFJPY Swiss Franc / Japanese Yen "Swiss Yen"
NZDUSD New Zealand Dollar / US Dollar "New Zealand Dollar" or "Kiwi"
USDZAR US Dollar / South African Rand "Dollar Zar" or "South African Rand"
GLDUSD Spot Gold "Gold"
SLVUSD Spot Silver "Silver"
Spot Forex versus Currency Futures
Many traders have made the switch from currency futures to spot foreign exchange ("forex") trading. Spot foreign exchange offers better liquidity and generally a lower cost of trading than currency futures. Banks and brokers in spot foreign exchange can quote markets 24 hours a day. Furthermore, the spot foreign exchange market is not burdened by exchange and NFA ("National Futures Association") fees, which are generally passed on to the customer in the form of higher commissions. For these reasons, virtually all professional traders and institutions conduct most of their foreign exchange dealing in the spot forex market, not in currency futures.
The mechanics of trading spot forex are similar to those of currency futures. The most important initial difference is the way in which currency pairs are quoted. Currency futures are always quoted as the currency versus the US dollar. In Spot forex, some currencies are quoted this way, while others are quoted as the US dollar versus the currency. For example, in spot forex, EURUSD is quoted the same way as Euro futures. In other words, if the Euro is strengthening, EURUSD will rise just as Euro futures will rise. On the other hand, USDCHF is quoted as US dollars with respect to Swiss Francs, the opposite of Swiss Franc futures. So if the Swiss Franc strengthens with respect to the US dollar, USDCHF will fall, while Swiss Franc futures will rise. The rule in spot forex is that the first currency shown is the currency that is being quoted in terms of direction. For example, "EUR" in EURUSD and "USD" in USDCHF is the currency that is being quoted.
The table below illustrates which spot currencies move parallel to the futures contract and which move inversely (opposite):
Forex
Symbol Currency Pair Futures
Symbol Directional
Relationship
GBPUSD British Pound / US Dollar BP Parallel
EURUSD Euro / US Dollar EU Parallel
USDJPY US Dollar / Japanese Yen JY Inverse
USDCHF US Dollar / Swiss Franc SF Inverse
USDCAD US Dollar / Canadian Dollar CD Inverse
AUDUSD Australian Dollar / US Dollar AD Parallel
NZDUSD New Zealand Dollar / US Dollar ND Parallel
In contrast to the world’s stock markets, foreign exchange is traded without the constraints of a central physical exchange. Transactions are instead conducted via telephone or online. With this transaction structure as its foundation, the Foreign Exchange Market has become by far the largest marketplace in the world. Average volume in foreign exchange exceeds $1.5 trillion per day versus only $25 billion per day traded on the New York Stock Exchange. This high volume is advantageous from a trading standpoint because transactions can be executed quickly and with low transaction costs (i.e., a small bid/ask spread).
As a result, foreign exchange trading has long been recognized as a superior investment opportunity by major banks, multinational corporations and other institutions.
Spot foreign exchange is always traded as one currency in relation to another. So a trader who believes that the dollar will rise in relation to the Euro, would sell EURUSD. That is, sell Euros and buy US dollars. Forex-Training.com has compiled the following guide for quoting conventions:
Symbol Currency Pair Trading Terminology
GBPUSD British Pound / US Dollar "Cable"
EURUSD Euro / US Dollar "Euro"
USDJPY US Dollar / Japanese Yen "Dollar Yen"
USDCHF US Dollar / Swiss Franc "Dollar Swiss", or "Swissy"
USDCAD US Dollar / Canadian Dollar "Dollar Canada"
AUDUSD Australian Dollar / US Dollar "Aussie Dollar"
EURGBP Euro / British Pound "Euro Sterling"
EURJPY Euro / Japanese Yen "Euro Yen"
EURCHF Euro / Swiss Franc "Euro Swiss"
GBPCHF British Pound / Swiss Franc "Sterling Swiss"
GBPJPY British Pound / Japanese Yen "Sterling Yen"
CHFJPY Swiss Franc / Japanese Yen "Swiss Yen"
NZDUSD New Zealand Dollar / US Dollar "New Zealand Dollar" or "Kiwi"
USDZAR US Dollar / South African Rand "Dollar Zar" or "South African Rand"
GLDUSD Spot Gold "Gold"
SLVUSD Spot Silver "Silver"
Spot Forex versus Currency Futures
Many traders have made the switch from currency futures to spot foreign exchange ("forex") trading. Spot foreign exchange offers better liquidity and generally a lower cost of trading than currency futures. Banks and brokers in spot foreign exchange can quote markets 24 hours a day. Furthermore, the spot foreign exchange market is not burdened by exchange and NFA ("National Futures Association") fees, which are generally passed on to the customer in the form of higher commissions. For these reasons, virtually all professional traders and institutions conduct most of their foreign exchange dealing in the spot forex market, not in currency futures.
The mechanics of trading spot forex are similar to those of currency futures. The most important initial difference is the way in which currency pairs are quoted. Currency futures are always quoted as the currency versus the US dollar. In Spot forex, some currencies are quoted this way, while others are quoted as the US dollar versus the currency. For example, in spot forex, EURUSD is quoted the same way as Euro futures. In other words, if the Euro is strengthening, EURUSD will rise just as Euro futures will rise. On the other hand, USDCHF is quoted as US dollars with respect to Swiss Francs, the opposite of Swiss Franc futures. So if the Swiss Franc strengthens with respect to the US dollar, USDCHF will fall, while Swiss Franc futures will rise. The rule in spot forex is that the first currency shown is the currency that is being quoted in terms of direction. For example, "EUR" in EURUSD and "USD" in USDCHF is the currency that is being quoted.
The table below illustrates which spot currencies move parallel to the futures contract and which move inversely (opposite):
Forex
Symbol Currency Pair Futures
Symbol Directional
Relationship
GBPUSD British Pound / US Dollar BP Parallel
EURUSD Euro / US Dollar EU Parallel
USDJPY US Dollar / Japanese Yen JY Inverse
USDCHF US Dollar / Swiss Franc SF Inverse
USDCAD US Dollar / Canadian Dollar CD Inverse
AUDUSD Australian Dollar / US Dollar AD Parallel
NZDUSD New Zealand Dollar / US Dollar ND Parallel
Leverage & Margin In Forex
The Forex market is exciting and accessible to small retail traders because of the industry's high leverage options. Leverage gives a trader the ability to increase the potential return on an investment. Leverage works both ways however; and it also increases potential risk. Therefore leveraging magnifies both gains and losses.
Leveraging a position involves putting down collateral, known as margin, to take on a position that is larger in value. CMS Forex offers a maximum leverage option of 100 to 1. This means to take on a standard $100,000 lot or contract, a minimum margin of $1000 is required.
How is this possible? In the Forex market, when trading the established currencies that CMS Forex offers, the amount that a currency changes in any given day is quite small. A one cent (or approximately 100 pip) change in the value of a currency is considered a large move. Therefore we can afford to hold a fairly small amount of collateral for any given position.
For example let's take a trader with $2,000 in his account. Our trader buys 1 lot of USD/JPY at a price of 97.25 with the 100:1 maximum leverage. His utilized margin is $1000. If the position makes money, the gains are added to the equity in the traders account. Likewise if the position goes against the trader the losses are subtracted from the account's total equity. If the price moves 100 pips in the trader's favor (the exchange rate moves upwards one yen to 98.25), then the trader would make a $1,000 profit (at almost $10 per pip × 100 pips). The trader has effectively made a 50% return on his $2,000 account or a 100% gain on his $1000 margin. Conversely if the position had gone at least 100 pips against the trader, his position would have been closed due to a margin call when his account equity dropped below his $1000 margin requirement. The trader would have a loss of approximately $1000, or 50% of his initial account, and about $1000 remaining in his account.
To minimize our clients' overall risk exposure the above requirements are calculated on a per-account rather than per-position basis. For example, if you buy 4 lots of USD/JPY and sell 2 lots of USD/CAD, the margin requirement for your account will be $6,000.
Margin and Leverage Options
CMS Forex requires 1% margin on the notional value of clients positions on the major pairs* and 4% margin on the notional value on minor currency pairs†. That translates to a leverage of 100:1 or 25:1. If you choose to have a larger margin requirement in order to make you leverage smaller than 100:1, please email Customer Service with your name, account number and the margin requirement option you wish applied to your account.
The full list of currency pairs and their maximum leverage is as follows:
*Major Currency Pairs Maximum Leverage
EUR/USD 100:1
USD/JPY 100:1
GBP/USD 100:1
USD/CHF 100:1
EUR/CHF 100:1
EUR/JPY 100:1
GBP/JPY 100:1
EUR/GBP 100:1
USD/CAD 100:1
AUD/USD 100:1
EUR/CAD 100:1
EUR/AUD 100:1
GBP/CHF 100:1
CHF/JPY 100:1
AUD/CAD 100:1
AUD/JPY 100:1
NZD/USD 100:1
CAD/JPY 100:1
NZD/JPY 100:1
GBP/AUD 100:1
AUD/NZD 100:1
†Minor Currency Pairs Maximum Leverage
USD/HKD 25:1
USD/SGD 25:1
USD/ZAR 25:1
ZAR/JPY 25:1
USD/MXN 25:1
Understanding Notional Value
In the forex market all contract sizes are not created equal. The standard size of a position is called a Lot. The size of 1 Lot is 100,000 units of the top currency (or the base currency) in a currency pair. For instance, 1 Lot of USD/JPY is equal to 100,000 USD, while 1 Lot of EUR/USD is equal to 100,000 EUR. Therefore, even though both contracts are 1 Standard Lot, they have different notional values. When opening a position the different notional values will affect how much margin is required to take out that position.
Example #1**
1 Lot of USD/JPY = 100,000 USD;
At 1% margin = 100,000 USD x 0.01 = $1,000 USD required for margin
Example #2 1 Lot of EUR/USD = 100,000 EUR;
Convert to USD (exchange rate = 1.3650) = 100,000 EUR x 1.3650 = 136,500 USD
At 1% margin = 136,500 USD x 0.01 = $1,365 USD required for margin
Non US Dollar Based Accounts
Clients with accounts denominated in a base currency other than US Dollars should convert the above amounts into their base currency to calculate their margin requirements. For example a Japanese Yen based account with an open 1 lot position would have a margin requirement of ¥97,500 Japanese Yen if the current USD/JPY rate is 97.50 [$1000 USD × 97.50 = ¥97,500 JPY].
In the case of a British Pound based account, an open 3 lot position would have a margin requirement of £3000 British Pounds if the current GBP/USD rate is 1.5100.
First off, the notional position size in USD would be equal to 3 lots x 100,000 GBP x 1.51 = $453,000 which would have a 1% margin requirement of $4,530. Converted back into Pounds, the margin requirement would be £3000 ($4,530 / 1.51 = £3,000).
Since all conversions are done automatically by our VT Trader software the moment a new position is opened, your margin requirement will always be displayed in your account’s base currency.
Leveraging a position involves putting down collateral, known as margin, to take on a position that is larger in value. CMS Forex offers a maximum leverage option of 100 to 1. This means to take on a standard $100,000 lot or contract, a minimum margin of $1000 is required.
How is this possible? In the Forex market, when trading the established currencies that CMS Forex offers, the amount that a currency changes in any given day is quite small. A one cent (or approximately 100 pip) change in the value of a currency is considered a large move. Therefore we can afford to hold a fairly small amount of collateral for any given position.
For example let's take a trader with $2,000 in his account. Our trader buys 1 lot of USD/JPY at a price of 97.25 with the 100:1 maximum leverage. His utilized margin is $1000. If the position makes money, the gains are added to the equity in the traders account. Likewise if the position goes against the trader the losses are subtracted from the account's total equity. If the price moves 100 pips in the trader's favor (the exchange rate moves upwards one yen to 98.25), then the trader would make a $1,000 profit (at almost $10 per pip × 100 pips). The trader has effectively made a 50% return on his $2,000 account or a 100% gain on his $1000 margin. Conversely if the position had gone at least 100 pips against the trader, his position would have been closed due to a margin call when his account equity dropped below his $1000 margin requirement. The trader would have a loss of approximately $1000, or 50% of his initial account, and about $1000 remaining in his account.
To minimize our clients' overall risk exposure the above requirements are calculated on a per-account rather than per-position basis. For example, if you buy 4 lots of USD/JPY and sell 2 lots of USD/CAD, the margin requirement for your account will be $6,000.
Margin and Leverage Options
CMS Forex requires 1% margin on the notional value of clients positions on the major pairs* and 4% margin on the notional value on minor currency pairs†. That translates to a leverage of 100:1 or 25:1. If you choose to have a larger margin requirement in order to make you leverage smaller than 100:1, please email Customer Service with your name, account number and the margin requirement option you wish applied to your account.
The full list of currency pairs and their maximum leverage is as follows:
*Major Currency Pairs Maximum Leverage
EUR/USD 100:1
USD/JPY 100:1
GBP/USD 100:1
USD/CHF 100:1
EUR/CHF 100:1
EUR/JPY 100:1
GBP/JPY 100:1
EUR/GBP 100:1
USD/CAD 100:1
AUD/USD 100:1
EUR/CAD 100:1
EUR/AUD 100:1
GBP/CHF 100:1
CHF/JPY 100:1
AUD/CAD 100:1
AUD/JPY 100:1
NZD/USD 100:1
CAD/JPY 100:1
NZD/JPY 100:1
GBP/AUD 100:1
AUD/NZD 100:1
†Minor Currency Pairs Maximum Leverage
USD/HKD 25:1
USD/SGD 25:1
USD/ZAR 25:1
ZAR/JPY 25:1
USD/MXN 25:1
Understanding Notional Value
In the forex market all contract sizes are not created equal. The standard size of a position is called a Lot. The size of 1 Lot is 100,000 units of the top currency (or the base currency) in a currency pair. For instance, 1 Lot of USD/JPY is equal to 100,000 USD, while 1 Lot of EUR/USD is equal to 100,000 EUR. Therefore, even though both contracts are 1 Standard Lot, they have different notional values. When opening a position the different notional values will affect how much margin is required to take out that position.
Example #1**
1 Lot of USD/JPY = 100,000 USD;
At 1% margin = 100,000 USD x 0.01 = $1,000 USD required for margin
Example #2 1 Lot of EUR/USD = 100,000 EUR;
Convert to USD (exchange rate = 1.3650) = 100,000 EUR x 1.3650 = 136,500 USD
At 1% margin = 136,500 USD x 0.01 = $1,365 USD required for margin
Non US Dollar Based Accounts
Clients with accounts denominated in a base currency other than US Dollars should convert the above amounts into their base currency to calculate their margin requirements. For example a Japanese Yen based account with an open 1 lot position would have a margin requirement of ¥97,500 Japanese Yen if the current USD/JPY rate is 97.50 [$1000 USD × 97.50 = ¥97,500 JPY].
In the case of a British Pound based account, an open 3 lot position would have a margin requirement of £3000 British Pounds if the current GBP/USD rate is 1.5100.
First off, the notional position size in USD would be equal to 3 lots x 100,000 GBP x 1.51 = $453,000 which would have a 1% margin requirement of $4,530. Converted back into Pounds, the margin requirement would be £3000 ($4,530 / 1.51 = £3,000).
Since all conversions are done automatically by our VT Trader software the moment a new position is opened, your margin requirement will always be displayed in your account’s base currency.
Forex- Trade With A Strategy
Trading successfully is by no means a simple matter. It requires time, market knowledge and market understanding and a large amount of self restraint.
Anyone who says you can consistently make money in foreign exchange markets is being untruthful. Foreign exchange by nature, is a volatile market. The practice of trading it by way of margin increases that volatility exponentially. We are therefore talking about a very 'fast market' which is naturally inconsistent. Following that precept, it is logical to say that in order to make a successful trade, a trader has to take into account technical and fundamental data and make an informed decision based on his perception of market sentiment and market expectation. Timing a trade correctly is probably the most important variable in trading successfully but invariably there will be times where a traders' timing will be off. Don't loose heart if you loose on some trades. Experienced and seasoned traders do not expect to generate returns on every trade.
Let's enumerate what a trader needs to do in order to put the best chances for profitable trades on his side:
Trade with money you can afford to lose:
Trading forex markets is speculative and can result in loss, it is also exciting, exhilarating and can be addictive. The more you are 'involved with your money' the harder it is to make a clear-headed decision. Money you have earned is precious, but money you need to survive should never be traded.
If in doubt, stay out:
If you're unsure about a trade and find you're hesitating, stay on the sidelines.
Trade logical transaction sizes:
Margin trading allows the forex trader a very large amount of leverage, trading at full margin capacity can make for some very large profits or losses on an account. Scaling your trades so that you may re-enter the market or make transactions on other currencies is generally wiser. In short, don't trade amounts that can potentially wipe you out and don't put all your eggs in one basket.
Identify the state of the market:
What is the market doing? Is it trending upwards, downwards, is it in a trading range. Is the trend strong or weak, did it begin long ago or does it look like a new trend that's forming. Getting a clear picture of the market situation is laying the groundwork for a successful trade.
Determine what time frame you're trading on:
Many traders get in the market without thinking when they would like to get out, after all the goal is to make money. This is true but when trading, one must extrapolate in his mind's eye the movement that one expects to happen. Within this extrapolation, resides a price evolution during a certain period of time. Attached to this is the idea of exit price. The importance of this is to mentally put your trade in perspective and although it is clearly impossible to know exactly when you will exit the market, it is important to define from the outset if you'll be 'scalping' (trying to get a few points off the market) trading intra-day, or going longer term. This will also determine what chart period you're looking at. If you trade many times a day, there's no point basing your technical analysis on a daily graph, you'll probably want to analyse 30 minute or hour graphs. Additionally it is important to know the different time periods when various financial centers enter and exit the market as this creates more or less volatility and liquidity and can influence market movements.
Time your trade:
You can be right about a potential market movement but be too early or too late when you enter the trade. Timing considerations are twofold, an expected market figure like CPI, retail sales or a federal reserve decision can consolidate a movement that's already underway. Timing your move means knowing what's expected and taking into account all considerations before trading. Technical analysis can help you identify when and at what price a move may occur.
Gauge market sentiment:
Market sentiment is what most of the market is perceived to be feeling about the market and therefore what it is doing or will do. This is basically about trend. You may have heard the term 'the trend is your friend', this basically means that if you're in the right direction with a strong trend you will make successful trades. This of course is very simplistic, a trend is capable of reversal at any time. Technical and fundamental data can indicate however if the trend has begun long ago and if it is strong or weak.
Market expectation:
Market expection relates to what most people are expecting as far as upcoming news is concerned. If people are expecting an interest rate to rise and it does, then there usually will not be much of a movement because the information will already have been 'discounted' by the market, alternatively if the adverse happens, markets will usually react violently.
Use what other traders use:
In a perfect world, every trader would be looking at a 14 day RSI and making trading decisions based on that. If that was the case, when RSI would go under the 30 level, everyone would buy and by consequence the price would rise. Needless to say, the world is not perfect and not all market participants follow the same technical indicators, draw the same trendlines and identify the same support & resistance levels. The great diversity of opinions and techniques used translates directly into price diversity. Traders however have a tendency to use a limited variety of technical tools. The most common are 9 and 14 day RSI, obvious trendlines and support levels, fibonnacci retracement, MACD and 9, 20 & 40 day exponential moving averages. The closer you get to what most traders are looking at, the more precise your estimations will be. The reason for this is simple arithmetic, larger numbers of buyers than sellers at a certain price will move the market up from that price and vice-versa.
Anyone who says you can consistently make money in foreign exchange markets is being untruthful. Foreign exchange by nature, is a volatile market. The practice of trading it by way of margin increases that volatility exponentially. We are therefore talking about a very 'fast market' which is naturally inconsistent. Following that precept, it is logical to say that in order to make a successful trade, a trader has to take into account technical and fundamental data and make an informed decision based on his perception of market sentiment and market expectation. Timing a trade correctly is probably the most important variable in trading successfully but invariably there will be times where a traders' timing will be off. Don't loose heart if you loose on some trades. Experienced and seasoned traders do not expect to generate returns on every trade.
Let's enumerate what a trader needs to do in order to put the best chances for profitable trades on his side:
Trade with money you can afford to lose:
Trading forex markets is speculative and can result in loss, it is also exciting, exhilarating and can be addictive. The more you are 'involved with your money' the harder it is to make a clear-headed decision. Money you have earned is precious, but money you need to survive should never be traded.
If in doubt, stay out:
If you're unsure about a trade and find you're hesitating, stay on the sidelines.
Trade logical transaction sizes:
Margin trading allows the forex trader a very large amount of leverage, trading at full margin capacity can make for some very large profits or losses on an account. Scaling your trades so that you may re-enter the market or make transactions on other currencies is generally wiser. In short, don't trade amounts that can potentially wipe you out and don't put all your eggs in one basket.
Identify the state of the market:
What is the market doing? Is it trending upwards, downwards, is it in a trading range. Is the trend strong or weak, did it begin long ago or does it look like a new trend that's forming. Getting a clear picture of the market situation is laying the groundwork for a successful trade.
Determine what time frame you're trading on:
Many traders get in the market without thinking when they would like to get out, after all the goal is to make money. This is true but when trading, one must extrapolate in his mind's eye the movement that one expects to happen. Within this extrapolation, resides a price evolution during a certain period of time. Attached to this is the idea of exit price. The importance of this is to mentally put your trade in perspective and although it is clearly impossible to know exactly when you will exit the market, it is important to define from the outset if you'll be 'scalping' (trying to get a few points off the market) trading intra-day, or going longer term. This will also determine what chart period you're looking at. If you trade many times a day, there's no point basing your technical analysis on a daily graph, you'll probably want to analyse 30 minute or hour graphs. Additionally it is important to know the different time periods when various financial centers enter and exit the market as this creates more or less volatility and liquidity and can influence market movements.
Time your trade:
You can be right about a potential market movement but be too early or too late when you enter the trade. Timing considerations are twofold, an expected market figure like CPI, retail sales or a federal reserve decision can consolidate a movement that's already underway. Timing your move means knowing what's expected and taking into account all considerations before trading. Technical analysis can help you identify when and at what price a move may occur.
Gauge market sentiment:
Market sentiment is what most of the market is perceived to be feeling about the market and therefore what it is doing or will do. This is basically about trend. You may have heard the term 'the trend is your friend', this basically means that if you're in the right direction with a strong trend you will make successful trades. This of course is very simplistic, a trend is capable of reversal at any time. Technical and fundamental data can indicate however if the trend has begun long ago and if it is strong or weak.
Market expectation:
Market expection relates to what most people are expecting as far as upcoming news is concerned. If people are expecting an interest rate to rise and it does, then there usually will not be much of a movement because the information will already have been 'discounted' by the market, alternatively if the adverse happens, markets will usually react violently.
Use what other traders use:
In a perfect world, every trader would be looking at a 14 day RSI and making trading decisions based on that. If that was the case, when RSI would go under the 30 level, everyone would buy and by consequence the price would rise. Needless to say, the world is not perfect and not all market participants follow the same technical indicators, draw the same trendlines and identify the same support & resistance levels. The great diversity of opinions and techniques used translates directly into price diversity. Traders however have a tendency to use a limited variety of technical tools. The most common are 9 and 14 day RSI, obvious trendlines and support levels, fibonnacci retracement, MACD and 9, 20 & 40 day exponential moving averages. The closer you get to what most traders are looking at, the more precise your estimations will be. The reason for this is simple arithmetic, larger numbers of buyers than sellers at a certain price will move the market up from that price and vice-versa.
Foreign Currency Exchange Of Forex
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The Foreign Exchange Market for Beginners
The foreign exchange market or forex market as it is often called is the market in which currencies are traded. Currency Trading is the world's largest market consisting of almost $2 trillion in daily volume and as investors learn more and become more interested, the market continues to rapidly grow. Not only is the forex market the largest market in the world, but it is also the most liquid, differentiating it from the other markets. In addition, there is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter. Unlike the stock market, this decentralization of the market allows traders to choose from a number of different dealers to make trades with and allows for comparison of prices. Typically, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to pass that on to their clients. The spot currency market is open twenty-four hours a day, five days a week, with currencies being traded around the world in all of the major financial centers. Learn more about currency trading online.
All trades that take place in the foreign exchange market involve the buying of one currency and the selling of another currency simultaneously. This is because the value of one currency is determined by its comparison to another currency. The first currency of a currency pair is called the "base currency," while the second currency is called the �counter currency.� The currency pair shows how much of the counter currency is needed to purchase one unit of the base currency. Currency pairs can be thought of as a single unit that can be bought or sold. When purchasing a currency pair, the base currency is being bought, while the counter currency is being sold. The opposite is true, when the sale of a currency pair takes place. There are four major currency pairs that are traded most often in the foreign exchange market. These include the EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
Forex Capital Markets (FXCM) is an online currency trading firm that offers a free demo account to traders who are new and interested in the foreign exchange market. Registering for a demo account allows a new trader to download the online trading platform that is used by the company's clients trading live accounts and make trades as if they were doing it with real money. The demo account is an excellent way to experiment with the foreign exchange market while learning your way around the trading platform. It allows you to experience every step of currency trading including choosing currency pairs, deciding how much risk to take, tracking the time and dates of placed trades, deciding how long to stay in the trade, and when to exit the trade. It also allows the placing of stop and limit orders on trades.
Information about trading and specifically about how to use the online trading platform can be found on the FXCM webpage. In addition, FXCM offers FREE interactive online seminars that are extremely useful to both new and experienced currency traders. These "educational webinars," as they are called are run by experienced financial strategists and range in topics from trading specific news events to trading the Euro. In addition to the webinars, FXCM also offers numerous online courses that teach investors how to trade the currency market.
All trades that take place in the foreign exchange market involve the buying of one currency and the selling of another currency simultaneously. This is because the value of one currency is determined by its comparison to another currency. The first currency of a currency pair is called the "base currency," while the second currency is called the �counter currency.� The currency pair shows how much of the counter currency is needed to purchase one unit of the base currency. Currency pairs can be thought of as a single unit that can be bought or sold. When purchasing a currency pair, the base currency is being bought, while the counter currency is being sold. The opposite is true, when the sale of a currency pair takes place. There are four major currency pairs that are traded most often in the foreign exchange market. These include the EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
Forex Capital Markets (FXCM) is an online currency trading firm that offers a free demo account to traders who are new and interested in the foreign exchange market. Registering for a demo account allows a new trader to download the online trading platform that is used by the company's clients trading live accounts and make trades as if they were doing it with real money. The demo account is an excellent way to experiment with the foreign exchange market while learning your way around the trading platform. It allows you to experience every step of currency trading including choosing currency pairs, deciding how much risk to take, tracking the time and dates of placed trades, deciding how long to stay in the trade, and when to exit the trade. It also allows the placing of stop and limit orders on trades.
Information about trading and specifically about how to use the online trading platform can be found on the FXCM webpage. In addition, FXCM offers FREE interactive online seminars that are extremely useful to both new and experienced currency traders. These "educational webinars," as they are called are run by experienced financial strategists and range in topics from trading specific news events to trading the Euro. In addition to the webinars, FXCM also offers numerous online courses that teach investors how to trade the currency market.
Foreign Exchange Market By Wasif
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. Retail traders (small speculators) are a small part of this market. They may only participate indirectly through brokers or banks and may be targets of forex scams.
The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 1-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $1,000,000.
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' cheques. Spot prices at market makers vary, but on EUR/USD are usually no more than 5 pips wide (i.e. 0.0005). Competition has greatly increased with pip spreads shrinking on the majors to as little as 1 to 1.5 pips.
The main trading centers are in London, New York, and Tokyo, but banks throughout the world participate. As the Asian trading session ends, the European session begins, then the US session, and then the Asian begin in their turns. Traders can react to news when it breaks, rather than waiting for the market to open.
There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers order flow. Trading legend Richard Dennis has accused central bankers of leaking information to hedge funds. [1]
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.
On the spot market, according to the BIS study, the most heavily traded products were:
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems, such as EBS, Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Bloomberg and TradeBook(R). The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in South East Asia.
Some investment management firms also have more speculative specialist currency overlay units, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. The number of this type of specialist is quite small, their large assets under management (AUM) can lead to large trades.
All firms offering foreign exchange trading online are either market makers or facilitate the placing of trades with market makers.
In the retail forex industry market makers often have two separate trading desks- one that actually trades foreign exchange (which determines the firm's own net position in the market, serving as both a proprietary trading desk and a means of offsetting client trades on the interbank market) and one used for off-exchange trading with retail customers (called the "dealing desk" or "trading desk").
Many retail FX market makers claim to "offset" clients' trades on the interbank market (that is, with other larger market makers), e.g. after buying from the client, they sell to a bank. Nevertheless, the large majority of retail currency speculators are novices and who lose money [3], so that the market makers would be giving up large profits by offsetting. Offsetting does occur, but only when the market maker judges its clients' net position as being very risky.
The dealing desk operates much like the currency exchange counter at a bank. Interbank exchange rates, which are displayed at the dealing desk, are adjusted to incorporate spreads (so that the market maker will make a profit) before they are displayed to retail customers. Prices shown by the market maker do not neccesarily reflect interbank market rates. Arbitrage opportunities may exist, but retail market makers are efficient at removing arbitrageurs from their systems or limiting their trades.
A limited number of retail forex brokers offer consumers direct access to the interbank forex market. But most do not because of the limited number of clearing banks willing to process small orders. More importantly, the dealing desk model can be far more profitable, as a large portion of retail traders' losses are directly turned into market maker profits. While the income of a marketmaker that offsets trades or a broker that facilitates transactions is limited to transaction fees (commissions), dealing desk brokers can generate income in a variety of ways because they not only control the trading process, they also control pricing which they can skew at any time to maximize profits.
The rules of the game in trading FX are highly disadvantageous for retail speculators. Most retail speculators in FX lack trading experience and and capital (account minimums at some firms are as low as 250-500 USD). Large minimum position sizes, which on most retail platforms ranges from $10,000 to $100,000, force small traders to take imprudently large positions using extremely high leverage. Professional forex traders rarely use more than 10:1 leverage, yet many retail Forex firms default client accounts to 100:1 or even 200:1, without disclosing that this is highly unusual for currency traders. This drastically increases the risk of a margin call (which, if the speculator's trade is not offset, is pure profit for the market maker).
According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005) "Even people running the trading shops warn clients against trying to time the market. 'If 15% of day traders are profitable,' says Drew Niv, chief executive of FXCM, 'I'd be surprised.' " [4]
In the US, "it is unlawful to offer foreign currency futures and option contracts to retail customers unless the offeror is a regulated financial entity" according to the Commodity Futures Trading Commission [5]. Legitimate retail brokers serving traders in the U.S. are most often registered with the CFTC as "futures commission merchants" (FCMs) and are members of the National Futures Association (NFA). Potential clients can check the broker's FCM status at the NFA. Retail forex brokers are much less regulated than stock brokers and there is no protection similar to that from the Securities Investor Protection Corporation. The CFTC has noted an increase in forex scams [6].
Large hedge funds and other well capitalized "position traders" are the main professional speculators.
Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not, according to this view. It is simply gambling, that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 150% per annum, and later to devalue the krona. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view [7]. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.
In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and forex speculators only made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.
Market size and liquidity
The foreign exchange market is unique because of:-
- its trading volume,
- the extreme liquidity of the market,
- the large number of, and variety of, traders in the market,
- its geographical dispersion,
- its long trading hours - 24 hours a day (except on weekends).
- the variety of factors that affect exchange rates,
- $600 billion spot
- $1,300 billion in derivatives, ie
- $200 billion in outright forwards
- $1,000 billion in forex swaps
- $100 billion in FX options.
| Rank | Name | % of volume |
| 1 | Deutsche Bank | 17.0 |
| 2 | UBS | 12.5 |
| 3 | Citigroup | 7.5 |
| 4 | HSBC | 6.4 |
| 5 | Barclays | 5.9 |
| 6 | Merrill Lynch | 5.7 |
| 7 | J.P. Morgan Chase | 5.3 |
| 8 | Goldman Sachs | 4.4 |
| 9 | ABN AMRO | 4.2 |
| 10 | Morgan Stanley | 3.9 |
The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 1-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $1,000,000.
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' cheques. Spot prices at market makers vary, but on EUR/USD are usually no more than 5 pips wide (i.e. 0.0005). Competition has greatly increased with pip spreads shrinking on the majors to as little as 1 to 1.5 pips.
Trading characteristics
There is no single unified foreign exchange market. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is no such thing as a single dollar rate - but rather a number of different rates (prices), depending on what bank or market maker is trading. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs.| Rank | Currency | ISO 4217 Code | Symbol |
| 1 | United States dollar | USD | $ |
| 2 | Eurozone euro | EUR | € |
| 3 | Japanese yen | JPY | ¥ |
| 4 | British pound sterling | GBP | £ |
| 5-6 | Swiss franc | CHF | - |
| 5-6 | Australian dollar | AUD | $ |
There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers order flow. Trading legend Richard Dennis has accused central bankers of leaking information to hedge funds. [1]
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.
On the spot market, according to the BIS study, the most heavily traded products were:
- EUR/USD - 28 %
- USD/JPY - 17 %
- GBP/USD (also called cable) - 14 %
Market participants
According to the BIS study Triennial Central Bank Survey 2004- 53% of transactions were strictly interdealer (ie interbank);
- 33% involved a dealer (ie a bank) and a fund manager or some other non-bank financial institution;
- and only 14% were between a dealer and a non-financial company.
Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems, such as EBS, Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Bloomberg and TradeBook(R). The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
Commercial Companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.Central Banks
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. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high - that is, to trade for a profit. Nevertheless, central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in South East Asia.
Investment Management Firms
Investment Management firms (who typically manage large accounts on behalf of customers such as pension funds, endowments etc.) use the Foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximisation.Some investment management firms also have more speculative specialist currency overlay units, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. The number of this type of specialist is quite small, their large assets under management (AUM) can lead to large trades.
Hedge Funds
Hedge funds, such as George Soros's Quantum fund have gained a reputation for aggressive currency speculation since 1990. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.Retail Forex Brokers
Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $25-50 billion daily, [2]which is about 2% of the whole market. CNN also quotes an official of the National Futures Association "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically."All firms offering foreign exchange trading online are either market makers or facilitate the placing of trades with market makers.
In the retail forex industry market makers often have two separate trading desks- one that actually trades foreign exchange (which determines the firm's own net position in the market, serving as both a proprietary trading desk and a means of offsetting client trades on the interbank market) and one used for off-exchange trading with retail customers (called the "dealing desk" or "trading desk").
Many retail FX market makers claim to "offset" clients' trades on the interbank market (that is, with other larger market makers), e.g. after buying from the client, they sell to a bank. Nevertheless, the large majority of retail currency speculators are novices and who lose money [3], so that the market makers would be giving up large profits by offsetting. Offsetting does occur, but only when the market maker judges its clients' net position as being very risky.
The dealing desk operates much like the currency exchange counter at a bank. Interbank exchange rates, which are displayed at the dealing desk, are adjusted to incorporate spreads (so that the market maker will make a profit) before they are displayed to retail customers. Prices shown by the market maker do not neccesarily reflect interbank market rates. Arbitrage opportunities may exist, but retail market makers are efficient at removing arbitrageurs from their systems or limiting their trades.
A limited number of retail forex brokers offer consumers direct access to the interbank forex market. But most do not because of the limited number of clearing banks willing to process small orders. More importantly, the dealing desk model can be far more profitable, as a large portion of retail traders' losses are directly turned into market maker profits. While the income of a marketmaker that offsets trades or a broker that facilitates transactions is limited to transaction fees (commissions), dealing desk brokers can generate income in a variety of ways because they not only control the trading process, they also control pricing which they can skew at any time to maximize profits.
The rules of the game in trading FX are highly disadvantageous for retail speculators. Most retail speculators in FX lack trading experience and and capital (account minimums at some firms are as low as 250-500 USD). Large minimum position sizes, which on most retail platforms ranges from $10,000 to $100,000, force small traders to take imprudently large positions using extremely high leverage. Professional forex traders rarely use more than 10:1 leverage, yet many retail Forex firms default client accounts to 100:1 or even 200:1, without disclosing that this is highly unusual for currency traders. This drastically increases the risk of a margin call (which, if the speculator's trade is not offset, is pure profit for the market maker).
According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005) "Even people running the trading shops warn clients against trying to time the market. 'If 15% of day traders are profitable,' says Drew Niv, chief executive of FXCM, 'I'd be surprised.' " [4]
In the US, "it is unlawful to offer foreign currency futures and option contracts to retail customers unless the offeror is a regulated financial entity" according to the Commodity Futures Trading Commission [5]. Legitimate retail brokers serving traders in the U.S. are most often registered with the CFTC as "futures commission merchants" (FCMs) and are members of the National Futures Association (NFA). Potential clients can check the broker's FCM status at the NFA. Retail forex brokers are much less regulated than stock brokers and there is no protection similar to that from the Securities Investor Protection Corporation. The CFTC has noted an increase in forex scams [6].
Speculation
Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, many economists (e.g. Milton Friedman) argue that speculators perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do. Other economists (e.g. Joseph Stiglitz) however, may consider this argument to be based more on politics and a free market philosophy than on economics.Large hedge funds and other well capitalized "position traders" are the main professional speculators.
Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not, according to this view. It is simply gambling, that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 150% per annum, and later to devalue the krona. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view [7]. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.
In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and forex speculators only made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.
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