WHAT IS FOREX

FOREX = FOReign EXchange
You can trade 24 hours a day
The FOREX is larger than al other financial markets COMBINED
The Foreign Exchange (FOREX) market is a cash (or “spot”) interbank market established in 1971 when floating exchange rates began to materialize. This market is the arena in which the curency of one country is exchanged for those of another and where setlements for international business are made.
The FOREX is a group of approximately 4500 curency trading institutions, including international banks, government central banks and commercial companies. Payments for exports and imports flow through the Foreign Exchange Market, as wel as payments for purchases and sales of assets. This is caled the “consumer” foreign exchange market. There is also a “speculator” segment in the FOREX Companies, which have large financial exposures to overseas economies participate in the FOREX to ofset the risks of international investing.Historicaly, the FOREX interbrain market was not available for smal speculators. With a previous minimum transaction size and often-stringent financial requirements, the smal trader was excluded from participation in this market. But today market maker brokers are alowed to break down the large interbank units and ofer smal traders the opportunity to buy or sel any number of these smaler units (lots).
Commercial banks play two roles in the FOREX market:
They facilitate transactions between two parties, such as companies wishing to exchange curencies (consumers), and
They speculate by buying and seling curencies. The banks take positions in certain curencies because they believe they wil be worth more (if “buyinglong”) or less (if “seling short”) in the future. It has been estimated that international banks generate up to70% of their revenues fromcurency speculation.Other speculators include many of the worlds’ most successful traders, such as George Soros.
The third category of the FOREX includes various countries’ central banks, like the U.S. Federal Reserve. They participate in the FOREX to serve the financial interests of their country. When a central bank buys and sels its or a foreign curency the purpose is to stabilize their own curency’s value.
The FOREX is so large and is composed of so many participants, that no one player, even the government central banks, can control the market. In comparison to the daily trading volume averages of the $300 bilion in the U.S. Treasury Bond market and the approximately $100 bilion exchanged in the U.S. stock markets, the FOREX is huge, and has grown in excess of $1.5 trilion daily.
The word “market” is a slight misnomer in describing FOREX trading. There is no centralized locationfor tradingactivity (“pit”) as there is in thecurency futures(andmany other) markets. Trading occurs over the phone and through the computer terminals at hundreds of locations worldwide. The bulk of the trading is between approximately 300 large international banks, which process transactions for large companies, governments and for their own accounts. These banks are continualy providing prices (“bid” to buy and “ask” to sel) for each other and the broader market. The most recent quotation from one of these banks is considered the market’s curent price for that curency. Various private data reporting services provide this “live” price information via the Internet.
There are numerous advantages for parties wishing to trade in the FOREX. They include:Liquidity: In the FOREX market there is always a buyer and a seler! The FOREX absorbs trading volumes and per trade sizes which dwarfs the capacity of any other market. On the simplest level, liquidity is a powerful atraction to any investor as it suggests the freedom to open or close a position at wil 24 hours a day.
Once purchased, many other high-return investments are dificult to sel at wil. FOREX traders never have to wory about being “stuck” in a position due to lack of market interest. In the 1.5 trilion U.S. dolar per day market, major international banks a “bid” (buying) and “ask” (seling) price
Access: The FOREX is open 24 hours daily from about 6:00 P.M. Sunday to about 4:00 P.M. Friday. An individual trader can react to news when it breaks, rather than waiting for the opening bel of other markets when everyone else-has the same information. This alows traders to take positions before the news details are fuly factored into the exchange rates. High liquidity and 24 hour trading permit market participants to take positions or exit regardless of the hour. There are FOREX dealers in every time zone, in every majormarket center (Tokyo, Hong Kong, Sydney, Paris,London, United States, etc.) wiling to continualy quote buy and sel prices.
Since no money is left on the market “table,” this is what is refered to as a “Zero Sum Game” or “Zero-Sum Gain.” Providing the trader picks the right side, money can always be made.
Two-Way Market: Curenciesaretraded in pairs, for example dolar/yen, or dolar/Swiss franc. Every position involves the seling of one curency and the buying of another. If a trader believes the Swiss franc wil appreciate against thedolar, the tradercan seldolarsand buyfrancs (“seling short!’).
If one holds the opposite belief, that trader can buy dolars and sel Swiss francs (“buying long”). Thepotentialfor profit exists because thereis always movement in the exchange rates (prices).
FOREX trading permits profit taking from both rising and faling currency values in relation to the dolar. In every curency trading transaction, one of the sides of the pair is always gaining and the other side is losing.
Leverage: Trading on the FOREX is done in curency “lots.” Each lot is approximately 100,000 U.S. dolars worth of a foreign curency. To trade on the FOREX market, a “margin account” mustbeestablished with a curency broker. This is, in efect, a bank account into whichprofits maybe depositedand losses may be deducted. These deposits and deductions are made instantly upon exiting a position.
Brokers have difering margin account regulations, with many requiring a $1,000 deposit to “day-trade” a currency lot. Day-trading is entering and exiting positions during the same trading day. For longer-term positions, many require a $2,000 per lot deposit. In comparison to trading in stocks and other markets, which may require a 50% margin account, FOREX speculators excelent leverage of 1% to 2% of the $100,000 lot value. The trader can control each lot for I to 2 cents on the dolar!
Execution Quality: Because the FOREX is so liquid, most trades can be executed at the curent market price. In al fast moving markets, slippage is inevitable in al trading (stocks, commodities, etc.), but can be avoided with some curency broker’s software, which informs you of your exact entering price just prior to execution. You are given the option of avoiding or accepting the slippage. The huge FOREX market liquidity ofers the ability for high quality execution.
Confirmations of trades are immediate and the Internet trader has only to print a copy of the computer screen for a writen record of al trading activities. Many individuals feel these features of Internet trading make it safer that using the telephone to trade. Respected firms such as Charles Schwab, Quick & Reily and T.D. Waterhouse ofer Internet trading. They would not risk their reputations by ofering Internet service if it were not reliable and safe. In the event of a temporary technical computer problem with the broker’s ordering system, the trader can telephone the broker 24 hours a day to immediately get in or out of a trade.
Internet brokers’ computer systems are protected by “firewals” to keep accountinformationfrom prying eyes. Account securityis abroker’s highest concern. They have taken multiple steps to eliminate any risk associated with transacting on the Internet.
AFOREXInternet trader does nothave to speak with a brokerby telephone. The elimination of the middleman (broker salesman) lowers expenses and makes the process of entering an order faster and has eliminated the possibility for misunderstanding.
Execution Costs: Unlike other markets, the FOREX does not charge commissions. The cost of a trade is represented in a Bid/Ask spread established by the broker. (Approximately 4 pips)
Trendiness: Over long and short historical periods, curencieshavedemonstrated substantial and identifiable trends. Each individual curency has its own “personality,” and each ofers a unique historical patern of trends, providing diversified trading opportunities within the spot FOREX market.
Focus: Instead of atempting to choose a stock, bond, mutual fund or commodity from the tens of thousands available in those markets, FOREX traders generaly focus on I to 4 curencies. The most common and mostliquid are theJapanese Yen,BritishPound, Swiss Franc and the new EURO. Highly successful traders have always focused on a limited number of investment options. Beginning FOREX traders usualy wil focus on one curency and later incorporate one to three more into their trading activities.
Margin Accounts: Trading on the FOREX requires a margin account. You are commiting to trade and take positions today. As a speculator trader you wil not be taking delivery on your product that you are trading. As a Stock Day Trader, you wil only hold a trading position for a few minutes to afew hours, and then you needto close out your position by the end of the trading session.
All orders must be placed through a broker. To trade stocks you wil need a stockbroker and to trade curencies you wil need a Forex curency broker. Most brokerage firms have diferent margin requirements. You need to ask them their margin requirements to trade stocks and curencies.
A margin account is nothing more than a performance bond. Al traders need a margin account to trade. When you gain profits, they place your profits into your margin account the same day you profited. When you lose profits, they need an account to take out the losses you incured that day. Al accounts are setled daily.A very important part of trading is, taking out some of your winnings or profits. When the time comes to take out your personal gains from your margin account, al you need to do is contact your broker and ask them to send you your requested dolar amount, and they wil send you a check. They can also wire transfer your money.