Thursday, March 5, 2009
Friday, February 13, 2009
Methods for Analyzing the Foreign Currency Market
The foreign currency market is fascinating and complicated in a way which is unparalleled. The potential for profit is colossal. However, trading requires considerable caution and discipline, and above all:
in order to succeed it requires experience and know-how.
In order to become a successful trader one has first to familiarize oneself with analysis techniques, the data that affects the market and financial management and risk management methods. There are two main methods for analyzing future market behavior:
fundamental analysis and technical analysis. Fundamental Analysis emphasizes collecting massive amounts of data and examining all the data that affects the market. The most important pieces of information include various economic data concerning markets across the globe. However, one should also consider political, religious, geographical and even climatic events. The method assumes that the more market-related data we have, the better can we forecast its results.
Technical analysis states that all the information required to identify future behavior of a certain currency, including the external factors which the previous method takes into account, are represented on a graph at any given point in time. Thus, one can forecast the behavior of the graph in the future, based on the currency’s fluctuation on the graph up to a particular point.
in order to succeed it requires experience and know-how.
In order to become a successful trader one has first to familiarize oneself with analysis techniques, the data that affects the market and financial management and risk management methods. There are two main methods for analyzing future market behavior:
fundamental analysis and technical analysis. Fundamental Analysis emphasizes collecting massive amounts of data and examining all the data that affects the market. The most important pieces of information include various economic data concerning markets across the globe. However, one should also consider political, religious, geographical and even climatic events. The method assumes that the more market-related data we have, the better can we forecast its results.
Technical analysis states that all the information required to identify future behavior of a certain currency, including the external factors which the previous method takes into account, are represented on a graph at any given point in time. Thus, one can forecast the behavior of the graph in the future, based on the currency’s fluctuation on the graph up to a particular point.
Characteristics of the Foreign Currency Market
A Decentralized, Advanced and Electronic Market
The foreign currency trading market has a unique character since there is no one central market (such as a specific stock exchange, like The New York Stock Exchange) in which trade is carried out. The trade is carried out "over the counter", 24 hours a day, 5 days a week and across the globe. The term "over the counter" (OTC) means that the currencies can be transferred between any two entities. For example: between a private client and a market-maker, and between a large company and a bank. Modern foreign currency trade is carried out electronically via the international banks’ networks and through news agencies, such as Reuters. Nowadays, market traders are gradually shifting from telephone-based to internet-based systems.
The Largest and Most Dominant Market in the World
The trade volume of the international currency market is estimated at three trillion dollars a day. When one compares this volume with the volume of trade on Wall Street (20-30 billion dollars a day), one can get a sense of the tremendous size differences between the foreign currency market and the other markets.
The foreign currency market is a dynamic one and it is constantly changing. Since the value of a currency is the basis of all economies, foreign currency trade affects international firms, importers, exporters and all the other international markets.
How Trade is Carried Out
A foreign currency transaction is the purchase of one currency in exchange for the sale of another currency. Each transaction applies to currency pair. The first currency in a transaction is called the base currency, and the second currency is called the secondary currency.A rate is a figure which represents the quantity of units in the secondary currency (x), which is equal to one unit of the base currency. Suppose that the USD/CHF rate is 1.2414. The base currency in this rate is the dollar (USD) and therefore it appears first. The secondary currency is the Swiss franc (CHF) and accordingly it is written second. The meaning of the rate "USD/CHF 1.2414" is that one dollar is worth 1.214 Swiss francs.All currencies are traded against the dollar and there are currencies that are traded against additional currencies. The main currencies that are traded against the dollar are:
Risks in the Foreign Currency Market
The combination of money and the virtual trade era has created an endless continuum of buying and selling. As in any other market, profits are attained by buying at low prices and selling at higher ones. As opposed to other markets, there is an additional risk in the market (which constitutes an advantage as well) – the foreign currency market never stops!Private and corporate investors enjoy free access to the market, which operates day and night. Trade volume is enormous and enables infinite liquidity in foreign currency trade. This means that profits are not limited. However, one may also lose large amounts of money. Therefore, before investing a lot of money in this market, it is important to study the rules of the market well and to understand the nature of its forces.
The foreign currency trading market has a unique character since there is no one central market (such as a specific stock exchange, like The New York Stock Exchange) in which trade is carried out. The trade is carried out "over the counter", 24 hours a day, 5 days a week and across the globe. The term "over the counter" (OTC) means that the currencies can be transferred between any two entities. For example: between a private client and a market-maker, and between a large company and a bank. Modern foreign currency trade is carried out electronically via the international banks’ networks and through news agencies, such as Reuters. Nowadays, market traders are gradually shifting from telephone-based to internet-based systems.
The Largest and Most Dominant Market in the World
The trade volume of the international currency market is estimated at three trillion dollars a day. When one compares this volume with the volume of trade on Wall Street (20-30 billion dollars a day), one can get a sense of the tremendous size differences between the foreign currency market and the other markets.
The foreign currency market is a dynamic one and it is constantly changing. Since the value of a currency is the basis of all economies, foreign currency trade affects international firms, importers, exporters and all the other international markets.
How Trade is Carried Out
A foreign currency transaction is the purchase of one currency in exchange for the sale of another currency. Each transaction applies to currency pair. The first currency in a transaction is called the base currency, and the second currency is called the secondary currency.A rate is a figure which represents the quantity of units in the secondary currency (x), which is equal to one unit of the base currency. Suppose that the USD/CHF rate is 1.2414. The base currency in this rate is the dollar (USD) and therefore it appears first. The secondary currency is the Swiss franc (CHF) and accordingly it is written second. The meaning of the rate "USD/CHF 1.2414" is that one dollar is worth 1.214 Swiss francs.All currencies are traded against the dollar and there are currencies that are traded against additional currencies. The main currencies that are traded against the dollar are:
Risks in the Foreign Currency Market
The combination of money and the virtual trade era has created an endless continuum of buying and selling. As in any other market, profits are attained by buying at low prices and selling at higher ones. As opposed to other markets, there is an additional risk in the market (which constitutes an advantage as well) – the foreign currency market never stops!Private and corporate investors enjoy free access to the market, which operates day and night. Trade volume is enormous and enables infinite liquidity in foreign currency trade. This means that profits are not limited. However, one may also lose large amounts of money. Therefore, before investing a lot of money in this market, it is important to study the rules of the market well and to understand the nature of its forces.
Modes of Trade
Trading in the foreign currency market requires considerable skill and knowledge. Those trading for the first time must learn the basic rules carefully. People who wish to experience market forces more strongly and to enjoy the colossal profit-making possibilities, should restrict the risk level in all transactions. Xforex™ offers the best tools for restricting risks, such as an advanced system for carrying out Stop-Losses, and a unique application for giving Take Profit instructions.Market Location The foreign currency markets are located across the globe and are not concentrated in specific locations, as opposed to certain exchanges.Transactions are carried out via internet and by telephone using an "over the counter" method, and without actual handling of money. Rather, transactions are carried out exclusively by means of calculating the differences between the transactions and their realization.Maximum Flexibility – 3 Forms of TradeThree forms of trade are customarily used in the market:
Day Trading Spot Transactions Forward Transactions Day TradingDaily trading is a transaction which is opened and closed on the same trading day. Currency exchange rates vary over the course of a trading day.Spot TransactionAn immediate transaction between a pair of currencies at an agreed rate. The rate according to which the currencies will be exchanged is the rate at the time the transaction was announced. The monies are actually only transferred two trading days after the declaration.Forward Transaction A contract for the execution of a purchase transaction or a sale transaction at an agreed future date and at an agreed rate. The rate agreed upon generally includes interest differences for both currencies.
Day Trading Spot Transactions Forward Transactions Day TradingDaily trading is a transaction which is opened and closed on the same trading day. Currency exchange rates vary over the course of a trading day.Spot TransactionAn immediate transaction between a pair of currencies at an agreed rate. The rate according to which the currencies will be exchanged is the rate at the time the transaction was announced. The monies are actually only transferred two trading days after the declaration.Forward Transaction A contract for the execution of a purchase transaction or a sale transaction at an agreed future date and at an agreed rate. The rate agreed upon generally includes interest differences for both currencies.
The History of Forigen Currency
It was at the time of the Pharaohs that money began to be used. In effect, the Babylonians were the first people who used notes and receipts. Foreign currency trade in the Middle East began when various peoples, each of whom had their own currency, began to trade with each other.In the middle ages, traders felt the need for a more convenient method of making payments – a fact which led to the adoption of notes for money. This development made the economies of peoples who chose to use notes flourish.The foreign currency market assumed its present form in the mid 1930's. London became the center of world trade and the British Pound Sterling became the basic currency. World War II turned the world economic balance on its head. The British economy collapsed, and at the same time, the USA, which emerged relatively unscathed from the war, became the leading player in the foreign currency market.
The Bretton Woods Agreement
As World War II drew to an end (1944), 730 representatives from 45 nations attended a conference in the town of Bretton, whose intention was to set a new world economic order. The overarching aim was to create a stable basis for the economic markets that had been damaged. At the time, an agreement was signed which officially made the dollar the global base currency. It was defined as linked to gold at a fixed rate of $35 per ounce of gold. In addition, the other currencies in the world were largely linked relative to the dollar.For the dollar, this was an important achievement since only 15 years earlier, in 1929, the United States had suffered an unprecedented economic collapse. And then at the end of the war – the dollar took center-stage.
International Monetary Fund (IMF)
Another important part of the Bretton Woods Agreement was the establishment of the International Monetary Fund, which was to provide economic support for developing nations that affect the balance of world trade. The fund supports weak economies by stabilizing them and by encouraging economic growth in the world.
The Smithsonian Agreement
The Bretton Wood Agreement ultimately failed to achieve its objective of rehabilitating and stabilizing the economy in Europe and in Japan. Following a decision made by US President Nixon in August 1971, representatives of the International Monetary Fund’s 10 senior countries met and signed the Smithsonian Agreement in December of that year. The agreement put an end to the policy of linking global currencies to the dollar and linking the dollar to gold. In effect, the agreement paved the way to a floating currencies policy, which is the dominant policy in the world until this very day. The Smithsonian agreement forms the basis for foreign currency trading as we know it, and it enables a high level of fluctuation in currency exchange rates, taking place in a completely free market.
The European Joint Float
In 1972, a decision was made to jointly float the European currencies (up to a fluctuation level of 2.25%) in order to avoid being dependent on the dollar. The countries which decided to float their currencies jointly were: Germany, France, Italy, Holland, Belgium and Luxemburg.
The Era of Free-Floating
The era of the free floating foreign currencies trade began in 1971 and currency exchange rates turned into floating ones, rates which vary in the wake of currency trading. The main effect of the market in the free-floating era is supply and demand. Other factors that determine exchange rates include: Gross National Product, unemployment levels, political events and interest rates.
The Foreign Currency Market
TodayNowadays the free floating policy, which is based upon supply and demand, is the dominant policy in global markets.All of the main currencies are traded freely opposite other currencies in accordance with relative changes in their values.Only very infrequently do the central banks try to influence trade levels. The free-floating method is ideal for trading in a virtual marketplace.
The Bretton Woods Agreement
As World War II drew to an end (1944), 730 representatives from 45 nations attended a conference in the town of Bretton, whose intention was to set a new world economic order. The overarching aim was to create a stable basis for the economic markets that had been damaged. At the time, an agreement was signed which officially made the dollar the global base currency. It was defined as linked to gold at a fixed rate of $35 per ounce of gold. In addition, the other currencies in the world were largely linked relative to the dollar.For the dollar, this was an important achievement since only 15 years earlier, in 1929, the United States had suffered an unprecedented economic collapse. And then at the end of the war – the dollar took center-stage.
International Monetary Fund (IMF)
Another important part of the Bretton Woods Agreement was the establishment of the International Monetary Fund, which was to provide economic support for developing nations that affect the balance of world trade. The fund supports weak economies by stabilizing them and by encouraging economic growth in the world.
The Smithsonian Agreement
The Bretton Wood Agreement ultimately failed to achieve its objective of rehabilitating and stabilizing the economy in Europe and in Japan. Following a decision made by US President Nixon in August 1971, representatives of the International Monetary Fund’s 10 senior countries met and signed the Smithsonian Agreement in December of that year. The agreement put an end to the policy of linking global currencies to the dollar and linking the dollar to gold. In effect, the agreement paved the way to a floating currencies policy, which is the dominant policy in the world until this very day. The Smithsonian agreement forms the basis for foreign currency trading as we know it, and it enables a high level of fluctuation in currency exchange rates, taking place in a completely free market.
The European Joint Float
In 1972, a decision was made to jointly float the European currencies (up to a fluctuation level of 2.25%) in order to avoid being dependent on the dollar. The countries which decided to float their currencies jointly were: Germany, France, Italy, Holland, Belgium and Luxemburg.
The Era of Free-Floating
The era of the free floating foreign currencies trade began in 1971 and currency exchange rates turned into floating ones, rates which vary in the wake of currency trading. The main effect of the market in the free-floating era is supply and demand. Other factors that determine exchange rates include: Gross National Product, unemployment levels, political events and interest rates.
The Foreign Currency Market
TodayNowadays the free floating policy, which is based upon supply and demand, is the dominant policy in global markets.All of the main currencies are traded freely opposite other currencies in accordance with relative changes in their values.Only very infrequently do the central banks try to influence trade levels. The free-floating method is ideal for trading in a virtual marketplace.
What is Forex
In the international currency exchange market, the currency trader's goal is to earn as much profit as possible as a result of purchasing and selling foreign currencies. Currency exchange rates fluctuate perpetually based on continuous supply and demand by traders in addition to other more significant factors discussed below. Currency traders derive substantial gains by taking advantage of considerable fluctuations in currency price while using the well-known "buy low - sell high" principle. In comparison to all other sectors of the financial world, foreign currency exchange is quite unique in that it is highly sensitive to myriad factors, open access to many classes of investors, high liquidity, and 24 hour access. Such day-long access to foreign exchange allows traders the luxury of dealing after normal hours or even during national holidays in their country of residence. Much as is the case in equity markets, trading currency comes with potential risk and considerably higher potential for ROI. However, in currency trading, as a consequence of the drastic and fluid fluctuations in currency valuation, the potential for risk, as well as return, is exceedingly high. It is essential to become familiar with the factors that affect prices and the levels of risk involved. When beginning to enter the foreign currency exchange arena, it is crucial to prepare, much like a saavy investor spends hours analyzing a stock's fundamentals or technical data before investing in equity. One way to achieve such preparation is to first look at some key factors and recent newsworthy events related to the currencies that one wishes to deal with. In addition, it is also important to use a demo account with "virtual" money in order to get one's feet wet and get a sense for how FOREX really works. Why would you want to learn and experiment with your own capital when you can make mistakes and get some experience by using imaginary capital. You'll minimize your material damage considerably by getting some practical experience in this fashion. If you do your homework, you'll notice that there are many firms out there offering demo accounts on a trial basis to help you get a taste for what it is like to trade foreign currency. Such demo accounts and proprietary software are usually available for free. We wish you the best of luck in your trading endeavors.
Forex?
What is it, anyway?The marketThe currency trading (FOREX) market is the biggest and fastest growing market on earth. Its daily turnover is more than 2.5 trillion dollars. The participants in this market are banks, organizations, investors and private individuals, just like you.The goods (merchandise)Markets are places to trade goods, and the same goes with FOREX. The Forex goods are the currencies of various countries. You buy Euro, paying with US dollars, or you sell Japanese Yens for Canadian dollars. That's all.How does one profit in Forex?Obviously, buy cheap and sell for more! The profit potential comes from the fluctuations (changes) in the currency exchange market.The nice thing about the FOREX market, is that regular daily fluctuations, say - around 1%, are multiplied by 100! .How risky is Forex trading?You cannot lose more than your "margin" (your initial investment)! You may profit unlimited amounts, but you never lose more than what you initially risked. However, risk only what you can afford and is not vital for your well-being.How do I monitor my Forex trading?Online, from anywhere, anytime. You have full control to monitor status, check scenarios, change some terms in the deal, or close it.Foreign Exchange MarketAn informal network of trading relationships between the world's major banks and other market participants, sometimes referred to as the 'interbank' market. The foreign exchange market has no central clearinghouse or exchange, and is considered an over-the-counter (OTC) market.Spot MarketMarket for buying and selling currencies usually for settlement within two business days (the value date). USD/CAD = 1 day.RolloverThe process whereby the settlement of a transaction is rolled forward to the next value date with the cost of this process being based on the interest rate differential between two currencies. Rollover typically occurs at 5PM EST/10PM GMT. For example, if you open a position on Monday, the settlement date will be Wednesday, however, if you hold this position past rollover cutoff on Monday, the new value date will be Thursday. Most brokers will automatically roll over your open positions, allowing you to hold a position for an indefinite period of time. Depending on your broker's rollover policy, if you are holding a currency with a higher rate of interest in the pair, you will earn credits, however if you are holding a currency with a lower rate of interest in the pair, you will pay it. Current central bank interest rates.Exchange RateThe value of one currency expressed in terms of another. For example, if the EUR/USD exchange rate is 1.3200, 1 Euro is worth US$1.3200.
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