|
The Foreign Exchange (Forex) Market is the oldest and
the largest financial market in the world. The Forex
market is a cash-bank market established in 1971 when
floating exchange rates began to materialize. Since
then, the expansion in the market has been massive.
Daily turnover has increased from approximately 5 billion
U.S. Dollars in 1977 to an estimated 1.5 trillion U.S.
Dollars nowadays. To put these numbers into perspective,
the estimated annual turnover in the world stock markets
–which is currently 21 trillion U.S. Dollars per
year –is just 16 days
of the volume traded in Foreign Exchange.
The Forex Market is a 24-hour
continuous exchange that never closes. There are dealers
in every major dealing center (London, New York, Tokyo,
Hong Kong and Sydney). The size of the market gives
the participants near perfect liquidity. Due to the
advantages of sheer volume and daily volatility, the
excitement of the Forex Market is unparalleled.
The
Participants
Since 1971 until recent years
the virtual players of this market were the banks, multinational
corporations and large brokerage firms. Today the most
important participants consist of five groups: central
banks, commercial banks, brokerage companies, multinational
corporations, and individual participants. Over the
last 10 years, individuals have been the fastest growing
group of participants. Thanks to the boom in computer
and communication technologies the Forex Market has
become easily accessible to everyone.
Transactions
Unlike traditional trading, which
brings buyers and sellers together in a central location
(trading floors), for Forex transactions there is no
centralized location. Forex is an over-the-counter market
where participants conduct business over the telephone,
computer terminals and via worldwide internet connections.
Transactions in the Forex Market
can be either spot or forward. The difference between
them is that a spot transaction has a settlement (liquidation)
of maximum 2 working days following the opening of the
position, while a forward transaction can have a settlement
of 1 week, 2 weeks, 1, 3, 6 or 12 months or even longer.
The
most effective way to trade Forex for short term trading
is through spot transactions.
Nowadays 65% of Foreign Exchange dealing is for spot
transactions, specially the ones done between the US
Dollar and the 4 major currencies: Euro, Japanese Yen,
British Pound and Swiss Franc.
Spot
Trade
Spot trading offers challenging
opportunities where the rewards would be worth taking
calculated risks. The features of the Forex Market that
make this possible are:
- Liquidity:
the Forex Market can absorb trading volumes that beat
the capacity of any other market.
- Instant
access:
A source of considerable attraction to the Forex Market
is the 24-hour nature of the market.
- Flexible
settlement:
In the Forex Market, a position can be established
for any specific period of time, while closing out
a position can be done swiftly and easily.
- Recognisable
Trends: Each individual currency shows
a substantial and identifiable pattern of trends providing
opportunities for diversification within the Spot
Forex Market.
How
to profit from currency trading
The main factors influencing exchange
rates are the balance of payments of a country, the
state of the economy, implications drawn from chart
analysis as well as political and psychological factors.
In addition, fundamental economic forces such as inflation
and interest rates are constantly influencing currency
prices. Faith in a government’s ability to stand
behind its currency also has an impact on currency price.
Activities by currency managers, generally on behalf
of an investment fund, have also become a factor moving
the market. While they may behave independently and
view the market from a unique perspective, most, if
not all, are aware of important technical chart points
in each major currency. As major support or resistance
levels are approached, the behavior of the market becomes
more technically oriented and the reactions of many
currency managers are often predictable and similar.
These market periods may result in sudden and dramatic
price swings as substantial amounts of capital are invested
in similar positions. Well advised individuals can profit
from these fluctuations by buying a specific currency
when it is weaker and selling it when it is stronger.
The flexibility of the Forex Market also allows for
an individual to “sell short”, or benefit
from a market moving down in value. Spot transactions
may last for only a few minutes, or as long as a maximum
of 2 days.
Leverage
One of the greatest benefits of
the Forex Market is the leverage
effect. Simply said, leverage is a smaller
amount of money controlling a much larger amount of
money. The individual buys or sells one currency against
another currency in multiples of his/her available funds.
For instance, a leverage factor of 100 allows the individual
to hold a 100,000 U.S. Dollar position with a mere 1,000
US Dollar deposit.
The leverage factor allows
individuals to profit from very small market movements
with a relatively modest investment.
|
