Online Foreign Exchange Discussed
When you think about forex currency, what do you think of first? Which aspects of forex currency are important, which are essential, and which ones can you take or leave? You be the judge.
People used to worry about exchange rates only when they were about to travel overseas. Today with internet thousands of ordinary people in the world are trading currencies. With no commissions, cash down payments as low as 1 percent and 24-hour action, the direct foreign exchange market (FOREX) has captivated many Nasdaq day traders of the late 1990s. It's like dot-com craze, but it's currencies.
FOREX is notoriously the domain of government central banks and other heavyweight entities like commercial and investment banks, not to mention hedge funds and massive international corporations. It offers trading 24-hours a day, five days a week, and the daily dollar volume of currencies traded in the currency market exceeds $1.5 trillion, making it the largest and most liquid market in the world. FOREX does offer huge potential profit for investors big and small.
Trading Opportunities :
The sheer number of currencies traded ensures a rather extreme level of volatility on a day-to-day basis. There will always be currencies that are moving rapidly up or down, offering opportunities for profit (and commensurate risk) to astute traders. Yet, like the equity markets, FOREX offers plenty of instruments to mitigate risk and allows the individual to profit in both rising and falling markets. FOREX also allows highly-leveraged trading with low margin requirements relative to its equity counterparts. Perhaps best of all, FOREX charges zero dealing commissions!
Many FOREX instruments -- such as forwards and futures, options, spread betting, contracts for difference, and the spot market--will appear similar to those used in the equity markets. Since the instruments on the FOREX often maintain minimum trade sizes in terms of the base currencies (the spot market, for example, requires a minimum trade size of 10,000 units of the base currency), the use of margin is absolutely essential for the person trading these instruments.
Buying and Selling Currencies :
Regarding the specifics of buying and selling on FOREX, currencies are always priced in pairs. All trades result in the simultaneous purchase of one currency and the sale of another. While trading on the FOREX, you would thus execute a trade only at a time when you expect the currency you are buying to increase in value relative to the one you are selling. If the currency you are buying does increase in value, you must sell the other currency back in order to lock in a profit. An open trade (or open position), therefore, is a trade in which a trader has bought or sold a particular currency pair and has not yet sold or bought back the equivalent amount to close the position.
Base and Counter Currencies and Quotes :
Currency traders must become familiar also with the means by which currencies are quoted. The first currency in the pair is considered the base currency; and the second is the counter or quote currency. Most of the time, the US currency is considered the base currency, and quotes are expressed in units of $1 USD per counter currency (for example, USD/JPY or USD/CAD). The only exceptions to this convention are in relation to the Euro, the Pound Sterling, and the Australian dollar--these three are quoted as dollars per foreign currency.
Those of you not familiar with the latest on forex currency now have at least a basic understanding. But there's more to come.
FOREX quotes always include a bid and an ask price. The bid is the price at which the market maker is willing to buy the base currency in exchange for the counter currency. The ask price is the price at which the market maker is willing to sell the base currency in exchange for the counter currency. The difference between the bid and the ask prices is referred to as the spread.
The cost of establishing a position is determined by the spread, and prices are always quoted using five numbers (for example, 1.3485), the final digit of which is referred to as a point or a pip. For example, if USD/CAD was quoted with a bid of 1.3485 and an ask of 1.3490, the five-pip spread is the cost of trading this position. From the very start, therefore, the trader must recover the five-pip cost from his profits, necessitating a favorable move in his position in order simply to break even.
More about Margin :
Trading in the currency markets requires a trader to think in a slightly different way also about margin. Margin on the FOREX is not a down payment on a future purchase of equity but a deposit to the trader’s account that will cover against any currency-trading losses in the future. A typical currency trading system will allow for a very high degree of leverage in its margin requirements, up to 100:1. The system will automatically calculate the funds necessary for current positions and will check for margin availability before executing any trade.
Rollover :
In the spot FOREX market, trades must be settled within two business days. For example, if a trader sells a certain number of currency units on Wednesday, he or she must deliver an equivalent number of units on Friday. Yet currency trading systems may allow for a "rollover," with which open positions can be swapped forward to the next settlement date (giving an extension of two additional business day). The interest rate for such a swap is predetermined, and, in fact, these swaps are actually financial instruments that can also be traded on the currency market.
In any spot rollover transaction the difference between the interest rates of the base and counter currencies is reflected as an overnight loan. If the trader holds a long position in the currency with the higher interest rate, he or she would gain on the spot rollover. The amount of such a gain would fluctuate day-to-day according to the precise interest-rate differential between the base and the counter currency. Such rollover rates are quoted in dollars and are shown in the interest column of the FOREX trading system. Rollovers, however, will not affect traders who never hold a position overnight, since the rollover is exclusively a day-to-day phenomenon.
Conclusion :
As one can immediately see, trading in FOREX requires a slightly different way of thinking than the equity markets. Yet, for its extreme liquidity, its multitude of opportunities for large profits due to strong trends, and its high levels of available leverage, the currency markets are hard to resist for the advanced trader. With such potential, however, comes significant risk, and traders should quickly establish an intimate familiarity with methods of risk management.
That's the latest from the forex currency authorities. Once you're familiar with these ideas, you'll be ready to move to the next level.
Check out this link :
Forex Robot
People used to worry about exchange rates only when they were about to travel overseas. Today with internet thousands of ordinary people in the world are trading currencies. With no commissions, cash down payments as low as 1 percent and 24-hour action, the direct foreign exchange market (FOREX) has captivated many Nasdaq day traders of the late 1990s. It's like dot-com craze, but it's currencies.
FOREX is notoriously the domain of government central banks and other heavyweight entities like commercial and investment banks, not to mention hedge funds and massive international corporations. It offers trading 24-hours a day, five days a week, and the daily dollar volume of currencies traded in the currency market exceeds $1.5 trillion, making it the largest and most liquid market in the world. FOREX does offer huge potential profit for investors big and small.
Trading Opportunities :
The sheer number of currencies traded ensures a rather extreme level of volatility on a day-to-day basis. There will always be currencies that are moving rapidly up or down, offering opportunities for profit (and commensurate risk) to astute traders. Yet, like the equity markets, FOREX offers plenty of instruments to mitigate risk and allows the individual to profit in both rising and falling markets. FOREX also allows highly-leveraged trading with low margin requirements relative to its equity counterparts. Perhaps best of all, FOREX charges zero dealing commissions!
Many FOREX instruments -- such as forwards and futures, options, spread betting, contracts for difference, and the spot market--will appear similar to those used in the equity markets. Since the instruments on the FOREX often maintain minimum trade sizes in terms of the base currencies (the spot market, for example, requires a minimum trade size of 10,000 units of the base currency), the use of margin is absolutely essential for the person trading these instruments.
Buying and Selling Currencies :
Regarding the specifics of buying and selling on FOREX, currencies are always priced in pairs. All trades result in the simultaneous purchase of one currency and the sale of another. While trading on the FOREX, you would thus execute a trade only at a time when you expect the currency you are buying to increase in value relative to the one you are selling. If the currency you are buying does increase in value, you must sell the other currency back in order to lock in a profit. An open trade (or open position), therefore, is a trade in which a trader has bought or sold a particular currency pair and has not yet sold or bought back the equivalent amount to close the position.
Base and Counter Currencies and Quotes :
Currency traders must become familiar also with the means by which currencies are quoted. The first currency in the pair is considered the base currency; and the second is the counter or quote currency. Most of the time, the US currency is considered the base currency, and quotes are expressed in units of $1 USD per counter currency (for example, USD/JPY or USD/CAD). The only exceptions to this convention are in relation to the Euro, the Pound Sterling, and the Australian dollar--these three are quoted as dollars per foreign currency.
Those of you not familiar with the latest on forex currency now have at least a basic understanding. But there's more to come.
FOREX quotes always include a bid and an ask price. The bid is the price at which the market maker is willing to buy the base currency in exchange for the counter currency. The ask price is the price at which the market maker is willing to sell the base currency in exchange for the counter currency. The difference between the bid and the ask prices is referred to as the spread.
The cost of establishing a position is determined by the spread, and prices are always quoted using five numbers (for example, 1.3485), the final digit of which is referred to as a point or a pip. For example, if USD/CAD was quoted with a bid of 1.3485 and an ask of 1.3490, the five-pip spread is the cost of trading this position. From the very start, therefore, the trader must recover the five-pip cost from his profits, necessitating a favorable move in his position in order simply to break even.
More about Margin :
Trading in the currency markets requires a trader to think in a slightly different way also about margin. Margin on the FOREX is not a down payment on a future purchase of equity but a deposit to the trader’s account that will cover against any currency-trading losses in the future. A typical currency trading system will allow for a very high degree of leverage in its margin requirements, up to 100:1. The system will automatically calculate the funds necessary for current positions and will check for margin availability before executing any trade.
Rollover :
In the spot FOREX market, trades must be settled within two business days. For example, if a trader sells a certain number of currency units on Wednesday, he or she must deliver an equivalent number of units on Friday. Yet currency trading systems may allow for a "rollover," with which open positions can be swapped forward to the next settlement date (giving an extension of two additional business day). The interest rate for such a swap is predetermined, and, in fact, these swaps are actually financial instruments that can also be traded on the currency market.
In any spot rollover transaction the difference between the interest rates of the base and counter currencies is reflected as an overnight loan. If the trader holds a long position in the currency with the higher interest rate, he or she would gain on the spot rollover. The amount of such a gain would fluctuate day-to-day according to the precise interest-rate differential between the base and the counter currency. Such rollover rates are quoted in dollars and are shown in the interest column of the FOREX trading system. Rollovers, however, will not affect traders who never hold a position overnight, since the rollover is exclusively a day-to-day phenomenon.
Conclusion :
As one can immediately see, trading in FOREX requires a slightly different way of thinking than the equity markets. Yet, for its extreme liquidity, its multitude of opportunities for large profits due to strong trends, and its high levels of available leverage, the currency markets are hard to resist for the advanced trader. With such potential, however, comes significant risk, and traders should quickly establish an intimate familiarity with methods of risk management.
That's the latest from the forex currency authorities. Once you're familiar with these ideas, you'll be ready to move to the next level.
Check out this link :
Forex Robot
posted by Robin at
12:28 AM
2 Comments:
It doesn't matter how you approach it, forex platform is complex and requires a lot of study and numbers crunching.
By
Anonymous, at 12:23 PM
omg i have been looking for this info for the longest time... nice post here, it just made my day, will check back more often.. thanks!
forex investment
By
Anonymous, at 2:03 PM
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