Foreign
exchange dates back to ancient times, when traders
first began exchanging coins from different
countries. However, the foreign exchange itself
is the newest of the financial markets. In the
last hundred years, the foreign exchange has
undergone some dramatic transformations.
The Bretton Woods Agreement, set
up in 1944, remained intact until the early
1970s. At this conference, representatives from
45 nations came together to discuss the future
exchange system.The conference result in the
formation of the International Monetary Fund.
It produced an agreement that
fixed currencies in an exchange rate system
that tolerated 10% currency fluctuations to
gold values, or to the dollar that was established
as the Gold Standard.
In 1971, the Bretton Woods Agreement
was first tested because of uncontrollable currency
rate fluctuations, by 1973 the gold standard
was abandoned by president Richard Nixon, currencies
where finally allowed to float freely. Thereafter,
the foreign exchange quickly established itself
as the financial market.
Open 24 hours a day, 6 days
a week, transactions in foreign exchange gained
from about $70 billion a day in the 1980s, to
more than $1.5 trillion a day in the year 2000.
Forex
Market Participants
The FOREX refers to the
Foreign Currency Exchange Market in which over
4,600 International Banks and millions of small
and large speculators participate worldwide.
Every day this worldwide market exchanges more
than $1.5 trillion in dozens of different currencies.
With the current growth rate the market is projected
to grow to more than $2.0 trillion per day by
the year 2005.
Forex
Compared to other Markets (Daily turnover)
Currency
Pairs Desciptions
In the forex market, currency
trading is always done in currency pairs, such
as EUR/USD or USD/JPY. Accordingly, all trades
result in the simultaneous buying of one currency
and the selling of another. The base currency
is the "basis" for the buy or the
sell. It is useful to consider the currency
pair as an instrument, which can be bought or
sold. The following are examples of situations
that might lead you to choose a particular currency
pair to trade:
EUR/USD
• Dollar weakness drives
EUR/USD higher
• US recovery and strong influx of foreign
demand will send EUR/USD lower
If, for example, you think the
US economy will continue to worsen and that
will hurt the USD, you click on BUY, which means
that you are buying euros and expecting them
to go up against the USD. If, for example, you
think that there will be increased foreign demand
for US assets such as equities and treasuries
and that will benefit the USD, you click on
SELL, which means that you are buying US dollars
and expecting them to climb in value against
the euro.
USD/JPY
• Japanese government intervention
to weaken their currency sends USD/JPY higher
• Gains in Nikkei and demand for Japanese
assets drive USD/JPY down
If, for example, you think that
the Japanese government will continue to weaken
the yen in order to help its export industry,
you would click on BUY, expecting the US dollar
to increase in value against the yen. If you
think that Japanese investors are pulling money
out of US financial markets and repatriating
funds back into the Japanese asset markets,
such as the Nikkei, you would click on SELL.
This means that you expect the yen to strengthen
against the US dollar as Japanese investors
sell their assets and convert their dollars
back into yen.
GBP/USD
• High yield and attractive
growth in the UK drives GBP/USD higher
• Speculation about UK adopting the euro
will send the GBP/USD lower
If, for example, you think the
British economy will continue to benefit from
its high yield and attractive growth, thus buoying
the pound, you would click BUY, which means
that you expect the British pound to strengthen
against the US dollar. If you believe the British
are about to commit themselves to adopting the
euro, you would click SELL, expecting the pound
to weaken against the dollar as the British
devalue their currency in anticipation of merging
with the euro.
USD/CHF
• Global stability and global
recovery will send USD/CHF higher
• USD/CHF rallies on geopolitical instability
If, for example, you think
that the market is headed towards a period of
global stability and economic recovery, meaning
that investors no longer need to park their
money in the safe haven currency, or Swiss franc,
you would click BUY, expecting the US dollar
to strengthen against the Swiss franc. If you
believe that due to instability in the Middle
East and in US financial markets, the dollar
will continue to weaken, you would click SELL,
expecting the Swiss franc to strengthen against
the dollar.
Currency
Pairs - Which ones are best to trade?
The most actively traded currency
pairs are the EUR/USD, USD/JPY, GBP/USD and
USD/CHF.
These four currency pairs are considered the
“major currency
pairs ” and thus enjoy the greatest
liquidity and tightest spreads.
British
Pound (GBP/USD)
Swiss Franc
(USD/CHF)
Euro Dollar (EUR/USD)
Japanese Yen (USD/JPY)
How
profits are being made at the Forex Market?
Profits are made by utilizing margin trading, where a relatively small amount of money is required in order to control much larger positions in the market. Please remember that trading currencies is risk and you may lose all or some of your investment. Also, this high degree of leverage without proper risk management can lead to large losses as well as gains.
Brokers normally requires a 1% margin deposit. Hereby $1000 controls $100,000
of the trade currency.
Currencies are traded in lots,
1 lot is equal to $1000 witch controls $100,000
in currency.
A margin call occur when your trading account
drops below this min. $1000 per traded lot,
your broker will close your position automatically.
Currencies are traded on a price
interest point system (pip). Each currency pair
has its own pip value.
A trader's goal is to capture as many profitable
pips as possible. Some pip values are fixed
while others can fluctuate slightly as one currency
gains or loses strength against the other.
