The journey of a thousand miles begins with a single step. Whether you’re actually travelling from place to place or perhaps learning all you can about a topic, you have to know where and how to get started in order to begin achieving any goal. This has led to the development of our introduction to Foreign Exchange Markets course. It’s part of our own overall goal to be your “one-stop shop” for margin foreign exchange market information and trading. The main objective of our education program is to try and enhance your ability to return good consistent results over the long term throughout all market and economic conditions.
Don’t worry about missing opportunities – they will always be there. Instead, put all your energy into preparation BEFORE you risk any money. Too many people rush into trading without completely understanding the risks, the terminology, the different choices and the time required, to become a successful trader. This is not a platitude. Let there be no misunderstanding – to trade currency and be successful is extremely difficult. The high number of traders who fail is a testimony to this. Most traders lose because of being ill prepared – too much preparation is never enough.
With that purpose in mind, we’ve made it easy for you to discover more about the foreign exchange market before you start trading. Introduction to foreign exchange markets covers trading in foreign exchange as well as describing the fundamentals of speculating, discussing additional mechanics of the marketplace, and explores trading techniques incorporating fundamental and technical analysis.
Foreign exchange markets are somewhat daunting initially, as there are a large number of characteristics involved in understanding the entire market. We endeavour in this course to cover all these facets and help you put the pieces of this complex puzzle together to create one simple picture.
The Forex Markets
The Foreign Exchange Market, which is perhaps better known as the Forex, is a global market established for the purchase and sale of currencies. It effectively operates around the clock and daily transactions run into trillions of dollars, which in itself sets it apart from markets such as the US Treasury Bond market which sees daily transactions in the region of three hundred billion dollars and the combined American stock markets at about one hundred billion dollars a day.
The Forex as we know it today was created in 1971 when fixed currency exchanges were abolished and currencies were, and still are, valued at ‘floating’ rates which are determined by the law of supply and demand. This change, combined with technological advances during the 1980s, created substantial growth in the Forex market so that today it is the world’s largest financial market.
The Forex comprises a diverse group of some 5,000 trading institutions including international banks, central government banks, commercial companies and brokers. Unlike most other markets, there is no centralized trading location for the Forex and trading takes place through a number of centers located in cities including New York, London, Paris, Frankfurt, Hong Kong, Singapore and Tokyo, to name just a few, with trading being conducted by telephone and increasingly over the Internet. Principally established to facilitate business trade across international border, today the majority of trading is carried out by currency traders who are looking to profit from small movements in the market.
Thanks to recent changes in the market’s regulations small investors can now participate in the market and the previously large transaction sizes have been reduced substantially and many trading restrictions either removed or relaxed. The advent of the Internet has also allowed large interbank units to be broken down into smaller units and standard trading lots of $100,000 are now accessible to the smaller investor who is permitted to trade on leverage of up to 100:1, which means that a $100,000 trade can be controlled with as little as $1,000.
There are many advantages to trading in the Forex including its accessibility, liquidity, the open nature of the market and its commission structure.
Because the market is effectively open 24 hours a day 7 days a weeks and operates largely over the Internet, traders can now work from home and set their own trading hours. And, because the market is so liquid there is never any problem in trading as international banks are always willing to set bid and ask offers and there are always buyers and sellers for any currency. Just as important, currency prices tend to move in response to changes occurring within national economies and, as news of such changes is readily available to everyone trading in currencies, the market does not suffer from the problem of ‘insider dealing’.
Perhaps one of the greatest advantages of the Forex lies in the cost of trading. Unlike other markets there are no commissions payable in currency trading and brokers earn their money from the ‘spread’, or the difference between the buying and selling price of a currency.
But perhaps an even greater advantage lies in the way in which the market operates. Currencies are always traded in pairs with one currency being bought and the other being sold. For example, you may be holding US dollars and sell these in order to buy Japanese yen. Currencies are constantly moving against one another and so, whatever currency you are holding, you will almost always find that there are other currencies moving against your currency to your advantage and offering you the opportunity to profit from that movement. The market also follows well established trends which make it relatively easy to read the future direction of current movements.
Introduction to Foreign Exchange Trading
Foreign Exchange (FX) is essentially about exchanging one country’s currency for another. We are speaking about buying or selling foreign currencies here; such as the euro, dollar, Swiss franc or Japanese yen.
FOREX as the market is commonly known, is the largest financial market, which trades around the clock. It is also the world’s oldest and one of the most liquid markets you can trade. The FX market trades enormous amounts of money, which is estimated at several trillion dollars on a daily basis. In fact it is estimated that $5.3 trillion has been traded on a daily basis in 2013, up from $4 trillion in 2010. This is the biggest financial market in our world but its not for the faint-hearted. More than 95% of foreign exchange trading consists of market speculation involving banks, brokers, fund managers and private traders taking positions on the direction of currency movements in a bid to turn a profit.
The currency market is not new; they’ve been around for as long as the Banks have been doing business. What is new is the accessibility of the markets to a private trader, particularly the small to medium sized investor. Less than 20 years ago, speculation in the foreign exchange markets was reserved to institutions and very rich individuals but today it is open to everyone thanks to online trading platforms. Forex trading is also becoming incredibly popular; retail trading is thought to have increased from from $6 billion in 2001 to some $313 billion in 2010, an Aite Group study found in 2011.
Using a Margin FX facility, a private trader can capitalise on the principle of leverage. For a cash deposit or initial margin, you can control a position many times larger than the size of the deposit. An initial margin is required to maintain each position you enter. The amount of margin for each position is determined on a daily basis by the volatility of each of the currencies. The initial may vary upwards from a minimum of 2% of the face value of the position. This isn’t someone to embark on unless you are already involved in the stock market, but can be very profitable if you know what you’re doing.
Why Trade Currencies
Forex trading is sometimes considered as an alternative investment tool; an alternative to real estate, shares, precious metals and collectables. It can therefore help build a diversified asset portfolio while reducing overall investment risk. However, forex trading is not a get rich quick scheme and like any other investment or trading choice requires education and discipline.
- Extremely liquid market, open 24 hours a day, fi ve and a half days a week.
- Low dealing costs.
- Economic information available to everyone at all times, so very transparent.
A common attraction to trading currencies is the opportunity for high returns. While this certainly exists, leveraging and risk/return often go hand in hand. Increased leveraging leads to increased risk. The markets move 24 hours a day and new opportunities and information will continually exist each and every day.
By staying informed on current world events and having an understanding of how currencies can move, a forex trader can take advantage of trading opportunities as they arise whether on a day to day, or week to week basis. This is where the leveraging concept really applies and some thrilling possibilities exist. Particularly if one is taking a position in a cross rate, and particularly if one has an opinion on each of the respective currencies.
On the downside the prevailing low interest rates means that yields on currency trading is very limited. Currency trading is also a specialized area that requires a lot of attention and markets can be very volatile at certain times of the day or during key data announcement releases. Technical analysis (charts) is particularly important when trading currencies.
Internet brokers today give you the ability to trade all of the world’s major currencies, 24-hours a day. All major currencies are available to trade including Australian, Euro, Canadian, Hong Kong, New Zealand, Singapore and US dollars; British Pounds, Japanese Yen and Swiss Franc with most brokers permitting you to trade on a wide range of cross rates and over-the-counter currency options.