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Forex Market Trading
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Introduction
to the Forex Market
The Foreign Exchange market, also
referred to as the "Forex" or "FX" market is the largest financial
market in the world, with a daily average turnover of US$1.9 trillion.
"Foreign Exchange" is the
simultaneous buying of one currency and selling of another. Currencies
are traded in pairs, for example Euro/US Dollar (EUR/USD) or US
Dollar/Japanese Yen (USD/JPY).
There are two reasons to buy and
sell currencies. About 5% of daily turnover is from companies and
governments that buy or sell products and services in a foreign country
or must convert profits made in foreign currencies into their domestic
currency. The other 95% is trading for profit, or speculation.
For speculators, we believe the
best trading opportunities are with the most commonly traded (and
therefore most liquid) currencies, called "the Majors." Today, more
than 85% of all daily transactions involve trading of the Majors, which
include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc,
Canadian Dollar and Australian Dollar.
A true 24-hour market from Sunday
5:00 PM ET to Friday 5:00PM ET, Forex trading begins each day in
Sydney, and moves around the globe as the business day begins in each
financial center, first to Tokyo, London, and New York. Unlike any
other financial market, investors can respond to currency fluctuations
caused by economic, social and political events at the time they occur
- day or night.
The FX market is considered an
Over The Counter (OTC) or 'interbank/interdealer' market, due to the
fact that transactions are conducted between two counterparts over the
telephone or via an electronic network. Trading is not centralized on
an exchange, as with the stock and futures market
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The
Benefits of Forex Trading
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No
Short Selling Restrictions
Forex trading always involves buying one currency and selling another,
so traders can easily trade in a rising or falling market. There is no
Zero Uptick rule or any other restriction against shorting a currency.
At $1.9 Trillion Per Day, Forex is the Most
Traded Market in the World
The sheer volume of Forex helps to facilitates price stability in most
market conditions. What's more, almost 90% of all currency transactions
involve the 7 major currency pairs.
Trade on Your Schedule; Respond to Changes in
the Market
Forex is a true 24-hour market, open continuously from 5:00pm ET on
Sunday to 5:00 pm on Friday. With three distinct trading sessions in
the US, Europe and Asia, you can trade on your own schedule and respond
to breaking news
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Forex
trading examples
Example
1 :
An investor has a margin deposit with Saxo Bank of USD 100,000.
The investor expects the US dollar to rise against the Swiss franc and
therefore decides to buy USD 2,000,000 - 2% of his maximum possible
exposure at a 1% margin Forex gearing.
The Saxo Bank dealer quotes him 1.5515-20. The investor buys USD at
1.5520.
Day 1: Buy USD 2,000,000 vs CHF 1.5520 = Sell CHF 3,104,000.
Four days later, the dollar has actually risen to CHF 1.5745 and the
investor decides to take his profit.
Upon his request, the Saxo Bank dealer quotes him 1.5745-50. The
investor sells at 1.5745.
Day 5: Sell USD 2,000,000 vs CHF 1.5745 = Buy CHF 3,149,000.
As the dollar side of the transaction involves a credit and a debit of
USD 2,000,000, the investor's USD account will show no change. The CHF
account will show a debit of CHF 3,104,000 and a credit of CHF
3,149,000. Due to the simplicity of the example and the short time
horizon of the trade, we have disregarded the interest rate swap that
would marginally alter the profit calculation.
This results in a profit of CHF 45,000 = approx. USD 28,600 = 28.6%
profit on the deposit of USD 100,000.
Example 2 :
The investor follows the cross rate between the EUR o and the Japanese
yen. He believes that this market is headed for a fall. As he is not
quite confident of this trade, he uses less of the leverage available
on his deposit. He chooses to ask the dealer for a quote in EUR
1,000,000. This requires a margin of EUR 1,000,000 x 5% = EUR 10,000 =
approx. USD 52,500 (EUR /USD 1.05).
The dealer quotes 112.05-10. The investor sells EUR at 112.05.
Day 1: Sell EUR 1,000,000 vs JPY 112.05 = Buy JPY 112,050,000.
He protects his position with a stop-loss order to buy back the EUR o
at 112.60. Two days later, this stop is triggered as the EUR o
strengthens short term in spite of the investor's expectations.
Day 3: Buy EUR 1,000,000 vs JPY 112.60 = Sell JPY 112,600,000.
The EUR side involves a credit and a debit of EUR 1,000,000. Therefore,
the EUR account shows no change. The JPY account is credited JPY
112.05m and debited JPY 112.6m for a loss of JPY 0.55m. Due to the
simplicity of the example and the short time horizon of the trade, we
have disregarded the interest rate swap that would marginally alter the
loss calculation.
This results in a loss of JPY 0.55m = approx.USD 5,300 (USD/JPY 105) =
5.3% loss on the original deposit of USD 100,000.
Example 3
The investor believes the Canadian dollar will strengthen against the
US dollar. It is a long term view, so he takes a small position to
allow for wider swings in the rate:
He asks Saxo Bank for a quote in USD 1,000,000 against the Canadian
dollar. The dealer quotes 1.5390-95 and the investors sells USD at
1.5390. Selling USD is the equivalent of buying the Canadian dollar.
Day 1: Sell USD 1,000,000 vs CAD 1.5390. He swaps the position out for
two months receiving a forward rate of CAD 1.5357 = Buy CAD 1,535,700
for Day 61 due to the interest rate differential.
After a month, the desired move has occurred. The investor buys back
the US dollars at 1.4880. He has to swap the position forward for a
month to match the original sale. The forward rate is agreed at 1.4865.
Day 31: Buy USD 1,000,000 vs CAD 1.4865 = Sell CAD 1,486,500 for Day
61.
Day 61: The two trades are settled and the trades go off the books. The
profit secured on Day 31 can be used for margin purposes before Day 61.
The USD account receives a credit and debit of USD 1,000,000 and shows
no change on the account. The CAD account is credited CAD 1,535,700 and
debited CAD 1,486,500 for a profit of CAD 49,200 = approx. USD 33,100 =
profit of 33.1% on the original deposit of USD 100,000.
Choosing The Right
Forex Broker
The first and most important step you will take as a
Forex trader is choosing a broker. Forex brokers come in all different
styles, types and qualities. Some are very user friendly, with easy to
use platforms, instant, hassle free execution and excellent customer
service, while others will take your initial in the blink of an eye.
It’s so important to choose the right broker because you want
to be able to focus on trading and let the broker handle the all the
other aspects of Forex.
These 5 things to look for will help you find the best
Forex broker, the one that’s right for you.
1.) Minimum Deposits
As an expert trader, the first thing I look for in a
broker is always the minimum deposit. Those offering mini accounts,
with a minimum deposit of $25, are generally great for more
inexperience, possibly new traders. Those which offer higher minimum
deposits are generally geared from more professional, experienced
traders who are ready to risk more money trading currencies. While this
isn’t an indication of whether or not it’s a
quality broker, it surely tells you the type you’re dealing
with.
As a newer trader, a mini account with a small initial
deposit is a great choice. If you’re an expert trader,
choosing a broker with an advanced platform geared towards experienced
traders may be the best option.
2.) Customer Reviews
Independent reviews and testimony’s are very
important because they show you the types of experiences real people
have had with a specific brokerage. When looking for reviews, remember
that people are more likely to post if their experience has been
negative and reviews on a broker’s own website will always be
positive, so I wouldn’t even take those into account as they
are usually biased.
3.) 24/7 Customer Service
Customer care is extremely important to me! If
you’re having trouble with execution, using the platform or
making deposits & withdrawals, it really helps to have
understanding, knowledgeable & caring customer service agents
on your site 24 hours a day. Talking to a real person about a question
or problem is so much easier and more convenient than reading an FAQ
page. You deserve a broker with 24/7 service, after all, it’s
your money!
4.) Other Services Offered
Check for market news feeds, commodity trading or other
currency pairs besides the majors that are offered by all brokers.
These types of services may not seem like a big deal now, but once
you’re making money and gaining experience, you may be
interested in them later.
It’s also important to note that a broker
which offers more services generally has more financial backup, meaning
the chances of it going under with your money are very small.
5.) Trying A Demo Account
Always trade on a demo account before choosing a broker.
A demo will let you try the platform, test the execution, customer
service and news feeds which are all vital parts of your trading
experience. Demo account should be free and you can try as many as you
like before actually making a deposit
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