What is the Foreign Exchange Market?
The Foreign Exchange market, also referred to as
the “Currency,” "Forex" or "FX" market, is the
largest financial market in the world, with a
daily average turnover of approximately US$3.5
trillion. The foreign exchange market exists
wherever one currency is traded for another. It
includes trading between large banks, central
banks, currency speculators, multinational
corporations, governments, and other financial
markets and institutions. Individual retail
traders are a small fraction of this market and
participate indirectly through brokers.
Although exchange rates are affected by many
factors, in the end, currency prices are a
result of supply and demand forces. The world's
currency markets can be viewed as a huge melting
pot: in a large and ever-changing mix of current
events, supply and demand factors are constantly
shifting, and the price of one currency in
relation to another shifts accordingly. No other
market encompasses (and distills) as much of
what is going on in the world at any given time
as foreign exchange. Supply and demand for any
given currency, and thus its value, are not
influenced by any single element, but rather by
several. These elements generally fall into
three categories: economic factors, political
conditions and market psychology.
Foreign exchange has developed into an asset
class (a type of investment such as stocks or
bonds). This is partly because it is
uncorrelated to any other asset class. As the
world's largest over-the-counter market, foreign
exchange is attractive to investors due to its
deep liquidity, volatility, and low-cost per
trade.
What are Currency Pairs and How Do They
Work?
Foreign Exchange trading involves the
simultaneous buying of one currency and the
selling of another. The world's currencies are
on a floating exchange rate and are always
traded in pairs, for example Euro/Dollar or
Dollar/Yen.
Currency Pairs are traded against each other,
meaning that the value of one currency is
determined by its comparison to another
currency. Currency Pairs are traditionally noted
in the internationally recognized three-letter
codes for the currencies involved: XXX/YYY.
Forex trades involve the simultaneous buying of
one currency and selling of another, but each
pair of currencies constitutes an individual
product that is itself bought and sold on the
Foreign Exchange market. For instance, a price
quote for EUR/USD gives the price of the Euro
expressed in US dollars, as in 1 euro = 1.3045
dollar. The internationally recognized symbols
for some of the most commonly traded currencies
are:
EUR Euros
USD United States dollar
CAD Canadian dollar
GBP British pound
JPY Japanese yen
AUD Australian dollar
CHF Swiss franc.
If you buy a Currency Pair, you buy the base
currency and sell the quote currency. The bid
(sell price) represents how much of the quote
currency is needed for you to get one unit of
the base currency. Conversely, when you sell a
Currency Pair, you sell the base currency and
receive the quote currency. The ask (buy price)
for the Currency Pair represents how much you
will get in the quote currency for selling one
unit of base currency.
For example, if the USD/EUR Currency Pair is
quoted as being USD/EUR = 1.5 and you purchase
the pair, this means that for every 1.5 euros
that you sell, you purchase (receive) US$1. If
you sold the Currency Pair, you would receive
1.5 euros for every US$1 you sell. The inverse
of this currency quote is EUR/USD, and the
corresponding price would be EUR/USD = 0.667,
meaning that US$0.667 would buy 1 euro
Where is the Central Location of the
Foreign Exchange Market?
FX Trading is not centralized on an exchange or
clearing house, as are the stock and futures
markets. The Foreign Exchange market is
considered an Over the Counter (OTC) or “inter
bank” market, because these that transactions
are conducted between two counterpartys over the
telephone or an electronic network.
The biggest geographic Foreign Exchange trading
centre is the United Kingdom , primarily London
. Other large centres include the United States
, Japan and Singapore . Most of the remainder is
accounted for by trading in Germany ,
Switzerland , Australia , Canada , France and
Hong Kong .
When is the Foreign Exchange Market Open
for Trading?
The Foreign Exchange market is a true 24-hour
market. Trading begins each day in Sydney , and
moves around the globe as the business day
begins in each financial center, first to Tokyo
, then 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.
What are the Most Commonly Traded
Currencies in the FX Markets?
The most often traded or 'liquid' currencies are
those of countries with stable governments,
respected central banks, and low inflation.
Today, over 85% of all daily Foreign Exchange
transactions involve the major currencies, which
include the US Dollar, Japanese Yen, Euro,
British Pound, Swiss Franc, Canadian Dollar and
the Australian Dollar.
Is Foreign Exchange Trading Capital
Intensive?
No. LANCEBANK requires a minimum deposit
of $100. The margin we grant is 1:100 and in
certain instances we grant 1:500 margin.
However, it is important to remember that while
this type of leverage allows investors to
maximize their profit potential, the potential
for loss is equally great.
What is Margin?
Margin is the amount of cash or other eligible
collateral that LANCEBANK requires in a
customer's account to open or to maintain an
open Foreign Exchange position. If the
customer's open position worsens and his or her
account does not have funds equal to or more
than the required margin amount, LANCEBANK will
initiate a margin call. When this occurs, the
customer must either deposit more money into the
account or close out the position. The LANCEBANK
trading system will automatically calculate
margin requirements for current open positions
and check for margin availability before
allowing the execution of a new trade.
What does it mean have a 'long' or
'short' position?
In trading parlance, a long position is one in
which a trader buys a currency at one price and
aims to sell it later at a higher price. In this
scenario, the trader benefits from a rising
market. A short position is one in which the
trader sells a currency in anticipation that it
will depreciate. In this scenario, the trader
benefits from a declining market. However, it is
important to remember that every Foreign
Exchange position requires a trader to go long
in one currency and short the other.
What is the difference between an
“intra-day” and an “overnight” position"?
Intra-day positions are all positions opened
anytime during the 24 hour period AFTER the
close of LANCEBANK 's normal trading hours at
4:30pm EST. Overnight positions are positions
that are still on at the end of normal trading
hours (4:30pm EST), which are automatically
rolled over by LANCEBANK at competitive
rates (based on the currencies interest rate
differentials) to the next day's prices.
How are Currency Prices Determined?
As mentioned above, currency prices are
determined primarily by supply and demand
factors. See, “What Is The Foreign Exchange
Market?” above. These factors are controlled and
affected by a variety of economic and political
conditions, most importantly interest rates,
inflation and political stability. Moreover,
governments sometimes participate in the Foreign
Exchange market to influence the value of their
currencies, either by flooding the market with
their domestic currency in an attempt to lower
the price, or conversely buying in order to
raise the price. This is known as Central Bank
intervention. Other such factors include the
flow of imports and exports in a particular
country, a country's trade balance, the flow of
capital into and out of a country, relative
inflation rates, governmental policies aimed at
limiting a currency's exchange rate
fluctuations, the difference in interest rates
between countries (known as the yield
differential), and rates of inflation. Any of
these factors, as well as large market orders,
can cause high volatility in currency prices.
However, the size and volume of this market
makes it impossible for any one entity to
"drive" the market for any length of time.
How do I Manage Risk?
The most common risk management tools in Foreign
Exchange trading are the limit order and the
stop loss order. A limit order places
restriction on the maximum price to be paid or
the minimum price to be received. A stop loss
order ensures a particular position is
automatically liquidated at a predetermined
price in order to limit potential losses should
the market move against a trader's position.
What kind of Trading Strategy Should I
Use?
Currency traders make typical decisions using
both technical and fundamental analysis
Technical traders use charts, trend lines,
support and resistance levels, and numerous
patterns and mathematical analyses to identify
trading opportunities, whereas fundamentalists
predict price movements by interpreting a wide
variety of economic information, including news,
government-issued indicators and reports, and
even rumor. The most dramatic price movements
however, tend to occur when unexpected events
happen. Such events can range from a Central
Bank raising domestic interest rates to the
outcome of a political election or even an act
of war. Often enough it is the expectation of an
event, rather than the event itself, that drives
the market.
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