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Trading Online With Jamaica Forex:
Forex Trading An Overview:
Foreign exchange (Forex or FX for short) is one of the most exciting, fast-paced markets around. Until recently, trading in the forex market had been the domain of large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. The emergence of the internet has changed all of this, and now it is possible for average investors to buy and sell currencies easily with the click of a mouse. Daily currency fluctuations are usually very small. Most currency pairs move less than one cent per day, representing a less than 1% change in the value of the currency.
This makes foreign exchange one of the least volatile financial markets around. Therefore, many speculators rely on the availability of enormous leverage to increase the value of potential movements. In the forex market, leverage can be as much as 250:1. Higher leverage can be extremely risky, but because of round-the-clock trading and deep liquidity, foreign exchange brokers have been able to make high leverage an industry standard in order to make the movements meaningful for FX traders. Extreme liquidity and the availability of high leverage have helped to spur the market's rapid growth and made it the ideal place for many traders. Positions can be opened and closed within minutes or can be held for months. Currency prices are based on objective considerations of supply and demand and cannot be manipulated easily because the size of the market does not allow even the largest players, such as central banks, to move prices at will. The forex market provides plenty of opportunity for investors. However, in order to be successful, a currency trader has to understand the basics behind currency movements. The goal of this tutorial is to provide a foundation for investors or traders who are new to the currency markets. We'll cover the basics of foreign exchange, its history and the key concepts you need to understand in order to be able to participate in this market. We'll also venture into how to start trading currencies and the different types of strategies that can be employed. Forex Market StructureThe FX market is an over-the-counter market with no centralized exchange. Traders have a choice between firms that offer trade-clearing services. Unlike many major equities and futures markets, the structure of the FX market is highly decentralized. This means that there is no central location where trades occur. The New York Stock Exchange, for example, is a totally centralized exchange. All orders pertaining to the purchase or sale of a stock listed on the NYSE are routed to the same dealer and pass through the hands of a single clearing firm. This structure requires buyers and sellers to meet at the NYSE in order to trade a stock that is listed on this exchange. It is for this reason that there is one universally quoted price for a stock at any given time. In the FX market there are multiple dealers whose business is to unite buyers and sellers. Each dealer has the ability and the authority to execute trades independently of each other. This structure is inherently competitive as traders are faced with a choice between a varieties of firms with an equal ability to execute their trades. The firm that offers the best services and execution will capitalize on this market efficiency by attracting the most traders. In the equities markets, the execution of trades is monopolized and there is no incentive for a clearing firm to offer competitive prices, to innovate, or to improve the quality of their service. The FX market has clear advantages over the equities markets in terms of efficiencies created by decentralization and competition. How does the nature of this market structure affect a trader’s profitability? While the foreign exchange market was traditionally exclusive to all but a select group of large banks, advances in technology and reductions to capital flow barriers have brought in a variety of new participants. Because all of these participants affect the supply of and demand for currencies, it is important to understand the role each plays in the market. Commercial and Investment Banks: Commercial and Investment banks make up the Inter-Bank market and trade on electronic brokerage systems (EBS). These banks trade among themselves via strong credit relationships, and account for the largest portion of FX trading. These banks trade on a proprietary basis (they trade for themselves) and through customer flow (they fill orders for clients outside of the Inter Bank market). The Inter Bank market consists of the world’s largest commercial and Investment banks and caters to the majority of commercial turnover as well as enormous amounts of speculative day-trading volume. These banks will trade among themselves via credit relationships they have established with one another as part of a system of balancing accounts. Large Corporations, Hedge Funds, Central Banks are all customers on the Inter Bank market. Aside from trading exclusively amongst themselves, these banks also trade with large corporations, hedge funds, central banks, or specialized dealers that cater to smaller retail traders. For example, when a large international corporation based in Japan needs to pay its employees in the United States, they must buy USD with JPY. To buy USD, this corporation will go to a bank to make the transaction. This trading amounts to billions of dollars daily, or about ¾ of daily FX volume. Due to their size and the large volume that they trade, these banks have unique access to important information on direction and size of capital flows. This means they may be able to make reasonable short-term predictions on FX movements based on the large positions they hold and trade. Significant capital power they might use to defend their proprietary positions at significant technical levels. This is often what creates support and resistance. Large research departments that offer fundamental and technical analysis to prop traders. All of these factors make it requisite for a good trader to take advantage of all the resources these banks provide. Possible trading opportunities as well as information on the particular interests of banks are disclosed in much of the research these banks create. Many of these reports can be accessed at www.dailvfx.com Central banks: Central banks have access to huge capital reserves. Central banks have specific economic goals. Central banks regulate money supply and interest rates. Central banks are large players with access to significant capital reserves. They enter the FX market primarily in a supervisory capacity in order to stabilize money supply and interest rates. Central banks closely monitor economic activity, and have many options available to them to regulate their economies. Many of these options relate to specific policies that greatly impact the FX market. Central banks set the overnight lending rates to change the rate of interest paid on their domestic currency. They buy and sell government securities to increase or reduce the supply of money. They buy and sell their domestic currency in the open market to influence exchange rates. Knowing the policy of a central bank and its opinion of the domestic economy will allow a trader to anticipate what actions the central bank is most likely to take in future policy meetings. Corporations: Corporations primarily use FX to hedge against currency depreciation. Corporations also buy and sell currencies in order to meet payroll for international offices. Foreign exchange plays an increasingly important role in the daily business of corporations as globalization forces them to make and receive payments in foreign currencies. When international transactions of goods are made, a transaction of currency is also necessary. Whether it is to pay employees abroad or to pay for products coming from a foreign nation, corporations must exchange their local currency for the domestic currency of the nation they are trading with. When a corporation agrees to buy or sell goods to a client in foreign nation at a future date, it runs the risk of its local currency depreciating in the meantime. If a corporation believes that its local currency is expected to depreciate, and as a result the outstanding position is at risk, it would most likely enter the FX market and buy the domestic currency of the country with which it is trading. Global Managed Funds: Many profit-seeking managed funds invest in foreign financial instruments. When they purchase and sell these instruments, an FX conversion is always necessary. Global fund managers (large mutual, pension, and arbitrage funds) invest in foreign securities and other foreign financial instruments. These investments can have substantial impacts on spot price movements because these firms constantly rebalance and adjust their international equity and fixed income portfolios. These portfolio decisions can be influential because they often involve sizable capital transactions. Major changes in equity or bond markets of respective countries dictate the roles of Global Managed Funds in the FX market. When equity markets are performing well they will attract substantial global capital, which will drive a domestic currency higher. To purchase stocks or bonds in a foreign nation, managed funds must exchange their local currency for the domestic currency of the country in which they are purchasing financial instruments. Many of these funds implement currency-hedging strategies. When they wish to hedge existing investments so they don’t incur the risks of depreciating currencies, they can also generate significant selling flows. Under the umbrella of Global Managed Funds are pure FX funds (Global Macro Funds). FX Funds trade in FX for speculative purposes. Many large funds tend to take large carry trade positions exploiting global interest rate differentials. They also watch for misguided economic policy and over/undervalued currencies to take large spot positions (assuming a natural return to equilibrium). Ultimately, these funds gauge global events and take a longer-term view on which currencies will strengthen/weaken in the next six to eight months. Fund participation in the FX market has risen sharply in recent years and its total trading market share is now around 20°h. While relatively small compared to other market participants, they can have a profound effect on the currency spot movements when acting together. Individuals: With the advent of online currency trading, retail investors now have total access to the spot FX market. Retail clients trade In FX for both speculative and hedging purposes. Retail participation is growing rapidly and is having a tremendous impact on the foreign exchange market. Retail spot currency trading is the new frontier of the trading around the world. Up until 1996, foreign exchange trading was only available to banks, institutions and extremely high net-worth individuals. Prior to online retail FX dealers, individuals could not realistically participate in the foreign exchange market from a speculative standpoint. The Inter Bank market operated as a tight circle and it managed transactions with Corporations and Managed Funds to accommodate its own needs. Online foreign exchange trading offers retail clients access to trading functionalities similar to those of the Inter Bank market. Spreads are slightly wider - 5 pips on most currency pairs as opposed to the Inter Bank standard of 3 - but execution is unsurpassed; additionally, many of these firms maintain fixed spreads, as opposed to fluctuating spreads in the inter Bank market. Now retail clients and multinational institutions can participate in the EX market on a highly equitable playing field. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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