What does FOREX mean?
The market Forex (English “Foreign Exchange”) is actually the market of foreign exchange, and its deals are carried out by means of the Internet and by means of electronic trading system.
Why Do People and What Kind of People Choose FOREX?
It is the proper way to achieve financial well-being and stability.
Gaining profit is one of the key motives to work with FOREX. Namely for this purpose professional market participants and private investors operate considerable amounts of funds on the FOREX market. Its turnover is ten times higher than that of any other markets.
It is a reliable way to invest funds.
In the situation when exchange rates float everyday, FOREX account can turn to be much more useful in practical way than a multi-currency bank deposit. Of course, it is true if you are ready at least from time to time to monitor individually a number of parameters: whether the currency basket contents go up or down, whether euro depreciates or strengthens to, whether gold, oil, etc. prices grow or fall etc.
Many people place in the market only a small portion of their funds and exchange currencies not quite often. They have another purpose – to protect their savings against unfavorable abrupt changes in exchange rates and to gain profit, at least slightly exceeding bank interest on deposits, rather than to earn.
It is the market of absolute liquidity.
Currently FOREX is the largest fraction of the financial market. Its volume is estimated as equal to one third of the total value of all financial transactions worldwide meanwhile the value of transactions effected for 24 hours amounts from one to three trillions US dollars.
Currency is the most liquid commodity: demand and supply are actually limited only to the total value of circulating money stock. Taking into consideration that banks – FOREX participants are bound by law to freely effect currency exchange transactions at the quoted market prices, is an assurance of absolute liquidity of transactions for any investor. In a real sense it is very simple thing: one currency can be always exchanged for another currency or other kind of commodity.
Even turn-downs and crises of the global economy have a beneficial effect on deriving a profit.
Depreciation of dollar, euro or any other currency promises the same considerable profit with FOREX as rise of them. Money can be gained either with growing or falling exchange rates. It is a valuable advantage of the exchange market in comparison with the securities market.
FOREX trader always deals with the currency pair where one currency definitely is falling down as against another one meanwhile another currency, naturally, is coming up. Therefore, both fluctuation trends are absolutely equal in terms of profit gaining.
What Is the Trader?
Trader is a person engaged in trading on the exchange stock. He is often called a speculator, because he tries to derive profit from any market situation. Trader’s task is to buy at a lower price and to sell at higher price. So the profit resulted from transaction becomes the property of trader.
FOREX Trading and Traders
Trading is processing and implementation of all range of trade operations. In English. FOREX is the international currency exchange market. Assembling those meanings, we have now”Trading on FOREX” (FOREX-Trading). It is pure and simple “Trading on exchange market”.
FOREX brokers are professional participants of the financial market who offering customers an opportunity to effect transactions with FOREX at their own expenses meanwhile such transactions are carried out on behalf of a brokerage company. Broker is an intermediary in the investment market who exercises tasks related to purchase and sale. Brokerage companies implement their business activities using the Internet and by means of specialized program-terminal. In addition, the customers may exercise the opportunity to effect ”voice” transactions by means of phone (now this method is deemed out-of-date). Structural divisions of brokerage companies – dealing halls are in charge of orders and execution thereof.
Dealing halls are specialized premises of company providing services related to entering the financial market, which are equipped with computer and communications facilities where brokers and traders effect their transactions. Each dealing hall offers customers an opportunity of direct trading on the exchange stock by means of trading terminals installed in such a hall.
FOREX Market Participants
Everybody who actually wishes it can deal with as well as make money with FOREX. In addition to private investors, the professional market participants of FOREX are centrals state banks, central national banks, banks – market-makers, exporting / importing companies, investment companies and hedging foundations, insurance companies, corporate investors, intermediary companies offering individuals and legal entities an access to the market.
Central banks — the major market participants who do not impose any formal limitations on price development. Nevertheless, they act as regulating authorities determining the level of main interest rates. Banks operate on the open market dealing with repurchase or sell securities meanwhile they express their preferences to the market participants and give assessment of the situation. In particular cases they also reserve the right to effect direct currency interventions (purchase or sale of the national currency to prevent subsequent fall or rise in its cost).
Market-makers (literally – who make market) are the banks individually quoting currency prices for other participants in the market. They obtained the right to determine price quotations on the basis of their agreement to adhere to the international standards.
Stability of services rendered by market-makers, as well as the code of laws and rules developed by the regulating institutions (for example, FSA in Great Britain, which activity, in its turn, is regulated by the Bank of England), plus the so-called ”honour code” established by market-makers themselves do secure their continuous operation of the FOREX market.
Export / import companies effecting currency exchange transactions in the market, do not set a goal to gain direct profit from such transactions but apply the international policies for currency exchange to carry out their economic activities instead.
Insurance companies are engaged in risk hedging (method of insuring transactions against the market risks) in the field of specialized transactions. For example, the company importing products from Germany bears a risk related to possible increase in cost of the European currency, and may offset such risks by means of buying euro in amounts assessed before for any other currencies.
Investment funds, corporate and private investors strive to gain profit from purchase and sale of currency, due to price differences at various time moments, and intermediary companies secure them access (entry) to the market meanwhile they receive market quotations from market-makers.
Namely these large participants effect exchange transactions with FOREX. The particular feature of FOREX is that it is not a trading platform in its traditional point of view. It has no certain place like, for example, an exchange stock or a usual market. All trading transactions are effected by means of online terminals simultaneously in hundreds of banks worldwide.
Currency Exchange Stock
Currency exchange stock is a place where non-limited process of national currencies sale and purchase based on the exchange rate correlation between them is carried out. The currency exchange stock is directly intended to determine an exchange rate that is foreign currency value. The main task of currency exchange stock is mobilizing temporarily free currency resources and further re-distribution of them by market methods from one branches of economy to others and to setting current market exchange rates for both national and foreign currencies under the conditions of fair and lawful trading.
What Currencies Are Traded on FOREX?
First of all, these are global reserve currencies (their standard international designations – ISO codes – are given in brackets):
- US dollar (USD);
- Euro (EUR);
- British pound sterling (GBP);
- Japanese yen (JPY);
- Swiss franc (CHF).
and other popular currencies:
- Australian dollar (AUD);
- New-Zealand dollar (NZD);
- Canadian dollar (CAD);
- Swedish crone (SEK);
- Norwegian crone (NOK);
- Danish crone (DKK);
- South-African rand (ZAR).
All such currencies form pairs; notably, and their combinations may be different. As a rule, the most popular ones are about 30 currency pairs.
Basic pairs (related to the largest trading volumes) are euro / dollar (EUR/USD), pound/ dollar (GBP/USD), dollar / yen (USD/JPY) and dollar / Swiss franc (USD/CHF). Other currency pairs with participation of US dollar are also drawn up considerable attention.
Cross-rates according to the FOREX terminology are the currency pairs without participation of US dollar, for example: euro/pound (EUR/GBP), pound/yen (GBP/JPY), pound/Swiss franc (GBP/ CHF) and so on.
Exchange Transactions Involving Gold
List of currency pairs quite often includes gold quotations as against US dollar: they are called gold-spot contracts (and designated as GOLD). To the certain extent it is reasonable, because gold, in substance, is a worldwide equivalent of money; meanwhile no current currency is provided with gold content by law. Accounts opened with FOREX allow to effect electronic exchange transactions involving gold meanwhile floats of every single moment any fluctuations of the exchange price of this precious metal can be traced. These transactions are especially popular upon the crisis conditions, when monetary units of all countries are depreciated to a certain (different) extent, leading to the increase in demand for gold.
Quotations, Points and Spreads
Currency exchange rates are usually calculated in the FOREX market within the accuracy to 5 significant figures: for example, if pound/dollar quotation is 1, 5719, this means that it is possible to receive currently more than 1 dollar and 57 cents for 1 pound. Normally quotation contains 4 digits after comma: certainly, it is a much more accurate value than that offered in exchange offices or banks. An exception is the Japanese yen rates calculated within the accuracy to 2 digits after comma: for example, quotation 105,17 for the pair dollar / yen means that 1 dollar contains 105 yens and ”a little more”, to be more precise, 105,17 yens.
Change in the last significant digit by one point is called a point. For example, quotations 1, 2815 and 1, 2816 differ in 1 point, and quotations 125, 17 and 125, 19 — in 2 points. Difference in 100 points is normally called a figure (as synonym for «number»): for example, quotations 125, 50 and 126, 50 differ in a figure.
To exchange currencies, banks charge a commission fee; a commission fee charged with FOREX is called a spread – difference between the purchase and sales prices (they are also called a bid price or an ask price), like in a usual exchange office. Spreads are usually equal to several points. Let’s presume that a record looks like this: EUR/USD 1, 2815/1, 2820. This means that 1 euro can be sold at 1, 2815 dollars, and to buy 1 euro, 1,2829 dollars are needed.
Types of Accounts
There are two kinds of accounts: operating (really existing) account and demo (training) account.
To deal with any of them you need the same program TeleTRADER (or analogous software), and you can download it at our site.
An operating trading account is analogous to a usual bank account, taking into consideration the difference its purpose is trading solely. In all other respects a really existing operating account does not differ from a bank account:
- Easy -to-use ands immediate deposit/withdrawal of funds by means of Internet bank ("Personal Office");
- Round-the clock-access to deposits;
- It is possible to deposit/store at account unlimited amounts of monetary means.
Real trading account with TeleTRADE can be opened in any place of the world by means of the Internet or at any of 120 representative offices of the company.
It is more reasonable to open your account with the company’s office, because in such a case you will have a certain financial advisor, and you can ask him for advice at any time. Therefore, you can work either remotely, operating your PC, or in any office of the company. The procedure of opening an operating account is very simple indeed.
Demo-account is analogous to really existing trading account trading is carried out by means of virtual money. It means that all profits or losses have no financial effect. The main purpose of dealing with demo-account is mastering high-level trading skills on FOREX exchange market.
Install our free software- TeleTRADER terminal, open demo-account to get learnt and try your opportunities on the exchange market!
The company TeleTRADE is interested in developing your professional skills, so it provides you the opportunity to install the TeleTRADER software free of charge as well as to deal with oil contracts, stock indexes and gold. And everything is carried out in the real time mode.
Transaction Volume: Lot
It is old-established in the European System
Developing a Trading Plan
Previous to making deals (purchase and sell), you should develop your trading plan.
That definition covers a number of important solutions.
It provides for several important solutions, the minimum being the following:
- according to which trend (upwards only or in both directions alternatively) to trade;
- what the price range is and what are conditions it is reasonable to effect transactions upon, and which should be profit targets and maximum transaction risks.
The minimum list of them includes:
- Which pairs of currency chosen for trading;
- Which trend (only upwards or in both directions in turn) is chosen to trade;
- What is the price range within and what conditions are upon should be reasonable to effect transactions; what the profit targets are and what is the amount of maximum permissible risk for target in question.
A basic trading plan should include 3 components:
- It is always possible to determine a risk limiting level (stop-loss) not only at a reasonable distance from the price of entering the market (not too far), it is also reasonable from the point of view of technical analysis (not too close). Stop-loss is a method to plan risks and to protect against large losses, and it is also an instrument helping to save profit already gained in current transaction.
- You can obtain comprehensive and more precise information about regulations for trading plan development as well as for other details related to applying levels of stop-loss and take profit attending training workshops arranged by our company.
Supplementary Trading Signals
When the trading plan is almost completely processed, you may also make use of supplementary trading signals applying for specifying and assisting in choice of the most favourable moment for effecting a transaction. Any supplementary signals are certainly considered to be an attachment to the trading plan processed before, not an independent concept of transaction.
Old-established types of supplementary trading signals include the so-called technical analysis figures. When this or that figure appears on the price chart, it makes a signal that the trend is turning back and changes for the opposite one or sideways. Turn-back figures facilitate specifying what namely we will face: a local bottom or the top of the market. A concept of searching for supplementary trading signals is often used for more accurate price intervals, with small-scale movement details well observed.
As it is accustomed, a customer intending to effect transaction places a certain amount of his funds into account of broker (bank or company offering an access to the market). Actual trading is carried out making use of broker’s money who provides a credit lever to enter the market (in a standard situation, credit lever is equal to 1:100). By means of credit lever, a customer (investor) has an opportunity to operate an amount much times exceeding his own so profitability is increasing in percentage terms. In such a case, the customer funds serve as a margin (a kind of pledge), which broker freezes on his account for the whole period of supporting the transaction, till the customer (investor) carries out a reverse exchange transaction.
The credit lever applied for this scheme, in spite of the widely-held view, does not increase (and does not reduce) investor’s risks in absolute terms. It is clear: credit lever value is not included in the formula applied for calculation the transaction results. Transaction risk or profit is assessed by the fixed lot (which cannot be changed) and the number of transaction lots. Credit lever makes it possible to invest lesser amount, i.e. releases spare money of customer. Please note that without a credit lever available, it would be absolutely impossible for an investor with the amount of not less than 100 thousand currency units to enter the market.
For credit lever granting a bank –intermediary charges a customer (investor) the so-called swap. The procedure of swapping position applies the difference in short-term interest rates for each of the traded currency pairs, taking into account the number of days, during which the customer (investor) supports this transaction. A certain interest of the intermediary- bank is added to this difference as well. In case if a transaction is opened or closed within one and the same banking day, such a swap is not charged. This means that within one trading day customer may use a credit lever completely free of charge.
Position swapping calculations are processed at 01:00 (Riga summer time) and at 00.00 (Riga winter time). If a transaction is closed before this time, the customer is not charged a swap. An overnight swap is usually equal to several tenth parts of a point to 2-3 points. On the night of Wednesday / Thursday a triple swap is charged, compensating for settlements among banks taken place for the period from Friday to Monday. And for the transactions remained opened for the period from Friday to Monday, a bank-intermediary calculates a usual single swap.
Actually, swap is not a considerable value affecting the transaction results. So it makes no sense to s take swap into account in a big way while planning a transaction. The resolution on whether to leave a transaction opened till the next day or to close it today is usually taken on the grounds what the probabilities (or non-probabilities) that the price changes the next day towards the direction the investor needs. Experienced traders, as a rule, do not recommend that a transaction remains opened for more than 3 trading days. According to statistics, after 2-3 days of price movement towards one direction, usually a rollback takes place: rise is often followed by fall, and fall by the new increase. So transaction opened for a longer time most often leads to the loss of a considerable amount of the transaction profit.