Welcome to this his first lesson in the course Forex course. We hope you find this content interesting, informative and will help her future as an operator. In this lesson you will learn all the basic information about the operation of the currency market (Forex).
In any business, from selling used cars, even in the forex market is very important to understand all aspects related to it, since most essential aspects to the most complicated issues.
Imagine this scenario, if you venture into the used car business, would you buy a lot of cars and try to sell without being informed? I think not, if I did this probably end up with a different car to use every day of the week. What would I do? Chances are that at first do some research about the used car market: who are their clients, see the strategies of competitors, an analysis of the pros and cons of the market, and more.
The same applies to the operation of the market. I have seen many players get a margin call, when not even know what that means leverage, others even know what a margin call! (do not worry if you are not familiar with these terms, will be discussed in the next lesson).
In this lesson, let’s examine the basics of the Forex market, from how it was formed, major players, pros and cons and how it compares the currency market to other financial markets like stocks or futures market.
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Section II: The Forex Market
What is Forex Market?
Forex is the acronym in English of “Foreign Exchange” or currency exchange.
What is exchanged in the forex market?
Money, simple as that.
Currencies are bought and sold freely on the market. This transaction involves the simultaneous purchase and sale of two currencies.
For example, you have information that suggests that the Euro will rise in value, in this case what we will do is buy a pair Euro: EUR / USD (Euro / Dollar). When you buy EUR / USD, which is actually doing is buying and selling simultaneously EUR USD. When you buy EUR also says you are “long” in Euros. When you sell the EUR, also known as “short” in Euros.
Over 80% of volume in the forex market is generated in what is known as the Big Seven pairs:
– The United States Dollar (USD)
– The Euro (EUR)
– The Pound Sterling (GBP)
– The Swiss Franc (CHF)
– The Canadian Dollar (CAD)
– The Australian Dollar (AUD)
– The Japanese Yen (JPY)
When did it start?
You can not say that one event triggered this phenomenon. Rather a series of events resulted in the forex market as we know it today.
It all began with the treaty “Breton Woods” was abandoned in the early seventies. In this treaty, participating countries had their currencies fixed to values of either gold or the U.S. dollar. In 1973 the world’s most powerful nations introduced a free float regime where allowed to float freely handled by market forces, more precisely the forces of supply and demand. Since then the currency market that was available for speculation, hedging and other reasons.
However, it was not until 1997 when the market was made available to individual speculators through online platforms and leverage (margin operations), giving operators worldwide investment opportunities.
The Forex market is now the most liquid financial market in the world with a volume generated over $ 2 trillion per day (source: BIS), more than all the U.S. financial market combined.
Where all transactions occur?
Unlike other financial markets, there is a physical place where all transactions are made in the forex market. All transactions are done through electronic communication systems (telephone, online platforms, etc..) Between banks, corporations, investors, operators, etc.. This market is called “Over the Counter (OTC).
Thinking – How do you think that all transactions are measured in the Forex Market? Let’s put the stock market in perspective, all transactions on the New York Stock Exchange (NYSE) are performed in the NYSE building, so they can measure the volume of purchases and sales made at any point in time. But as in the forex market there is no physical place where all transactions occur, how you can measure its volume?
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Section III: Benefits of Forex Market
Trading the Forex market has some advantages over other market finances, among the most important are: liquidity, 24 hour market, leverage, low transaction costs, investment, small, specialized operation anywhere operations among others.
Liquidity – The Forex market is by far the most liquid market in the world with over 2 trillion daily volume according to the Bank of International Settlements.
Why liquidity is important to us? It helps in the following ways:
– The most important benefit of all is that with higher liquidity helps to have more price stability. With a market so large, almost always going to be someone interested in buying or selling in the quote “present”, making it easy to open and close operations. Remember however, that there are periods with high volatility is likely where we get a difference between the price they want and they give us.
– In the highly liquid, most of the time, we can enter the market with consistent performances, but as other markets in periods of extreme volatility we have inconsistent performances.
– Liquidity so high it also makes the currency market is very difficult to handle extensively. If any participants would handle it, it would need huge amounts of money (millions and millions) making it virtually impossible.
Volume Generated by Country
Source: Bank of International Settlements (BIS) 2006 Survey
In the table above we can see that UK and U.S. have approximately 50% of total volume, as a rule of thumb, the more volatility, the bigger the market movements. We can talk about this in future lessons.
24-hour market – It is said that the forex market revolves around the clock. This means you can open or close positions from Sunday at 5:00 PM EST when New Zealand begins operations until Friday at 5:00 pm EST when San Francisco ends operations.
Here is a more illustrative table:
Table of Sessions
Fuel for Thought – As you can see in the picture above, there are 4 hours in which the meetings in London and New York come together, what can it mean in terms of volume?
Map of the meetings of the World
Leverage – Trading in the Forex gives you the opportunity to have more power to buy / sell other financial markets. This allows large amounts of money to operate with a small margin deposit. Some brokers offer up to 400:1 leverage, you can control a position of $ 100,000 with only .25% or $ 250. This in turn allows us to maintain our capital at risk to a minimum.
This feature is like a double edged sword. If leverage is not used properly can work as a disadvantage. While we use more leverage, more of our “risk capital” is at risk.
Imagine the following scenario: Two players with the same capital but using different levels of leverage:
Operator A: Use 400:1 with an account of U.S. $ 2,000
Operator B: 100:1 using an account with $ 2,000
If the two operators standard open surgery (100,000 units), the operator A will have at risk $ 1,750 (2,000 – 250 = 1.750), while the operator B is only going to have to risk $ 1,000 (2,000 – 1.000 = 1.000 ) *.
* There are risk management techniques that allow you to reduce capital risk as orders of arrest or stop loss. We will discuss this in more detail in the next lesson.
That’s why we DO NOT recommend using a higher leverage than 100:1.
Remember: the margin is always used as a deposit, the remaining principal in the account is at risk.
Low Transaction costs – The Currency Market is considered one of the financial markets with lower operating costs. Most brokers charge based on the following two schemes:
Spread – The brokers charge a different price for buying and selling operations, this difference is that the broker is.
Spread and Commissions – Most brokers charge a commission this scheme, but usually the spread is very small, even while transaction costs may be lower than the brokers that charge only spread.
The Minimum Capital Risk – For the foreign exchange market risk requires less capital than other markets. Algunosbrokers even allow the opening of accounts with $ 1 (yes, you read right, one dollar). On average, the minimum investment is usually $ 300.
Of course, we can not expect to make a fortune in the capital, but definitely we can help to enter the world market without risking large amounts of money.
Operations Specialist – Market liquidity allows us to operate only some currencies, with the largest volume. About 85% of transactions occur in the seven major currencies mentioned above. This allows us to monitor, continue to detail and learn every instrument better.
Operate from anywhere – the fact that transactions do not have a physical place where all happen, we can make transactions anywhere in the world. We just need a phone or an Internet connection where we can access the broker.
Below we will see two tables between the Forex market and other financial market.
Forex Vs. Actions
Forex Vs. Futures
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Section IV: Major Participants
A few decades ago most important participants in the Forex market commercial banks were taking positions against other banks for a variety of reasons including speculation, to cover, among others, and companies (exporters and importers of goods and services) using the banks to carry out transactions. This was approximately 70% of turnover generated by foreign exchange transactions.
These days this has changed. With the development of technologies and the ability to conduct transactions more easily intercontinental other financial and nonfinancial institutions can participate in the Forex market. Just as they do investors and operators around the world.
Now, speculation has a stake of over 80% of the volume generated daily. These transactions are conducted from banks to small operators and investors.
The main market participants include banks, central banks, commercial companies, traders and individual investors and brokers. They make operations for a variety of reasons including:
– Get profit from fluctuations in currency
– To protect against currency fluctuation (hedging)
– To profit from interest earned on interest rates.
The banks are the largest foreign exchange market participants. Most transactions are made through the same banks (for speculation and commercial). Large transactions are made by these banks (billion dollars a day) and are made by self and client orders. Speculation of banks is about 70% of the volume generated daily.
Larger operators Forex Market
Central banks are major participants in the currency market, although the reasons they are not speculative. The main objective of central banks is to control and regulate the amount of money offered in a nation to achieve its economic goals. A central bank may intervene in currency markets for the following reasons:
– To gain stability in the exchange rate and prices
– To protect certain levels of the exchange rate and inflation
– When the main economic objectives to be achieved.
Some central banks are more conservative than others, some involved regularly (such as Bank of Japan *) and not so often as the Fed (U.S. central bank).
The major central banks are:
The Federal Reserve, U.S.
The Bank of England
The European Central Bank
The Bank of Canada
The Swiss National Bank
* The Japanese central bank used to be involved much in the recent past, but recently it has been noticed both his speech.
These are corporations that participate in the currency market exchange of goods and services across the nation. Most companies like to receive cash in local currency or U.S. dollars, then to complete the transactions they need to acquire foreign currency through commercial banks.
Another reason why companies participate in the currency market is to hedge in case of high fluctuations of the currency. For example, a company will receive payments in the future in your local currency. The local currency has been depreciating and is expected to continue to depreciate until next year. In this case, the company can sell (or short put) in your local currency and buy (get along) in the currency in which payment will be received. Thus the currency fluctuation does not affect the company.
These are companies that represent mutual and pension funds, and make investment transactions and arbitration that invest abroad.
In recent times, more and more funds are participating in the foreign exchange market to speculate and to cover their operations abroad.
The main objective of the broker is to bring together buyers and sellers of a currency, ie they are intermediaries. Most brokers do not charge fees, but achieve their profit spread.
There are two types of brokers:
Market Makers (Market Maker) – The broker is the counterparty to all care operations by operators. When an operator opens a transaction, the broker opens the opposite operation, if the trader buys a pair, the broker sells the same. In this way the brokers can be covered.
No transactions table (Non-dealing-desk) – This type of brokers connected only to operators with travpes banks of electronic communications network (ECN – Electronic Communications Network). The broker does not open any type of operation. This is the kind of broker who charges a commission and a spread, but as mentioned earlier, transaction costs may be lower than those of other broker.
Individual Traders and Investors
Individuals that perform for several reasons including: speculation, a tourist who need foreign currency, etc.
This is a lesson that many do not want to check, “just blah” is understandable, but if you went so far in this lesson, congratulations! You definitely know how we do the things, “first things first.” Congratulations again and good luck on your experience of operator.
This lesson mainly talks about the forex market theory, as it formed, how it works, who its participants, etc.. If you’ve read this far do not think it necessary to review again the material in this lesson. Perhaps most important in this lesson is the difference between the two types of brokers (go to the forex market participants and reread that paragraph, I think it’s worth).
In this lesson we had two sections “To think”.
Fuel for Thought 1 – About the volume, if you arrived at a complex answer and a new theory of how the volume can be calculated, delete it. It can not be calculated, the operations are not centralized in one place. We have estimated by the futures market, with data from individual brokers, etc.. But they are only estimates.
Thinking 2 – About the joint session in London and New York, where, I believe this if it had. When the sessions overlap, there tends to be much more volume in the market, this means, that when a joint, most of the time there are also larger market movements. This is good for us because we can fix operators beyond the level of profit taking.