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Home Introduction into FOREX

Introduction into FOREX. FOREX: general information, peculiarities and characteristics.
FOREX /Foreign Exchange Market or FX/, is a set of operations in sale-trade/jobbing of foreign currency that are implemented under certain conditions /sum, exchange rate, period/ bounded by execution on a certain date. Key participants in the currency market are commercial banks, central banks, financial-stock brokerages, investment and hedge funds, companies that are engaged in foreign trade operations, and individuals. The main currencies that form the basic volume of operations implemented on FOREX are: U.S. Dollar /USD/, Euro /EUR/, Japanese Yen /JPY/, Swiss Franc /CHF/, and the British Pound /GBP/. International trade growth after the Second World War stipulates the creation of world currency market that has to serve the foreign trade exchange.  After the dropping out of the fixed currency rates, FOREX becomes a convenient place for speculative profits realization by big institutional investors.

In 1971 Bretton Woods’s treaty was denounced and the U. S. Dollar was no longer convertible into gold. After 1973, the currencies of the major industrial countires were traded on a free floating rate that is formed by supply and demand in the international currency markets.
FOREXThe transboundary movements of the capital flows were significantly increased with computer technologies advent at the beginning of 1980s and that allowed continuation of the trade. When the markets in Europe close, those in USA open; when the Yankees finish work, people start working in Asia then in Australia and then again in Europe; in this way twenty-four-hour opportunity for speculations is provided.

In 1980 daily volumes in FOREX were about 80 billion dollars per day and two decades later they exceeded 2 trillion dollars per day. The real boom occurs with the appearance of Internet and the beginning of the electronic trading. In 1998 only 11% of the market volumes were realized electronically while these days this number is over 80%. The players at FOREX are mainly big commercial banks executing orders by export/import companies, hedge funds, and big private investors. Banks often make deals with their own funds at their own expense within daily volumes of billion dollars. The best among them /those we call sharks/ form a predominant part of their profits by currency speculations. Besides the banks, active participants at Forex market are some big financial-stock brokerages that execute intermediary functions among large number of institutional investors.
 
Certain banks and stock brokerages not only perform sale-trade of currencies on current prices but they themselves also offer their own quotes actively influencing the pricing and the whole market functioning and this is the reason why they are called market makers, i.e. ‘makers of the market’ and also ‘active participants’.
Market makers in Forex maintain their own bid and offer rate for the main currency pairs under usually restricted spread. During the last year many of them “became smart enough” and at moments of bigger volatility are acting with floating spreads.  Of course, bid and offer orders are never equal in value. Covering the difference is market makers’ obligation appearing as the so-called residual exposition. Quotations and spread of different market makers are not totally the same but FOREX great competition and liquidity make these differencies neglectfully small. The rest participants cannot announce their own prices and make deals on prices offered by the market makers and that is why they are called “passive participants”. Their goals usually are speculations from rate differences, hedging of foreign exchange risk, foreign trade payments, foreign production investments and others.

FOREXAs a rule, central banks appear in FOREX not with the purpose of making profits but to test the stability or to correct the rate of the national currency due to its significant importance for the national economic status. They do not directly come out in the market but use first-rate trade banks or said in professional slang ‘they mask their interventions’. In certain cases the central banks of some countries implement joint coordinated interventions when one of the main currencies is undesirably strong or weak. On exceptional cases the activities are consulted in the form of G-7 and recently even in G-20.

Interventions are really important for the traders at FOREX because they provoke deep corrections or turn the direction of currently acting major trends. Initially, interventions have verbal character in the form of pronouncements by the respective director, financial minister or other authorized people; if this does not help, then it is indispensable to proceed to real activities. The levels at which they are performed are observed by the Forex traders because at a later stage the market is often corrected up to them; this, however, is completely logical as the central bankers not at all like to lose money.

Some of the most important players at FOREX are the different funds – hedge, mutual or investment. When the fund managers decide to purchase a certain currency, for example euro, their outlook is for at least 1-2 years ahead. The market positioning itself takes months because funds manage hundreds of billions. If they entered for a day or a week, they would boost the currency rate “up to the sky”and would “eat” the potential profits. Similarly, when managers decide to “come out” of a currency /i.e. to collect the profits from purchases and start selling it/ it will take months for smooth “unloading” and taking up opposing positions. Otherwise the prices would fall sharply and much of the profits would be lost.

Finally let us not forget and the tens of millions of individual investors with capitals from several hundred to several million dollars. They are particularly important indicator of what should not be done. When young players’ prevailing intentions are to buy, you must do just the opposite, i.e. to sell. Basically, in order for someone to win in FOREX, someone else has to lose. The big players such as banks, funds, etc. could hardly lose in longterm, so it is not difficult to guess where their profits would come from. There is a golden rule in the Texas Poker game which says ‘as you sit at the table to play and see the other players, if you do not understand in five minutes time who would be the victim, then it will be you’. See more at Courses

 

 
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