What is Forex ?

Forex (FOReign EXchange market) is an inter-bank market that took shape in 1971 when global trade shifted from fixed exchange rates to floating ones. This is a set of transactions among forex market agents involving exchange of specified sums of money in a currency unit of any given nation for currency of another nation at an agreed rate as of any specified date. During exchange, the exchange rate of one currency to another currency is determined simply: by supply and demand – exchange to which both parties agree. The scope of transactions in the global currency market is constantly growing, which is due to development of international trade and abolition of currency restrictions in many nations. Global daily conversion transactions came to $1,982 billion in mid-1998 (the London market accounted for some 32% of daily turnover; the New York market exchanged approx. 18%, and the German market, 10%). Not only the scope of transactions but also the rates that mark the market development are impressive: in 1977, the daily turnover stood at five billion U.S. dollars; it grew to 600 billion U.S. dollars over ten years – to one trillion in 1992. Speculative transactions intended to derive profit from jobbing on the exchange rate differences make up nearly 80% of total transactions. Jobbing attracts numerous participants – both financial institutions and individual investors. With the highest rates of information technology development in the last two decades, the market itself changed beyond recognition. Once surrounded with a halo of caste mystique, the foreign exchange dealer’s profession became almost grasroots. Forex transactions that used to be the privilege of the biggest monopolist banks not so long ago are now publicly accessible thanks to e-commerce systems. And the foremost banks themselves also often prefer trade in electronic systems over individual bilateral transactions. E-brokers now account for 11% of the forex market turnover. The daily scope of transactions of the biggest banks (Deutsche Bank, Barclays Bank, Union Bank of Switzerland, Citibank, Chase Manhattan Bank, Standard Chartered Bank) reaches billions of dollars. The FOREX market as a place where to apply one’s personal financial, intellectual and psychic power is not designed for attempts at catching a bluebird there. Sometimes someone manages to do so but for a short time only. The key advantage of a forex market is that one can succeed there just by the strength of one’s intelligence. Another essential feature of the FOREX market, no matter how strange it might seem, is its stability. Everybody knows that sudden falls are very typical of the financial market. However, unlike the stock market, the FOREX market never falls. If shares devalue it means a collapse. But if the dollar slumps, that only means that another currency gets stronger. For instance, the yen strengthened by a quarter against the dollar late in 1998. On some days dollar fell by dozens percentage points. However, the market did not collapse anywhere; trading continued in the usual manner. It is here that the market and

it is even stronger than central banks with their huge foreign exchange reserves. Exchange rates àre so flexible that significant changes happen quite frequently. which no other business can match by efficiency. finding a reliable broker is also quite a real thing. there were plenty of problems and interests that would not allow to hold the pound. The rest depends on the trader himself or herself. High liquidity is a powerful . no real business can be established with this money. The Bank of England. Actually. jacked it up. If we have an elaborate and reliable trade technology we can make a business. by giving it in to the market. powerful information and telecommunications technologies made it possible to consolidate monetary systems of different nations into the single global financial system that has no boundaries. and Soros got his billion. The main thing the market will require for successful operations is not the quantity of money you will enter it with – the main thing is the ability to constantly focus on studying the market. but it is surely experiencing the most exciting and earlier unthinkable changes. trade takes place among banks located in different corners of the globe. with existing contradictions inherent in the European financial system. as in no other area of business now. The FOREX market is a 24-hour market that does not depend on certain business hours of foreign exchanges. this is constant improvement of one’s trade approaches and their disciplined implementation. Everything depends on you personally. With excessive offers of services. The global monetary system has gone a long way during thousands of years of the human history. which enables to make several transactions every day. Nobody has achieved success in that market by forcing one’s way with one’s capital atilt. to buy a computer. did not win the Bank of England at all. George Soros. The market settled this problem.currency is an absolutely liquid commodity and will be always traded in. it costs several thousands of dollars to take a course of initial training. The market is stronger than anything else. having spent nearly $20 billion to maintain the pound rate. That’s exactly what happened. Typical attractive features of the market: liquidity: the market operates the enormous money supply and gives absolute freedom in opening or closing a position in the current market quotation.the related business stability lie . The two main changes determine a new image of the global monetary system: the money is fully separated from any tangible media. a national hero of the FOREX market. to purchase an information service and to create a deposit. It is not without reason that the pivotal banks buy expensive electronic equipment and maintain the staffs of hundreds of traders operating in different sectors of the FOREX market. as many of us believe – he made the right guess that. The starting costs of joining this business are very low now. understanding its mechanisms and participants’ interests.

except for the natural bid/ask market spread between the supply and the demand price. Each particular currency demonstrates its own typical temporary changes. margin: the credit “leverage” (margin) in the FOREX market is only determined by an agreement between a customer and the bank or the brokerage house that pushes it to the market and is normally equal to 1:100. because it gives him or her the freedom to open or to close a position of any size whatever. at least to the overwhelming majority of them. at the investor’s discretion. that is several times as big as the deposit. or a credit leverage. Brokers providing margin trading services require that a pledge deposit should . That means that. availability: a possibility to trade round-the-clock. flexible regulation of the trade arrangement system: a position may be opened for a predetermined period of time in the FOREX market. as is the case in many markets. a customer can enter into transactions for an amount equivalent to $100. which enables to plan the timing of one’s future activity in advance. which makes this market highly profitable but also highly risky. which presents investment managers with the opportunities to manipulate in the FOREX market. thus enabling to avoid the instability problem existing with futures and other forex investments where limited quantities of currency only can be sold concurrently and at a specified price. Involvement of small and medium investors in the Forex market was facilitated by intermediacy of dealing or brokerage companies. A dealing company provides its customers with a credit line – a so-called dealing leverage. using the sums of money starting from $2. Medium and small investors have access to the global forex market in many nations. market trend: currency moves in a quite specific direction that can be tracked for rather a long period of time. one-valued quotations: with high market liquidity. in conjunction with highly variable currency quotations. However.000.000 in their transactions.magnet for any investor. promptness: with a 24-hour work schedule. it is quite clear that such transaction values are not affordable for a private investor – well. a market participant need not wait to respond to any given event. most sales may be carried out at the uniform market price. It is such extensive credit “leverages”. value: the Forex market has traditionally incurred no service charges. upon making a $1. participants in the FOREX market need not wait to respond to any given event.000 pledge. Margin Trading System A typical transaction amounts to $10 million in inter-bank trade.

In this case. the second is the closing of a position.be contributed. This agency provides you with a (computer or telephone) communications channel with a broker who makes available forex quotations to you and through whom you can enter into transactions. Upon closing of a position. we are able to generate profit whether the exchange rate goes up or down. the essence of margin trading can be reduced to the following: by placing pledged capital. and then its compulsory sales/purchase at another (or at the same) price. A dealing center may act as such intermediary.” Just the same. In this case. A customer concludes a contract with the company whereby the latter undertakes. at the customer’s order and in its own name. Therefore. when we believe that the euro will cheapen (look down) vs the dollar. All the time until the position has been closed we have an “open euro position. The last option has been becoming increasingly more common recently. was called margin trading. so the customer deposits a certain sum of money with the bank as pledge. The amount of this deposit is determined based on the amount of transactions entered into by the bank and on the credit . the company runs the risk of losses from entering into such transactions. To put it simply. You can also operate directly from your home PC through the Internet. The prices you can see on your computer’s screen are prices of actual transactions at FOREX. and provide a customer with an opportunity of entering into forex sales and purchase transactions for amounts that are 50. the insurance deposit is returned. to enter into transactions. The system of operations through a dealing (brokerage) house. especially those with little funds. make use of trading with an insurance deposit . For instance. with a credit leverage. 100 and sometimes even 200 times as large as the deposit made. and profit or losses are calculated. unlike with forex transactions with actual delivery or actual currency exchange. each transaction must consist of the two stages – purchase/sales of foreign exchange at one price. our transaction will consist of the following steps: opening a position – sales of a more expensive euro. closing of a position – its sale. Any margin trading transaction must comprise two parts: opening of a position and closing of a position.margin trade. when forecasting the euro goes up (looks up) vs the dollar. You can enter FOREX through an intermediary only. we want to buy a cheaper euro with dollars now and to sell it back when it rises in price. FOREX participants. the transaction will look as follows: opening of a position – euro purchase. or leverage trade. In case of marginal trade. Opening of a position is not accompanied with actual delivery of foreign exchange. the deposit serves as security hedging a broker. The risk of losses is borne by the customer. an investor becomes able to manage target loans provided against this pledge and to guarantee indemnification against any potential losses on open forex positions with the deposit. closing a position – purchase of a cheapened euro. and a participant that opened the position contributes an insurance deposit that serves as guarantee of indemnification against any possible losses. As mentioned above. The first action is called the opening of a position.

. Otherwise the bank may close a long position with a short one.) and are the object of long-term investments. If the bank’s dealer understands that potential losses. yet the company jobs with its own money. if the company generates profit from a concluded transaction. the investor becomes liable to it in the amount of this loss. Share purchase for bull transactions seems more attractive but requires greater investments. If a dealing company makes losses from a concluded transaction. The customer’s order to the company to close an open position is a must. without waiting for the customer’s instructions.S. but. and losing his or her pledge is next to impossible if a customer jobs reasonably. and the customer may sustain losses. Investing funds into securities of the most developed foreign countries to generate any fixed income would hardly be interesting for our compatriots. and 1%-3% of a transaction value will do to enter into the transaction. however. being very expensive. it becomes liable to the investor in the amount of this profit. Margin trading appeals by its affordability. and these liabilities are covered from the pledge deposit.lever provided to the customer. Margin trading is free from the said limitations – you can sell and buy depending on your expectations. might exceed the pledge deposit amount. 6% p. with losses not exceeding the pledge amount. Generated profit is remitted to the customer’s pledge deposit. dividend amount is directly dependent on successful operations of any particular enterprise and its shareholders’ preferences. if the rate changes for the worse.a. Treasury bonds are surely the most reliable and stable. Shares generate higher yield. The situations when cross rates change by more than two percentage points hardly ever happen in the global market. U. they have low yield (approx. the dealer can close a position independently.