FOREX (FOReign EXchange market)

Forex is the name of inter-bank market that was founded in 1971. Back then global trade rapidly shifted from fixed to floating exchange rates. The process of Forex trading means a set of transactions that are performed by market agents and involve exchange of the certain money sums in a currency unit of any given nation for another nations’ currency at a specific agreed rate. During the exchange process, the rate of exchanging currencies is determined by demand and supply upon the agreement of both parties.

Due to development of world trade and cancelation of a number of currency restrictions existing in many nations, the number of currency transactions is constantly growing. The rates that mark the development of financial market are also pretty impressive. Speculative translations with the help of which people earn profit from the differences of the exchange rate make approximately 80% of all transaction and jobbing attract a number of different traders, starting from the financial institutions and ending with individual investors.

During the past two decades the Forex market changes significantly: these days Forex transactions are available not only for world’s biggest banks but also for ordinary people due to the existence of systems of e-commerce. Also, the banks themselves often prefer these systems over ordinary operations. The daily scopes of operations performed by the most famous banks (such as Union Bank of Switzerland, Barclays Bank, Standard Chartered Bank, Citibank, Chase Manhattan Bank, Deutsche Bank) can reach billions of dollars.

The key to success in the Forex market is one’s intelligence: only with the help of it people are able to succeed in trading for a long time. It is also very stable and this can be called another significant feature. Unlike the ordinary stock markets that fall often, the Forex market can never collapse due to the fact that he exist because of currency exchange. And so if one currency falls in price, another rises in the amount and the daily trading is continued.

The Forex market works 24 hours a day and doesn’t depend on standard business hours as the banks that indulge into Forex trading are located all over the world. Exchange rates are very flexible and due to that fact the investors are able to perform several operations every day. This is why even the world biggest banks spend their money for expensive technique and indulge into Forex trading.

It is easy to start trading on Forex market as the initial costs are really low. To buy a laptop or a PC, to purchase a certain information service and to create your own deposit you need only few thousands of dollars while to start a real big business you need much more money. It is important to find a good broker, of course, but the rest depends on the investor. In order to succeed you will have to study the Forex market constantly, trying to understand all of its mechanisms and all of the interest of its participants as this will help you to improve your trading skills and to become a professional trader.

The global monetary system has experienced a lot of significant changes over a years but there are only two main changes that are able to describe its new image:

• all the costs are completely separated from any tangible media;
• the help of telecommunications technologies and powerful information monetary systems of different nations can be easily consolidated into the single global financial system without no boundaries.

Typical attractive features of the financial market:

liquidity:

high liquidity of the market gives investors the freedom to easily open or close any position of any size;

promptness:

due to a 24-hour work schedule Forex market traders doesn’t have to wait to respond to any given event;

availability:

a market participant doesn’t have to wait if he wants to respond to any given event;

Margin Trading System

All the essence of margin trading can be described simply: after an investor places pledged capital, he receives the ability to manage all of the target loans that were provided against his pledge and also to guarantee compensation against all of the potential losses with the help of the deposit.

It has been already mentioned above that all of the Forex traders (especially the ones who have small founds) are able to receive the profit of trading with the help of an insurance deposit –whether it is margin trade or leverage trade. In marginal trade case it is necessary to remember that every transaction must have two stages: purchase or sales of foreign exchange at one certain price and later its obligatory purchase or sale at different (or even the same price). The first stage is called by the traders the opening of a position and the second is named the closing of a position. Opening of a position doesn’t require any actual delivery of a certain foreign exchange. The trader who opened the position has to contribute a certain insurance deposit as it serves to other traders as a compensation guarantee in case possible losses occur. When the position is closes, this insurance deposit is returned to the trader and then losses or profit are calculated.

All of the margins trading transactions have to include both parts: opening and closing of a position. For example, in case when the euro rise against the dollar is forecasted, it is obvious that we want to purchase euro when it is cheaper and then sell it when it goes up in price. So, the transaction will look like that: euro purchase will be the opening of a position and its sale will be the closing of a position. Before this position has been finally closed we have an “open euro position”. Naturally, when we hear forecasts that the euro will fall against the dollar, we want to perform the following operations: sale more expensive euro (this will be considered the opening of a position) and purchase weakened euro later (this will be the closing of a position). This way we are able to receive profit when the foreign exchange rate falls or rises.

If you want to enter Forex, you will have to find an intermediary –for example, a dealing center that will be able to connect you with a broker via a certain (telephone or computer) communications channel. The broker can provide you with the available forex quotations and also to give you an access to the transactions. Also, you are able to perform operation right from your home PC or laptop via the Internet – this option has been becoming very popular recently. All the prices that you will see you your PC’s screen when trading Forex from home are actual Forex transactions prices.

All of the customers have to conclude and sign a contract with the company to receive access to the transactions. According to this contract, the company undertakes to access into transactions at the order of their clients and their own names – though, a certain amount of money has to be put into the bank as pledge, because company takes upon itself the risk of all losses received in such transactions. The amount of the pledged deposit can be determined depending of the amount of these transactions and in the credit lever that is provided to the client. In case a dealing company suffers losses from a certain transaction, the investor is obliged to compensate for these losses from his pledged deposit – but in case a dealing company receives profit from a certain transaction, it has to restore this profit to the client’s pledge deposit. The costumer must order the company to close an open position when he decides so; though, the company works with its own money – in other ways the bank is able to close a certain long position with a short one and in this case the client may suffer great losses. Though, the situations when cross rates suddenly change over two percentage points hardly occur in the global financial markets and loss of the customer’s pledge is almost impossible in case if he or she jobs reasonably. In case when the bank’s dealer is able to calculate that potential losses in case of worse rate change are able to exceed the amount of client’s pledge deposit, he has a right to close a position on his independent will, without having to wait for the instructions of the client.

Margin trading is attractive due to its affordability: the investment of the funds into stocks of the worlds’ most developed countries in order to receive any profit wouldn’t seem very interesting to our fellow countrymen. Though U.S. Treasury bonds are undoubtedly the most stable and reliable, they are also really expensive and have low yield. So they can be viewed rather as an object of various long-term investments. Shares are able to produce higher yield but the problem is that the amount of dividends depends on successful operations in certain enterprises and preferences of their shareholders. The purchase of the shares for bull transactions may seem more appealing but at the same time needs bigger investments. And margin trading is completely free of these limitations as you are able to buy and sell depending on your personal expectations only and you need only 1%-3% of a transaction value to get an access to it.