What is FOREX - part II

There are numerous advantages for parties wishing to trade in the FOREX.
They include:

• Liquidity: In the FOREX market there is always a buyer and a seller! The FOREX absorbs trading volumes and per trade sizes which dwarfs the capacity of any other market. On the simplest level, liquidity is a powerful attraction to any investor as it suggests the freedom to open or close a position at will 24 hours a day.
• Access: The FOREX is open 24 hours daily from about 6:00 P.M. Sunday to about 3:00 P.M. Friday. An individual trader can react to news when it breaks, rather than waiting for the opening bell of other markets when everyone else-has the same information. This allows traders to take positions before the news details are fully factored into the exchange
  rates. High liquidity and 24 hour trading permit market participants to take positions or exit regardless of the hour. There are FOREX dealers in every time zone, in every major market center (Tokyo, Hong Kong, Sydney, Paris, London, United States, etc.) willing to continually quote buy and sell prices.
• Two-Way Market: Currencies are traded in pairs, for example dollar/yen, or dollar/Swiss franc. Every position involves the selling of one currency and the buying of another. If a trader believes the Swiss franc will appreciate against the dollar, the trader can sell dollars and buy francs (“selling short!’). If one holds the opposite belief, that trader can buy dollars and sell Swiss francs (“buying long”). The potential for profit exists because there is always movement in the exchange rates (prices).
• Leverage: Trading on the FOREX is done in currency “lots.” Each lot is approximately 100,000 U.S. dollars worth of a foreign currency. To trade on the FOREX market, a “margin account” must be established with a currency broker. This is, in effect, a bank account into which profits may be deposited and losses may be deducted. These deposits and deductions are made instantly upon exiting a position.
• Execution Quality: Because the FOREX is so liquid, most trades can be executed at the current market price. In all fast moving markets, slippage is inevitable in all trading (stocks, commodities, etc.), but can be avoided with some currency broker’s software, which informs you of your exact entering price just prior to execution. You are given the option of avoiding or accepting the slippage. The huge FOREX market liquidity offers the
  ability for high quality execution.
  

Confirmations of trades are immediate and the Internet trader has only to print a copy of the computer screen for a written record of all trading activities. Many individuals feel these features of Internet trading make it safer that using the telephone to trade. Respected firms such as Charles Schwab, Quick & Reilly and T.D. Waterhouse offer Internet trading. They
would not risk their reputations by offering Internet service if it were not reliable and safe. In the event of a temporary technical computer problem with the broker’s ordering system, the trader can telephone the broker 24 hours a day to immediately get in or out of a trade.
Internet brokers’ computer systems are protected by “firewalls” to keep account information from prying eyes. Account security is a broker’s highest concern. They have taken multiple steps to eliminate any risk associated with transacting on the Internet.


A FOREX Internet trader does not have to speak with a broker by telephone. The elimination of the middleman (broker salesman) lowers expenses and makes the process of entering an order faster and has eliminated the possibility for misunderstanding.

What is Forex?!

• FOREX = FOReign EXchange
• You can trade 24 hours a day
• The FOREX is larger than all other financial markets COMBINED

The Foreign Exchange (FOREX) market is a cash (or “spot”) interbank market established in 1971 when floating exchange rates began to materialize. This market is the arena in which the currency of one country is exchanged for those of another and where settlements for international business are made.

The FOREX is a group of approximately 4500 currency trading institutions, including international banks, government central banks and commercial companies. Payments for exports and imports flow through the Foreign Exchange Market, as well as payments for purchases and sales of assets. This is called the “consumer” foreign exchange market. There is also a “speculator” segment in the FOREX Companies, which have large financial exposures to
overseas economies participate in the FOREX to offset the risks of international investing.

Historically, the FOREX interbank market was not available for small speculators. With a previous minimum transaction size and often-stringent financial requirements, the small trader was excluded from participation in this market. But today market maker brokers are allowed to break down the large interbank units and offer small traders the opportunity to buy or sell any number of these smaller units (lots).

Commercial banks play two roles in the FOREX market:

1. They facilitate transactions between two parties, such as companies wishing to exchange currencies (consumers), and
2. They speculate by buying and selling currencies. The banks take positions in certain currencies because they believe they will be worth more (if “buying long”) or less (if “selling short”) in the future. It has been estimated that international banks generate up to 70% of their revenues from currency speculation. Other speculators include many of the worlds’ most successful traders, such as George Soros.

The third category of the FOREX includes various countries’ central banks, like the U.S. Federal Reserve. They participate in the FOREX to serve the financial interests of their country. When a central bank buys and sells its or a foreign currency the purpose is to stabilize their own currency’s value.

The FOREX is so large and is composed of so many participants, that no one player, even the government central banks, can control the market. In comparison to the daily trading volume averages of the $300 billion in the U.S. Treasury Bond market and the approximately $100 billion exchanged in the U.S. stock markets, the FOREX is huge, and has grown in excess of $1.5 trillion daily.

The word “market” is a slight misnomer in describing FOREX trading. There is no centralized location for trading activity (“pit”) as there is in the currency futures (and many other) markets. Trading occurs over the phone and through the computer terminals at hundreds of locations worldwide. The bulk of the trading is between approximately 300 large international banks, which process transactions for large companies, governments and for their own accounts. These banks are continually providing prices (“bid” to buy and “ask” to sell) for each other and the broader market. The most recent quotation from one of these banks is considered the market’s current price for that currency. Various private data reporting services provide this “live” price information via the Internet.

Once purchased, many other high-return investments are difficult to sell at will. FOREX traders never have to worry about being “stuck” in a position due to lack of market interest. In the 1.5 trillion U.S. dollar per day market, major international banks a “bid” (buying) and “ask” (selling) price