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Meanings Forex

 

The foreign exchange market is known as the "Forex," or "FX" market. It is the largest financial market in the world. Foreign exchange is the simultaneous purchase of one currency and sale of another – currencies are always traded in pairs. International currencies are traded on floating exchange rates. There is a daily average turnover of about US$1.9 trillion in the foreign exchange markets.

In the past, Forex markets were accessed only by larger financial institutions, investments banks, large multinational companies, global money managers, international currency dealers and liquidity providers, but lately it was opened to individuals who want to trade currencies in order to gain profits

Forex Market Location

Forex trading is not managed through an exchange. Since transactions are conducted between two counterparts, the FX market is an “inter-bank,” or over the counter (OTC) market.

Forex Players

The Forex Players are central, commercial and investment banks have traditionally dominated the Forex market. Other market participation is rapidly increasing, and now includes international money managers and brokers, multinational corporations, registered dealers, options and futures traders, and private investors.

24hrs Market

Forex is a true global 24-hour marketplace. The trading day begins in Sydney, and moves around the globe as each financial center comes to life. Tokyo follows, then London, and finally New York. Investors can respond in real time to any fluctuations caused by current economic, social and political events.

Forex  common currencies

The most “liquid” currencies in the Forex market are those of countries with low inflation, stable governments, and respected central banks. Nearly 85% of daily transactions involve the major currencies, including the U.S. Dollar, Japanese Yen, the European Union Euro, British Pound, Swiss Franc, and the Canadian and Australian Dollars.

“short” and “long” positions

Short positions are taken when a trader sells currency in anticipation of a downturn in price. Making this move allows the investor to benefit from a decline. Long positions are taken when a trader buys a currency at a low price in anticipation of selling it later for more. Making these moves allows the investor to benefit from changing market prices. Remember! Since currencies are traded in pairs, every forex position inevitably requires the investor to go short in one currency and long in the other.

Pricing for certain currencies

The full range of economic and political conditions impact currency pricing. It is generally held that interest rates, inflation rates and political stability are top among important factors. At times, governments participate in the forex market in order to influence the traded value of their currencies. These and other market factors such as very large orders can cause extreme relative volatility in currency prices. The sheer size of the forex market prevents any single factor from dominating the market for any length of time.

Risk management

The most common risk management tools in Forex trading are the stop-loss order and the limit order. The stop-loss order directs that a position be automatically liquidated at a certain price in order to guard against dramatic changes against the position. A limit order sets the maximum price that the investor is willing to pay in a transaction, as well as a minimum price to be received in exchange. The foreign exchange marketplace is so liquid that it is easy to execute stop-loss and limit orders.

Trading strategy

Both economic fundamentals and technical factors influence the decisions of currency traders. Those who follow economic fundamentals use government issued reports, current news, and broad economic trends to anticipate movements in price. Technical traders rely on trend lines, support and resistance levels, and a variety of charts and mathematical analysis to identify trading opportunities. Over time, the most significant price movements occur in close association with unexpected events. Perhaps the central bank changes rates without warning or an election puts an unexpected candidate in power. News from conflicts certainly impacts currency pricing. More often than not, it is the expectation of a certain event rather than the actual event that drives price pressures.

Hold a position

Forex traders generally hold positions until one of three criteria is met:

1. A sufficient profit has been realized from the position.

2. A pre-set stop-loss order is triggered.

3. A better potential position emerges and the trader needs to liquidate funds to take advantage of it.

Margin calls

A margin call is generated when the equity balance in an account drops below the margin requirement for that size account. If the maximum allowable leverage has been exceeded, any open positions are immediately liquidated, regardless of the nature or size of the positions.