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Currency converter
The Foreign Exchange market, also referred to as the "Forex" or "FX" market, is the largest financial market
in the world, with a daily average turnover of approximately US$1.5 trillion. In comparison, the daily volume
of the New York Stock Exchange is approximately US$30 billion per day.
Until now, professional traders from major international commercial and investment banks have dominated
the FX market. Other market participants range from large multinational corporations, global money
managers, registered dealers, international money brokers, and futures and options traders, to private
speculators.
There are three main reasons to participate in the FX market. One is to facilitate an actual transaction,
whereby international corporations convert profits made in foreign currencies into their domestic currency.
Corporate treasurers and money managers also enter the FX market in order to hedge against unwanted
exposure to future price movements in the currency market. The third and more popular reason is
speculation for profit. In fact, today it is estimated that less than 5% of all trading on the FX market is
actually facilitating a true
HOW IT WORKS?
The return for the investor is not in the value of the currency per se, but rather the relative exchange value
of one currency against another currency. Therefore Forex trading is always expressed in currency pairs such
as US dollars and UK Sterling or US dollars and Euros.
By simultaneously buying and selling pairs of currencies, the investor/speculator hopes to cash in on
favorable exchange rate fluctuations. Like the interaction of gravity and airborne objects, though, exchange
rates go down as well as up. The trick in the black art that is Forex trading is accurately forecasting the
direction of the fluctuation between two currencies. Change is frequently rapid and influenced by world events
and a multitude of other factors such as oil prices, interest rates and economic climates.
The objective of any Forex trader, naturally, is to make a profit when the value of the currencies changes in
favor of the investor. Plenty people certainly think that’s the case; the Forex market is daily worth on average
in excess of $1 trillion. This staggering volume of buying and selling of currency makes Forex trading around
50 times larger than all the futures markets combined!
So how do you make money in this massive marketplace?
For example, suppose you had $100 and bought Euros when the exchange rate was two Euros to the dollar.
You would then have 200 Euros. If the value of Euros against the US dollar increased then you would sell
(exchange) your Euros for dollars and have more dollars than you started with. This scenario, simple as it is,
is the nub of Forex trading – buying and selling currency when exchange rates move in the right direction.
Now, all this sound fine and dandy, but what are the risks?
Surprisingly, compared with other money market trades, the sheer scale of the Forex market ensures greater
price stability and better leverage. With built-in protection in the form of automatic limits for buying and
selling, safety margins and other risk protection measures the likelihood of ending up in the red even when
the Forex market is volatile is infinitely reduced.
But all Forex traders should note that the market is one of the most liquid around and subject to strong
currency trends. While leverage figures of 100:1 are often times quoted, without adequate risk protection in
place the pendulum swing between profit and loss can be stark. Even veteran Forex traders can be caught
out and take large hits from time to time. With this type of investor speculation, the golden rule must be:
don’t risk what you can’t afford to lose.
The FX market is considered an Over The Counter (OTC) or 'Interbank' market, due to the fact that
transactions are conducted between two counterparts over the telephone or via an electronic network.
Trading is not centralized on an exchange, as with the stock and futures markets. A true 24-hour market,
Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each
financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can
respond to currency fluctuations caused by economic, social and political events at the time they occur - day
or night.
Where is the Forex Market based?
In contrast to other money markets around the world the Forex or FX market has no central location as such.
Because it’s a truly global market place in currency, the Forex is not centralized on one exchange. In contrast
to stock markets where the main protagonists often come face to face, Forex trading is conducted by buyers
and sellers either across an electronic network such as the internet or sometimes over the telephone.
Each day trading commences in Sydney , Australia and flows around the globe in step with each of the main
financial centers starting their normal business day. As the Australians get their first hour of trading over,
the Japanese are just kicking in before London joins the action and then finally New York .
The global 24 hour five days a week nature of the Forex market means however that it is swiftly susceptible
to change. Investors, unlike their counterparts in other financial marketplaces, can react round the clock in
near real time to the currency value movements caused by economic, social or political events.
It’s this trait that feeds the strong swings in currency values that hallmark the Forex market: a breeze in
Australia can be a gale force wind by the time it hits New York . The Forex market, then, is no place for the
unwary. Even seasoned Forex traders are known to get caught out on occasion when the market shifts
unexpectedly, leaving them with losses.
Generally, the most commonly traded currencies in Forex market are those of countries with stable
governments, reputable banks and low inflation. In practice this means that in excess of 80 per cent of
transactions each day are in the major currencies, i.e. the US dollar, the Japanese Yen, the Euro, UK Sterling,
the Swiss Franc and Canadian and Australian dollars.
The currency exchange rates for these and all other currencies are driven by a number of factors and require
investors to be armed with a good deal of insight, up to the minute info and an aptitude for crystal-ball
gazing.
While variables such as the global economy and political climate exert an influence, the main sways tend to be
interest rates, inflation and political stability. Money markets are jumpy and this is why governments often
trade in the Forex market in order to affect the value of their currencies. By buying up currency or
alternatively upping the supply of their currency - in similar fashion to oil producers - governments can raise
or lower the price of their currency.
This kind of intervention tends to be a short-lived quick fix approach due to the sheer scale of the Forex
market. Highly volatile shifts in values simply cannot be sustained in the long term.
What Are Forex Rates?
Foreign exchange rates - aka Forex rates – are the values of two currencies relative to each other.
In other words, how much of one currency needed to buy a unit of the other currency. For ease of use, the
Forex normally expresses this relationship as the amount of one currency required to buy one US dollar. The
shorthand for this is a pairing; USD/JPY at 110.00 means one US dollar buys 110 Japanese Yen.
Sometimes the pairing of currencies is reversed, with the rate expressing the US dollar equivalent of one unit
of foreign currency. In addition, you will also see currency pairings between foreign currencies and these
values are known as “cross rates”. In cross rates, where the US dollar does not figure, the value is the
relative value between the two currencies. The pairing, EUR/JPY at 135.10 signifies that one Euro can be
exchanged for 135.10 Japanese Yen.
Forex rates, unlike the simplified examples above, are usually denoted to four decimal points, which are
referred to as pips or basis points. If Euros were used to buy Yen at 135.1030 and then the Euro exchange
rate went up to 135.1035, this would be a five pip improvement on the rate.
Like trading in other markets, the Forex operates on a bid/ask price basis. The twin nature of foreign
exchange transactions means that Forex rates are quoted as ‘two tier’ rates, e.g. USD/JPY at 110.00/10
indicates a trader prepared to buy Yen at 110 and sell at 110.10. If this trade is made, the trader will then
have secured a 10 pip “spread”, the difference between the buying and selling price.
The spread between currencies depends on market conditions and how traders around the globe believe each
currency is set to perform and its likely volatility.
Officially quoted Forex rates, though, are generally only available to licensed Forex traders. Most small
investors or day traders will acquire their currency from a commercial bank but at a less favorable rate.
Finding the best rates, and hence improving the chances of making a profitable trade, is therefore crucial in
the Forex marketplace.
Due to its global nature, the Forex market – as opposed to the Forex players per se – is unregulated.
Neither the Fed, the US government nor the governments of any other nation can intervene unilaterally in the
Forex. The market in foreign exchange exists and perpetuates itself only because there are always buyers
and sellers willing to trade on a cash-only basis in the commodity of currency. The rewards in the Forex have
a reputation for being far superior to elsewhere. The downside is that with trades done at breakneck speed in
an often volatile market the risks are proportionately higher too.
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FENIX CAPITAL MANAGEMENT, LLC, 12890 S.W.VILLAGE PARK LANE, TIGARD OR 97223, U.S.A.
E-MAIL: admin@fenixcapitalmanagement.com FAX: 1.503.213.8896 TEL: 1.512.532.7475
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The educational resources about currency trading for all levels of traders from novice to professional.
