Docstoc

Forex

Document Sample
Forex Powered By Docstoc
					Introduction to Trading Forex

Foreign Exchange
This short introduction explains the basics of trading Forex online, a brief explanation of the
markets and the major benefits of trading Forex online. There are also two scenarios describing
the implications of trading in a bear as well as a bull market to better acquaint you with some of
the risks and opportunities of the largest and most liquid market in the world.

As an additional aid for those who are new to Forex, there is also a glossary at the bottom of this
text which explains some of the terms used in connection with currency trading.
Overview
Foreign exchange, Forex or just FX are all terms used to describe the trading of the world's many
currencies. The Forex market is the largest market in the world, with trades amounting to more
than USD 3 trillion every day. Most Forex trading is speculative, with only a low percentage of
market activity representing governments' and companies' fundamental currency conversion
needs.
Unlike trading on the stock market, the Forex market is not conducted by a central exchange, but
on the “interbank” market, which is thought of as an OTC (over the counter) market. Trading
takes place directly between the two counterparts necessary to make a trade, whether over the
telephone or on electronic networks all over the world. The main centres for trading are Sydney,
Tokyo, London, Frankfurt and New York. This worldwide distribution of trading centres means
that the Forex market is a 24-hour market.
Trading Forex
A currency trade is the simultaneous buying of one currency and selling of another one. The
currency combination used in the trade is called a cross (for example, the euro/US dollar, or the
GB pound/Japanese yen.). The most commonly traded currencies are the so-called “majors” –
EURUSD, USDJPY, USDCHF and GBPUSD.

The most important Forex market is the spot market as it has the largest volume. The market is
called the spot market because trades are settled immediately, or “on the spot”. In practice this
means two banking days,
Why Trade Forex?
24 hour trading

One of the major advantages of trading Forex is the opportunity to trade 24 hours a day from
Sunday evening (20:00 GMT) to Friday evening (22:00 GMT). This gives you a unique
opportunity to react instantly to breaking news that is affecting the markets.
Superior liquidity

The Forex market is so liquid that there are always buyers and sellers to trade with. The liquidity
of this market, especially that of the major currencies, helps ensure price stability and narrow
spreads. The liquidity comes mainly from banks that provide liquidity to investors, companies,
institutions and other currency market players.
No commissions

The fact that Forex is often traded without commissions makes it very attractive as an investment
opportunity for investors who want to deal on a frequent basis.
Trading the “majors” is also cheaper than trading other cross because of the high level of
liquidity. For more information on the trading conditions of Saxo Bank, go to the Account
Summary on your SaxoTrader and open the section entitled “Trading Conditions” found in the
top right-hand corner of the Account Summary.
100:1 Leverage

Leverage (gearing) enables you to hold a position worth up to 100 times more than your margin
deposit. For example, a USD 10,000 deposit can command positions of up to USD 1,000,000
through leverage. You can leverage the first USD 25,000 of your investment up to 100 times and
additional collateral up to 50 times.
Profit potential in falling markets

Since the market is constantly moving, there are always trading opportunities, whether a
currency is strengthening or weakening in relation to another currency. When you trade
currencies, they literally work against each other. If the EURUSD declines, for example, it is
because the US dollar gets stronger against the euro and vice versa. So, if you think the
EURUSD will decline (that is, that the euro will weaken versus the dollar), you would sell EUR
now and then later you buy euro back at a lower price. In case that the EURUSD indeed declines,
then you can take your profit. The opposite trading scenario would occur if the EURUSD
appreciates.

How to Trade Forex

Trading foreign exchange is exciting and potentially very profitable, but there are also significant
risk factors. It is crucially important that you fully understand the implications of margin trading
and the particular pitfalls and opportunities that foreign exchange trading offers. On these pages,
we offer you a brief introduction to the Forex markets as well as their participants and some
strategies that you can apply. However, if you are ever in doubt about any aspect of a trade, you
can always discuss the matter in-depth with one of our dealers. They are available 24 hours a day
on the Saxo Bank online trading system, SaxoTrader.

The benchmark of its service is efficient execution, concise analysis and expertise – all achieved
whilst maintaining an attractive and competitive cost structure. Today, Saxo Bank offers one of
Europe's premier all-round services for trading in derivative products and foreign exchange. We
count amongst our employees numerous dealers and analysts, each of whom has many years
experience and a wide and varied knowledge of the markets – gained both in our home countries
and in international financial centres. When trading foreign exchange, futures and other
derivative products, we offer 24-hour service, extensive daily analysis, individual access to our
Research & Analysis department for specific queries, and immediate execution of trades through
our international network of banks and brokers. All at a price considerably lower than that which
most companies and private investors normally have access to.

The combination of our strong emphasis on customer service, our strategy and trading
recommendations, our strategic and individual hedging programmes, along with the availability
to our clients of the latest news and information builds a strong case for trading an individual
account through Saxo Bank.

Terms of trading are agreed individually depending on the volume of your transactions, but are
generally much lower in cost when compared to banks and brokers. Your margin deposit can be
cash or government securities, bank guarantees etc. Large corporate or institutional clients may
be offered trading facilities on the strength of their balance sheet. The minimum deposit accepted
for an individual trading account depends on the account type. Trade confirmations and real-time
account overview are built into SaxoTrader, while further account information can be produced
in accordance with your specific requirements.

Forex Trading Basics part 01

The global foreign exchange market is the biggest market in the world. The 3.2 trillion USD
daily turnover dwarfs the combined turnover of all the world's stock and bond markets.

There are many reasons for the popularity of foreign exchange trading, but among the most
important are the leverage available, the high liquidity 24 hours a day and the very low dealing
costs associated with trading.

Of course many commercial organisations participate purely due to the currency exposures
created by their import and export activities, but the main part of the turnover is accounted for by
financial institutions. Investing in foreign exchange remains predominantly the domain of the big
professional players in the market - funds, banks and brokers. Nevertheless, any investor with the
necessary knowledge of the market's functions can benefit from the advantages stated above.

In the following article, we would like to introduce you to some of the basic concepts of foreign
exchange trading. If you would like any further information, we suggest that you sign up for a
FREE Membership on this website, where you will be able to exchange views with other Forex
traders and get answers to any questions you might have.
Margin Trading
Foreign exchange is normally traded on margin. A relatively small deposit can control much
larger positions in the market. For trading the main currencies, Saxo Bank requires a 1% margin
deposit. This means that in order to trade one million dollars, you need to place just USD 10,000
by way of security.

In other words, you will have obtained a gearing of up to 100 times. This means that a change of,
say 2%, in the underlying value of your trade will result in a 200% profit or loss on your deposit.
See below for specific examples. As you can see, this calls for a very disciplined approach to
trading as both profit opportunities and potential risks are very large indeed. Please refer to our
page Forex Rates & Conditions for current Spreads, Margins and Conditions.
Base Currency and Variable Currency
When you trade, you will always trade a combination of two currencies. For example, you will
buy US dollars and sell euro. Or buy euro and sell Japanese yen, or any other combination of
dozens of widely traded currencies. But there is always a long (bought) and a short (sold) side to
a trade, which means that you are speculating on the prospect of one of the currencies
strengthening in relation to the other.
The trade currency is normally, but not always, the currency with the highest value. When
trading US dollars against Singapore dollars, the normal way to trade is buying or selling a fixed
amount of US dollars, i.e. USD 1,000,000. When closing the position, the opposite trade is done,
again USD 1,000,000. The profit or loss will be apparent in the change of the amount of SGD
credited and debited for the two transactions. In other words, your profit or loss will be
denominated in SGD, which is known as the price currency. As part of our service, Saxo Bank
will automatically exchange your profits and losses into your base currency if you require this.
Dealing Spread, but No Commissions
When trading foreign exchange, you are quoted a dealing spread offering you a buying and a
selling level for your trade. Once you accept the offered price and receive confirmation from our
dealers, the trade is done. There is no need to call an exchange floor. There are no other time-
consuming delays. This is possible due to live streaming prices, which are also a great advantage
in times of fast-moving markets: You can see where the market is trading and you know whether
your orders are filled or not.

The dealing spread is typically 3-5 points in normal market conditions. This means that you can
sell US dollars against the euro at 1.7780 and buy at 1.7785. There are no further costs,
commissions or exchange fees.

This ensures that you can get in and out of your trades at very low slippage and many traders are
therefore active intra-day traders, given that a typical day in USDEUR presents price swings of
150-200 points.

Forex Trading Basics part 02

Spot and forward trading
When you trade foreign exchange you are normally quoted a spot price. This means that if you
take no further steps, your trade will be settled after two business days. This ensures that your
trades are undertaken subject to supervision by regulatory authorities for your own protection
and security. If you are a commercial customer, you may need to convert the currencies for
international payments. If you are an investor, you will normally want to swap your trade
forward to a later date. This can be undertaken on a daily basis or for a longer period at a time.
Often investors will swap their trades forward anywhere from a week or two up to several
months depending on the time frame of the investment.

Although a forward trade is for a future date, the position can be closed out at any time - the
closing part of the position is then swapped forward to the same future value date.
Interest Rate Differentials
Different currencies pay different interest rates. This is one of the main driving forces behind
foreign exchange trends. It is inherently attractive to be a buyer of a currency that pays a high
interest rate while being short a currency that has a low interest rate.

Although such interest rate differentials may not appear very large, they are of great significance
in a highly leveraged position. For example, the interest rate differential between the US dollar
and the Japanese yen has been approximately 5% for several years. In a position that can be
supported by a 5% margin deposit, this results in a 100% profit on capital per annum when you
buy the US dollar. Of course, an even more important factor normally is the relative value of the
currencies, which changed 15% from low to high during 2005 – disregarding the interest rate
differential. From a pure interest rate differential viewpoint, you have an advantage of 100% per
annum in your favour by being long US dollar and an initial disadvantage of the same size by
being short.
Please refer to our page Forex Rates & Conditions for current Spreads, Margins and Conditions!

Such a situation clearly benefits the high interest rate currency and as result, the US dollar was in
a strong bull market all through 2005. But it is by no means a certainty that the currency with the
higher interest rate will be strongest. If the reason for the high interest rate is runaway inflation,
this may undermine confidence in the currency even more than the benefits perceived from the
high interest rate.
Stop-loss discipline
As you can see from the description above, there are significant opportunities and risks in foreign
exchange markets. Aggressive traders might experience profit/loss swings of 20-30% daily. This
calls for strict stop-loss policies in positions that are moving against you.

Fortunately, there are no daily limits on foreign exchange trading and no restrictions on trading
hours other than the weekend. This means that there will nearly always be an opportunity to react
to moves in the main currency markets and a low risk of getting caught without the opportunity
of getting out. Of course, the market can move very fast and a stop-loss order is by no means a
guarantee of getting out at the desired level.

But the main risk is really an event over the weekend, where all markets are closed. This happens
from time to time as many important political events, such as G7 meetings, are normally
scheduled for weekends.

For speculative trading, we always recommend the placement of protective stop-lossorders. With
Saxo Bank Internet Trading you can easily place and change such orders while watching market
development graphically on your computer screen.

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:8
posted:1/18/2012
language:
pages:5
Description: Its all about business education.