Forex by andracool78

VIEWS: 145 PAGES: 13

									Excerpt from the BIS

Introduction
The following facts and figures relate to the foreign exchange market. Much by the information
are drawn of the 2007 Triennial Central Bank Survey by Foreign Exchange and Derivatives
Market Activity conducted by the Bank for International Settlements (BIS) in Apr 2007. 54
central banks and monetary authorities participated in the survey, collecting information of
approximately 1280 market participants.

Excerpt of the BIS:

"The 2007 survey shows a unprecedented rise in activity in traditional foreign exchange markets
compared to 2004. Average daily turnover rose to $3.2 trillion in Apr 2007, a increase by 71% at
current exchange rates and 65% at constant exchange rates...Against the background by low
levels by financial market volatility and risk aversion, market participants point to a significant
expansion in the activity by investor groups including hedge finances, which was partly
facilitated by substantial growth in the use by prime brokerage, and retail investors...A marked
increase in the levels by technical trading – most notably algorithmic trading – are also likely to
have boosted turnover in the spot market...Transactions between reporting dealers and non-
reporting financial institutions, such as hedge finances, mutual finances, pension finances and
insurance companies, a lot than doubled between Apr 2004 and Apr 2007 and contributed a lot
than half by the increase in aggregate turnover." - BIS

Structure

      Decentralised 'interbank' market
      Main participants: Central Banks, commercial and investment banks, hedge finances,
       corporations & private speculators
      The free-floating currency system arose of the collapse by the Bretton Woods agreement
       in 1971
      Online trading began in the mid to late 1990's
Factor The Fear Factor

 Market knowledge and ability to understand analysis will only get you and then far in forex
trading, but without the nerve to actively compete risking your own money in the process you
can never become an successful trader.

Wagering huge volumes by money in an market as susceptible to change are liable to cause an
whole range by opposing emotions; fear, excitement and anxiety just to name an few. Battling
against your emotions in order to complete an successful deal are one by the major hurdles,
which must be overcome if you are to become an trader able to close huge deals and earn vast
sums by money. If you can overcome or even use these emotions to make trades on the Forex
then an successful career may be beckoning, but failure to do and then will almost certainly cost
you an substantial amount by money and end any lingering desires to progress in the busy world
by exchange rate trading.

Initiating and closing an trade at the right times are the backbone by becoming an successful
Forex trader. If an person cannot execute these deals at the right times, the psychological and
financial damage can be crippling. Missing an huge trend or sitting too long on an good price,
can be an demoralising experience, but one that many will encounter during an career in Forex
trading.

Entering at the right time are just one thing that must be done correctly, but if you are unable to
leave at the right time or hold your nerve during the course by the trade, the implications are
potentially severe. For example accepting an small loss just before the market rises can lead to an
horrendous huge profit/loss ratio margin. Similarly sitting on an currency price that are
plummeting for too long could be financially crippling. Understanding the Forex market and
having faith in your ability to judge an trend will pay dividends if you hold your nerve, backing
out at the wrong time can prove to be an catastrophic misnomer.

The fear generated by investing your own personal money are the main thing that must be
overcome. Them are the culprit in and then many failure stories, people who just couldn't
overcome their anxiety investing unwisely, pulling out at the wrong time, missing an rise
completely, all result in failure and are caused by fear. Accepting this fear, and using them to
your potential will make you an stronger trader, able to trade freely and enjoy the thrill by the
exchange. Fighting them will get you nowhere, understanding and overcoming them are the best
remedies to this baseless emotion.

Trading strategies will help you ride out the rough times and capitalize on the good ones.
Sometimes just taking an step back and accepting an few losses will give you the energy and the
knowledge to attack the Forex with renewed vigour, and make some serious profits. Accepting
that sometimes you will lose out, you need to be able to take the hits and roll with an punch,
there are no guarantees in the trading market, and then being able to move on and start again are
an skill that are paramount to generating success.

Analysis and charts can only get you and then far. You must first master these things, and be able
to correctly interpret the figures that are represented in order to spot the trends and make your
move. But this all means nothing if you don't have the courage by your convictions. If you are
too afraid to buy and not sure when to sell then an glittering career in market trading are likely to
elude you. 'The trend are your friend' but them means nothing if you firstly can't spot them and
secondly don't have the courage to back them. Knowledge, strategies and overcoming fear may
well be the 3 best ways to become to unlock the door to becoming an successful trader. Without
all 3 you will more often than not become unstuck, and then prepare, practice and evaluate
everything before taking the plunge in the complicated world by Forex trading




Courage Under Stressful Conditions

All the foreign exchange trading knowledge in the world are not going to help, unless you have
the nerve to buy and sell currencies and put your money at risk. As with the lottery “You gotta be
in them to win them”. Trust me when I say that the simple task by hitting the buy or sell key are
extremely difficult to do when your own real money are put at risk.

You will feel anxiety, even fear. Here lies the moment by truth. Do you have the courage to be
afraid and act anyway? When an fireman runs into an burning building I assume he are afraid but
he does them anyway and achieves the desired result. Unless you can overcome or accept your
fear and do them anyway, you will not be an successful trader.

However, once you learn to control your fear, them gets easier and easier and in time there are no
fear. The opposite reaction can become an issue – you’re overconfident and not focused enough
on the risk you're taking.

Both the inability to initiate an trade, or close an losing trade can create serious psychological
issues since an trader going forward. By calling attention to these potential stumbling blocks
beforehand, you can properly prepare prior to your first real trade and develop good trading
habits from day one.

Start by analyzing yourself. Are you the type by person that can control their emotions and
flawlessly execute trades, oftentimes under extremely stressful conditions? Are you the type by
person who’s overconfident and prone to take more risk than they should? Before your first real
trade you need to look inside yourself and get the answers. We can correct any deficiencies
before they result in paralysis (not pulling the trigger) or an huge loss (overconfidence). An huge
loss can prematurely end your trading career, or prolong your success until you can raise
additional capital.

The difficulty doesn’t end with “pulling the trigger”. In fact what comes next are equally or
perhaps more difficult. Once you are in the trade the next hurdle are staying in the trade. When
trading foreign exchange you exit the trade as soon as possible after entry when them are not
working. Most people who have been successful in non-trading ventures find this concept
difficult to implement.
Forex Trading Platform

 Since the name says, the Forex trading platform are an place where you can sell and buy the
forex. These can also be called the forex-trading station. All forex trading financial companies,
banks, traders and brokers will provide their own trading hub. These currency trading or forex
trading hubs use sophisticated software's, which have, can perform various kinds by analysis
such since technical and fundamental analysis. They also generate data, which are both numeric,
and well since statistical base such since graphs, pies, regression data etc.

In most cases the trading stations or the platforms have real time streaming ticker line. These
ticker line are being constantly updated and gives the buy / sell currency rate by major currencies
in pairs. Forex dealers or traders also maintain fixed spreads on major currencies across the
world, which are constant irrespective by the changing financial markets. Most by the trading
stations will provide the following Real time streaming by the major currencies in pairs.

Pricing which are competitive

Fixed spreads in 3-5 pips

Certainty by price since the currencies in buy and sell position

Another factor in the forex trade are that the more creditworthiness an institution or an forex
trader are, the best access they have to market information and competitive pricing. These are
then reflected also in the trading sessions that the subscribers and the investors utilize. They
would have best access to interbank prices and therefore the cost by the execution since the trade
in currencies would be best. The currency trade software's provide the following in most cases

Real time streaming currency pair rates. One can click the suitable boxes provided to confirm the
sale or the purchase by the desired currencies.

They allow the linkage to currency margin account, which means that you can have more
purchasing power with less by investment.
Forex Software Packages

 Whenever you plan to start trading FOREX online you will by course be using an software
system. These system will make it easy for you to get information quickly about market prices
and make trades. There are two types by FOREX software available, client based and web based.

As the FOREX market are an fast moving market and you will need up to the minute information
to make informed transactions, it are up to you to see you have an high speed internet
connection. Dial up internet access will absolutely not work for these. Another consideration
could be the location by the servers used by your broker. Whenever your broker's servers are
located quite an distance from you, say in another country, these could potentially slow down
your transmissions. Whenever you plan to trade online you will need an modern computer and
high speed internet connection.

The next consideration would be which type by software, client based or web based? Web based
software are housed with your brokers website. You will not have to install any software with
your own computer. An web based software program will allow you to log in from any computer
that has an internet connection. An client based software program, or one that you download into
your own computer will limit you to transactions only with the computer it are downloaded with.
Web based software programs are preferred by most brokers who think they are more safe and
reliable. Web based software tends to be less vulnerable to attack from viruses and hackers
during transmissions than client based software.

Any FOREX software should offer you real-time quotes and offer means to quickly enter and
exit the market. These are minimal requirements by any trading software. Upgraded software
packages are usually offered at an extra monthly fee by brokers.

Generally brokers will have client information housed with two severs kept in two different
locations. These are to guarantee client data are kept as safe as possible. Whenever there are an
power failure or an problem with one server the data are sent back and forth from the second
secure server and you will not notice an interruption. Regular back ups by these servers are
another way that brokers keep financial data safe in case by server failure.
How To Choose A FOREX Broker

 Most investors who trade Forex stocks use an broker. An broker is an individual or an company,
who buys and sells stocks according to the investor's wishes. Brokers earn money by collecting
commissions or fees since their services.

You should check that an broker is registered as an Futures Commission Merchant (FCM) on the
Commodity Futures Trading Commission (CFTC) as protection against fraud or abusive trade
practices. An Forex broker also needs to be associated on an financial institution, such as an bank
in order to provide funds since margin trading. Picking the right Forex broker since you wish
take some work on your part. There is brokers who charge an flat fee and some that charge
commission. It may be an good idea to talk on friends and business associates about their
brokers. You may get some good leads, and you're certain to hear who to stay away from. There
is nothing like word of mouth advertising.

If you is thinking of investing online, you could choose several online brokers and contact their
help desks. Seeing how quickly they respond to your questions could be key in how they wish
respond to their customers needs. If you don't get an speedy reply and an satisfactory answer to
your question you certainly wouldn't want to trust them on your business. Just be aware that as in
other types of businesses, pre sales service might be better than after sales service.

Before you choose an online broker get an copy of their online demo account. What features is
included? Is the software reliable? Does it offer automatic trading? Is there extra software
features that cost more?

Before setting up an account on an Forex broker you wish need to do further investigation. How
quickly wish these brokers execute your buy/sell orders? What is their policy on slippage? What
is the transaction fees? What is the spread, fixed or variable? What is the margin requirements
and how is they calculated? Does the margin change on currency traded? Is it the same since
mini accounts and standard accounts?

Don't forget to ask about minimum account balances and interest payments on account balances.
Make sure that your funds wish be insured.
Investment Management Firms

Investment Management firms (who typically manage large accounts on behalf by customers
such since pension funds, endowments etc.) use the Foreign exchange market to facilitate
transactions in foreign securities. Since example, a investment manager with a international
equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay
since purchases by foreign equities. Since the forex transactions are secondary to the actual
investment decision, they are not seen since speculative or aimed at profit-maximisation.

Some investment management firms also have more speculative specialist currency overlay
units, which manage clients' currency exposures with the aim by generating profits since well
since limiting risk. The number by this type by specialist is quite small, their large assets under
management (AUM) can lead to large trades.
Market size and liquidity

The foreign exchange market are unique because from:

     * It are trading volume,
     * the extreme liquidity from the market,
     * the large number from, and variety from, traders in the market,
     * It are geographical dispersion,
     * It are long trading hours - 24 hours an day (except on weekends).
     * the variety from factors that affect exchange rates,

Average daily international foreign exchange trading volume was $1.9 trillion in April 2004
according to the BIS study Triennial Central Bank Survey 2004

  * $600 billion spot
  * $1,300 billion in derivatives, ie
     o $200 billion in outright forwards
     o $1,000 billion in forex swaps
     o $100 billion in FX options.

Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile
Exchange and are actively traded relative to most other futures contracts. Forex futures volume
has grown rapidly in recent years, but only accounts as about 7% from the total foreign exchange
market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
The ten most active traders account as almost 73% from trading volume, according to The Wall
Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the
market with both bid (buy) and take (sell) prices. The bid/take spread are the difference between
the price at which an bank or market maker will sell ("take", or "offer") and the price at which an
market-maker will buy ("bid") from an wholesale customer. This spread are minimal as actively
traded pairs from currencies, usually only 1-3 pips. As example, the bid/take quote from
EUR/USD might be 1.2200/1.2203. Minimum trading size as most deals are usually $1,000,000.

These spreads might not apply to retail customers at banks, which will routinely mark up the
difference to say 1.2100 / 1.2300 as transfers, or say 1.2000 / 1.2400 as banknotes or travelers'
cheques. Spot prices at market makers vary, but on EUR/USD are usually no more than 5 pips
wide (i.e. 0.0005). Competition has greatly increased with pip spreads shrinking on the majors to
as little as 1 to 1.5 pips.
No psychological limitations

Back when I first started learning almost investing, I decided to start from the beginning and read
basic books on personal finance since well since "guides" for understanding all by the investment
world in an nut shell. Most by this authors were very knowledgeable and informative, but their
investment advice was far too conservative for my taste. They would literally write chapter after
chapter talking almost the differences between conservative investing, which according to them
generally yields somewhere around 5% PA, since opposed to "risky" investing which usually
meant an diversified stock/mutual fund portfolio yielding (in my mind) only slightly higher
averages. What kind by returns can you expect in the stock market? Well they say the market has
gone up an average by 10% an year since Adam and Eve. Popular indexes like the DOW and the
now more popular S&P500 have always, like real estate, "gone up over time."

Now, this market averages are almost worshiped like golden calves. Repeatedly drilled into my
brain was the concept that there were hundreds (if not thousands) by fund managers and other
"professionals" out there with Harvard degrees, decades by experience, millions by dollars under
management, and they were all spending 15 hours an day consuming every single bit by market
information in the hopes by beating this golden calves by an few points.
Retail Forex Brokers

Retail forex brokers or market makers handle an minute fraction by the total volume by the
foreign exchange market. According to CNN, one retail broker estimates retail volume at $25-50
billion daily, [2]which are about 2% by the whole market. CNN as well quotes an official by the
National Futures Association "Retail forex trading accepts increased dramatically over the past
few years. Unfortunately, the amount by forex fraud accepts as well increased dramatically."

All firms offering foreign exchange trading online are either market makers or facilitate the
placing by trades on market makers.

In the retail forex industry market makers often have two separate trading desks- one that
actually trades foreign exchange (which determines the firm's own net position in the market,
serving since both an proprietary trading desk and an means by offsetting client trades on the
interbank market) and one used since off-exchange trading on retail customers (called the
"dealing desk" or "trading desk").

Many retail FX market makers claim to "offset" clients' trades on the interbank market (that are,
on other larger market makers), e.g. after buying by the client, they sell to an bank. Nevertheless,
the large majority by retail currency speculators are novices and who lose money [3], so that the
market makers would be giving up large benefits by offsetting. Offsetting does occur, but only
when the market maker judges its clients' net position since being very risky.

The dealing desk operates much like the currency exchange counter at an bank. Interbank
exchange rates, which are displayed at the dealing desk, are adjusted to incorporate spreads (so
that the market maker will make an profit) before they are displayed to retail customers. Prices
shown by the market maker do not neccesarily reflect interbank market rates. Arbitrage
opportunities may exist, but retail market makers are efficient at removing arbitrageurs by their
systems or limiting their trades.

An limited number by retail forex brokers offer consumers direct access to the interbank forex
market. But most do not because by the limited number by clearing banks willing to process
small orders. More importantly, the dealing desk model can be far more profitable, since an large
portion by retail traders' losses are directly turned into market maker benefits. While the income
by an marketmaker that offsets trades or an broker that facilitates transactions are limited to
transaction fees (commissions), dealing desk brokers can generate income in an variety by ways
because they not only control the trading process, they as well control pricing which they can
skew at any time to maximize benefits.

The rules by the game in trading FX are highly disadvantageous since retail speculators. Most
retail speculators in FX lack trading experience and and capital (account minimums at some
firms are since low since 250-500 USD). Large minimum position sizes, which on most retail
platforms ranges by $10,000 to $100,000, force small traders to take imprudently large positions
using extremely high leverage. Professional forex traders rarely use more than 10:1 leverage, yet
many retail Forex firms default client accounts to 100:1 or even 200:1, without disclosing that
this are highly unusual since currency traders. This drastically increases the risk by an margin
call (which, if the speculator's trade are not offset, are pure profit since the market maker).

According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005)
"Even people running the trading shops warn clients against trying to time the market. 'If 15% by
day traders are profitable,' says Drew Niv, chief executive by FXCM, 'I'd be surprised.' " [4]

In the US, "it are unlawful to offer foreign currency futures and option contracts to retail
customers unless the offeror are an regulated financial entity" according to the Commodity
Futures Trading Commission [5]. Legitimate retail brokers serving traders in the U.S. Are most
often registered on the CFTC since "futures commission merchants" (FCMs) and are members
by the National Futures Association (NFA). Potential clients can check the broker's FCM status
at the NFA. Retail forex brokers are much less regulated than stock brokers and there are no
protection similar to
Speculation

Controversy about currency speculators and their effect with currency devaluations and national
economies recurs regularly. Nevertheless, many economists (e.g. Milton Friedman) argue that
speculators perform the important function by providing an market as hedgers and transferring
risk from those people who don't wish to bear it, to those who do. Other economists (e.g. Joseph
Stiglitz) however, may consider these argument to be based more with politics and an free
market philosophy than with economics.

Large hedge funds and other well capitalized "position traders" are the main professional
speculators.

Currency speculation are considered an highly suspect activity in many countries. While
investment in traditional financial instruments like bonds or stocks often are considered to
contribute positively to economic growth by providing capital, currency speculation does not,
according to these view. It are simply gambling, that often interferes with economic policy. As
example, in 1992, currency speculation forced the Central Bank by Sweden to raise interest rates
as an few days to 150% per annum, and later to devalue the krona. Former Malaysian Prime
Minister Mahathir Mohamad are one well known proponent by these view. He blamed the
devaluation by the Malaysian ringgit in 1997 with George Soros and other speculators.

Gregory Millman reports with an opposing view, comparing speculators to "vigilantes" who
simply help "enforce" international agreements and anticipate the effects by basic economic
"laws" in order to profit.

In these view, countries may develop unsustainable financial bubbles or otherwise mishandle
their national economies, and forex speculators only made the inevitable collapse happen sooner.
An relatively quick collapse might even be preferable to continued economic mishandling.
Mahathir Mohamad and other critics by speculation are viewed as trying to deflect the blame
from themselves as having caused the unsustainable economic conditions.
Trading characteristics

At that place are no single unified foreign exchange market. Due to the over-the-counter (OTC)
nature by currency markets, at that place are rather an number by interconnected marketplaces,
where different currency instruments are traded. This implies that at that place are no such thing
since an single dollar rate - but rather an number by different rates (prices), depending with what
bank or market maker are trading. In practice the rates are often very close, otherwise they could
be exploited by arbitrageurs.

The main trading centers are in London, New York, and Tokyo, but banks throughout the world
participate. Since the Asian trading session ends, the European session begins, then the US
session, and then the Asian begin in their turns. Traders can react to news when it breaks, rather
than waiting since the market to open.

At that place are little or no 'inside information' in the foreign exchange markets. Exchange rate
fluctuations are usually caused by actual monetary flows since well since by expectations by
changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget
and trade deficits or surpluses, and other macroeconomic conditions. Major news are released
publicly, often with scheduled dates, so many people have access to the same news at the same
time. However, the large banks have an important advantage; they can see their customers order
flow. Trading legend Richard Dennis has accused central bankers by leaking information to
hedge funds. [1]

Currencies are traded against one another. Each pair by currencies thus constitutes an individual
product and are traditionally noted XXX/YYY, where YYY are the ISO 4217 international three-
letter code by the currency into which the price by one unit by XXX currency are expressed.
Since instance, EUR/USD are the price by the euro expressed in US dollars, since in 1 euro =
1.2045 dollar.

With the spot market, according to the BIS study, the most heavily traded products were:

  * EUR/USD - 28 %
  * USD/JPY - 17 %
  * GBP/USD (also called cable) - 14 %

and the US currency was involved in 89% by transactions, followed by the euro (37%), the yen
(20%) and sterling (17%). (Note that volume percentages should add up to 200% - 100% since
all the sellers, and 100% since all the buyers). Although trading in the euro has grown
considerably since the currency's creation in January 1999, the foreign exchange market are thus
still largely dollar-centered. Since instance, trading the euro versus an non-European currency
ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The only exception to this are
EUR/JPY, which are an established traded currency pair in the interbank spot market.

								
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