Every forex (foreign exchange) transaction involved the transfer of funds between two nations and that means that it also involves the payment and settlement systems of the two countries concerned in the transaction. For this reason national payment and settlement systems play a key role in the day to day operations of the forex market.
Today there are a wide variety of payment systems which are legally acceptable within the United States and payments can be made for example in cash, by check, using an automated clearing house or using an electronic funds transfer.
In terms of the sheer number of transactions the vast majority of payments in the United States today are made in cash or by check, however, in terms of value, the greatest amount of money is paid by electronic funds transfer. For this reason the electronic funds transfer system is a key component of the Unites States payment and settlement system and it is this system which is used to make inter-bank transfers between dealers in the forex market.
There are two main electronic funds transfer systems operating in the United States today. The first is the Clearing House Inter-bank Payments System (CHIPS) which is a private system operated by the New York Clearing House and the second is a system operated by the Federal Reserve Bank and known as Fedwire.
Using Fedwire a regional Federal Reserve Bank debits the account of the sending bank and credits the account of the receiving bank so that the transfer is effectively immediate and this is often referred to as a RTGS (real time gross settlement) system. By contrast individual transactions are not settled during the course of the trading day using CHIPS but are settled at the close of each day's business as a net settlement for each individual CHIPS account holder. Final settlement of CHIPS obligations is made using Fedwire.
Other countries operate systems similar to those in the United States. In the United Kingdom for example settlement is made through the Clearing House Association Payments System (CHAPS) with settlement being made through the Bank of England, while in the European Community a system linking the banks of member states and known as Target is used to settle transactions involving the Euro.
The United States settlement system is particularly important in the world of forex trading because the majority of global foreign exchange transactions involve the US dollar with daily settlements running into trillions of dollars. Indeed, the bulk of the transactions processed through CHIPS every day are foreign exchange transaction settlements.
Although modern technology has done much to transform foreign exchange trading one element which still concerns many people is that of 'settlement risk'. In other words, the risk that you will pay out the currency you are selling but not receive the currency you are buying. Considerable efforts have been made in recent years to reduce settlement risk in the foreign exchange markets and today the vast majority of forex traders would consider this risk to be minimal.
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Monday, September 1, 2008
The Complex Nature Of Exchange Rates In Forex Trading
An exchange rate is simply a score for one currency against another and represents the number of units of one currency that need to be exchanged for a single unit of another currency. The exchange rate is thus the price of one currency against another and, given the number of world currencies today, within the US alone there are literally dozens of exchange rates. Now that seems simple enough but, unfortunately, it is not quite that easy.
Quite apart from these simple exchange rates, which are sometimes referred to as 'spot' rates, there are also a whole range of 'trade weighted' or 'effective' rates which show the movement of one currency against an average of several other currencies. There are also exchange rates which are used in markets such as the forwards markets in which delivery dates are set at some point in the future, rather than at the time of the initial transaction. In other words, there is no such thing as an exchange rate, but are in fact a series of different exchange rates depending upon the nature of the transaction.
The foreign exchange market is driven largely by supply and demand and the exchange rate between any two currencies at any moment in time is influenced substantially by the interaction of the various players in the market. In a few cases currencies are still fixed, or the exchange rate is set by the monetary authorities, and when this is the case the country's central bank will normally intervene if required and either buy or sell the currency to keep its exchange rate within a narrow and defined band. In the vast majority of cases however, and certainly in the case of the US, currencies are allowed to float and central banks do not normally, and certainly not routinely, intervene to support their currency. Accordingly, the exchange rate for a particular currency against other currencies is determined by players, large and small, who are buying and selling the currency at any particular moment in time.
The mix of participants in the market is important and will affect different currencies to varying degrees. Some buyers and sellers deal in the market purely in support of international trade and are operating in the 'goods' market buying and selling currency to pay for merchandise being traded across national borders. Other dealers are buying and selling currencies in support of 'portfolio investment' and are trading in bonds, stocks and other financial instruments across national borders. Yet another group of currency traders are operating in the 'money' market and are trading short term debt across international borders.
As if this were not complicated enough, this mix of traders whether they are paying for imports, investing, speculating, hedging, arbitraging or simply seeking to influence exchange rates are also focusing their attention of a variety of different timeframes in their trading which will range from a matter of minutes to several years.
Against this background it is no wonder than predicting exchange rates is a complex business. Doing so however is vitally important since exchange rates influence the behavior of all of the participants in the market and, in today's open market, also influence interest rates, consumer prices, economic growth, investment decision and so much else. It is for this reason that the forex market plays such a critical role in determining exchange rates.
Quite apart from these simple exchange rates, which are sometimes referred to as 'spot' rates, there are also a whole range of 'trade weighted' or 'effective' rates which show the movement of one currency against an average of several other currencies. There are also exchange rates which are used in markets such as the forwards markets in which delivery dates are set at some point in the future, rather than at the time of the initial transaction. In other words, there is no such thing as an exchange rate, but are in fact a series of different exchange rates depending upon the nature of the transaction.
The foreign exchange market is driven largely by supply and demand and the exchange rate between any two currencies at any moment in time is influenced substantially by the interaction of the various players in the market. In a few cases currencies are still fixed, or the exchange rate is set by the monetary authorities, and when this is the case the country's central bank will normally intervene if required and either buy or sell the currency to keep its exchange rate within a narrow and defined band. In the vast majority of cases however, and certainly in the case of the US, currencies are allowed to float and central banks do not normally, and certainly not routinely, intervene to support their currency. Accordingly, the exchange rate for a particular currency against other currencies is determined by players, large and small, who are buying and selling the currency at any particular moment in time.
The mix of participants in the market is important and will affect different currencies to varying degrees. Some buyers and sellers deal in the market purely in support of international trade and are operating in the 'goods' market buying and selling currency to pay for merchandise being traded across national borders. Other dealers are buying and selling currencies in support of 'portfolio investment' and are trading in bonds, stocks and other financial instruments across national borders. Yet another group of currency traders are operating in the 'money' market and are trading short term debt across international borders.
As if this were not complicated enough, this mix of traders whether they are paying for imports, investing, speculating, hedging, arbitraging or simply seeking to influence exchange rates are also focusing their attention of a variety of different timeframes in their trading which will range from a matter of minutes to several years.
Against this background it is no wonder than predicting exchange rates is a complex business. Doing so however is vitally important since exchange rates influence the behavior of all of the participants in the market and, in today's open market, also influence interest rates, consumer prices, economic growth, investment decision and so much else. It is for this reason that the forex market plays such a critical role in determining exchange rates.
The World And The Forex Market
It is possible to day trade currencies along with trading stocks. In case you have ever wondered how the foreign exchange market, or Forex, works, here is an overview of some of the markets basic features:
First and foremost there are the foreign exchange rates, which is the proportional value of two currencies. To be more specific, it’s the required quantity of one particular currency to sell or buy a unit of another currency. There are two methods used to express a foreign exchange rate. The most common method would express the amount of foreign currency that is needed to buy one U.S. dollar. For instance, if a foreign exchange quote expressed as USD/CND at 1.4300, this means that one U.S. dollar can be exchanged for 1.43 Canadian dollars, and vise versa. The second method is when the foreign exchange rate is expressed under the terms that the USD amount can be exchanged for one unit of a foreign currency. For instance, if a quote of CND/USD at 0.6700 means that one Canadian dollar can be exchanged for the same 0.6700 USD. When the USD is not used to convey an exchange rate, then the “cross rate” term is used to convey the proportional values between the two currencies. For instance, if the quote is DEM/SFR at .7000, this means that on German Mark can be exchanged for only .7 Swiss Francs.
Basis points are normally when the foreign exchange rate is expressed by a whole number followed by four decimal points. For example, 0.0001 is called a basis point. Therefore, if an exchange rate rises from 1.4550 to 1.4590, then the currency is said to have changed by 40 basis points.
The Forex market is used to invest in other countries or even to buy foreign products. Sometimes individuals or firms who wish to buy foreign currencies or products, may need to get hold of some of the currency, beforehand, from the country in which they wish to do business with. Also, the exporters may require payment for services or goods in their own currency, or in USD, which is accepted throughout the world.
In the Forex market, a majority of selling and buying of foreign currencies throughout the world is taken place, mostly by the large commercial banks, who are the major traders in the Forex market. With five major institutions based throughout the world in New York, London, Frankfurt, Zurich and Tokyo, the Forex market is considered the largest financial market in the world by far, with the multitude of trading volumes exceeding 1.5 trillion USD on most days.
The foreign exchange spreads are when the exchange rates in the Forex market are cited as a two-tier “bid” or “ask” rate. For instance, when a USD and a DEM is cited as 1.6000/15, the Forex trader who cites this exchange rate is agreeing to buy the DEM’s at 1.6000 and sell them at 1.6015. The “spread” is the actual difference between cites of purchase and cites of sale and also illustrates the profit expected from the transaction for the Forex trader. The “spread” may vary comprehensively on any specific currency; all depending on the currency’s strength or weakness, and even it’s past history or prospective volatility.
Forex traders who consist primarily of world wide network interbank traders are connected together by computers and telephone lines and are constantly negotiating prices among one another. These artful negotiations normally ensue in a market bid, or asking price, for a specific currency that is then introduced continuously into computers to be displayed on official quote screens. When the Forex exchange rates are quoted between banks, this is called “Interbank Rates.”
Many individuals may not be able to get hold of some foreign currencies at Forex rates unless they become licensed traders through Forex. Instead, those individuals may be able to come across foreign currency through a commercial bank, which may charge the individuals with either a commission or a higher spread than those reigning in the Forex market. Sometimes these commercial banks will even charge individuals both commission and higher spread as to enable the bank to make a reasonable profit from the transaction.
The world is big and so is the world of the Forex market.
First and foremost there are the foreign exchange rates, which is the proportional value of two currencies. To be more specific, it’s the required quantity of one particular currency to sell or buy a unit of another currency. There are two methods used to express a foreign exchange rate. The most common method would express the amount of foreign currency that is needed to buy one U.S. dollar. For instance, if a foreign exchange quote expressed as USD/CND at 1.4300, this means that one U.S. dollar can be exchanged for 1.43 Canadian dollars, and vise versa. The second method is when the foreign exchange rate is expressed under the terms that the USD amount can be exchanged for one unit of a foreign currency. For instance, if a quote of CND/USD at 0.6700 means that one Canadian dollar can be exchanged for the same 0.6700 USD. When the USD is not used to convey an exchange rate, then the “cross rate” term is used to convey the proportional values between the two currencies. For instance, if the quote is DEM/SFR at .7000, this means that on German Mark can be exchanged for only .7 Swiss Francs.
Basis points are normally when the foreign exchange rate is expressed by a whole number followed by four decimal points. For example, 0.0001 is called a basis point. Therefore, if an exchange rate rises from 1.4550 to 1.4590, then the currency is said to have changed by 40 basis points.
The Forex market is used to invest in other countries or even to buy foreign products. Sometimes individuals or firms who wish to buy foreign currencies or products, may need to get hold of some of the currency, beforehand, from the country in which they wish to do business with. Also, the exporters may require payment for services or goods in their own currency, or in USD, which is accepted throughout the world.
In the Forex market, a majority of selling and buying of foreign currencies throughout the world is taken place, mostly by the large commercial banks, who are the major traders in the Forex market. With five major institutions based throughout the world in New York, London, Frankfurt, Zurich and Tokyo, the Forex market is considered the largest financial market in the world by far, with the multitude of trading volumes exceeding 1.5 trillion USD on most days.
The foreign exchange spreads are when the exchange rates in the Forex market are cited as a two-tier “bid” or “ask” rate. For instance, when a USD and a DEM is cited as 1.6000/15, the Forex trader who cites this exchange rate is agreeing to buy the DEM’s at 1.6000 and sell them at 1.6015. The “spread” is the actual difference between cites of purchase and cites of sale and also illustrates the profit expected from the transaction for the Forex trader. The “spread” may vary comprehensively on any specific currency; all depending on the currency’s strength or weakness, and even it’s past history or prospective volatility.
Forex traders who consist primarily of world wide network interbank traders are connected together by computers and telephone lines and are constantly negotiating prices among one another. These artful negotiations normally ensue in a market bid, or asking price, for a specific currency that is then introduced continuously into computers to be displayed on official quote screens. When the Forex exchange rates are quoted between banks, this is called “Interbank Rates.”
Many individuals may not be able to get hold of some foreign currencies at Forex rates unless they become licensed traders through Forex. Instead, those individuals may be able to come across foreign currency through a commercial bank, which may charge the individuals with either a commission or a higher spread than those reigning in the Forex market. Sometimes these commercial banks will even charge individuals both commission and higher spread as to enable the bank to make a reasonable profit from the transaction.
The world is big and so is the world of the Forex market.
What is Currency Markets?
The currency market includes the Foreign Currency Market and the Euro-currency Market. The Foreign Currency Market is virtual. There is no one central physical location that is the foreign currency market. It exists in the dealing rooms of various central banks, large international banks, and some large corporations. The dealing rooms are connected via telephone, computer, and fax. Some countries co-locate their dealing rooms in one center. The Euro-currency Market is where borrowing and lending of currency takes place. Interest rates for the various currencies are set in this market.
Trading on the Foreign Exchange Market establishes rates of exchange for currency. Exchange rates are constantly fluctuating on the forex market. As demand rises and falls for particular currencies, their exchange rates adjust accordingly. Instantaneous rate quotes are available from a service provided by Reuters. A rate of exchange for currencies is the ratio at which one currency is exchanged for another.
The foreign exchange market has no regulation, no restrictions or overseeing board. Should there be a world monetary crisis in this market; there is no mechanism to stop trading. The Federal Reserve Bank of New York publishes guidelines for Foreign Exchange trading. In their “Guidelines for Foreign Exchange Trading”, they outline 50 best practices for trading on the forex market.
Spot Exchange
The spot exchange is the simplest contract. A spot exchange contract identifies two parties, the currency they are buying or selling and the currency they expect to receive in exchange. The currencies are exchanged at the prevailing spot rate at the time of the contract. The spot rate is constantly fluctuating. When a spot exchange is agreed upon, the contract is defined to be executed immediately. In reality, a series of confirmations occurs between the two parties. Documentation is sent and received from both parties detailing the exchange rate agreed upon and the amounts of currency involved. The funds actually move between banks two days after the spot transaction is agreed upon.
Forward Exchange
The forward exchange contract is similar to the spot exchange. However, the time period of the contract is significantly longer. These contracts use a forward exchange rate that differs from the spot rate. The difference between the forward rate and the spot rate reflects the difference in interest rates between the two currencies. This prevents an opportunity for arbitrage. If the rates did not differ, there would be a profit difference in the currencies. That is, investing in one currency for a year and then selling it should be the same profit or loss as setting up a forward contract at the forward rate one year in the future. Investing in one currency would be more profitable than investing in the other. Thus there would exist an opportunity for arbitrage. Forward exchange contracts are settled at a specified date in the future. The parties exchange funds at this date. Forward contracts are typically custom written between the party needing currency and the bank, or between banks.
Currency Futures and Swap Transactions
Currency futures are standardized forward contracts. The amounts of currency, time to expiry, and exchange rates are standardized. The standardized expiry times are specific dates in March, June, September, and December. These futures are traded on the Chicago Mercantile Exchange (CME). Futures give the buyer an option of setting up a contract to exchange currency in the future. This contract can be purchased on an exchange, rather than custom negotiated with a bank like a forward contract.
A currency swap is an agreement to two exchanges in currency, one a spot and one a forward. An immediate spot exchange is executed, followed later by a reverse exchange. The two exchanges occur at different exchange rates. It is the difference in the two exchange rates that determines the swap price. There is also something called a currency swap. This is a method to exchange an income stream of one currency for another.
Currency Options
A currency option gives the holder the right, but not the obligation, either to buy (call) from the option writer, or to sell (put) to the option writer, a stated quantity of one currency in exchange for another at a fixed rate of exchange, called the strike price. The options can be American, which allows an option to be exercised until a fixed day, called the day of expiry, or European, which allows exercise only on the day of expiry, not before. The option holder pays a premium to the option writer for the option.
The option differs from other currency contracts in that the holder has a choice, or option, of whether they will exercise it or not. If exchange rates are more favorable than the rate guaranteed by the option when the holder needs to exchange currency, they can choose to exchange the currency on the spot exchange rather than use the option. They lose only the option premium. Options allow holders to limit their risk of exposure to adverse changes in the exchange rates.
Hedging
It is also common for currency options to be used to hedge cash positions. Companies are not typically in the business of gambling with their profits on deals. It is in the company’s best interest to lock in an exchange rate they can count on. They are motivated to insure that their profits are as expected. Two ways they might do this are to enter forward contracts or to buy options.
They would select an exchange rate that would be acceptable but not too expensive. They might choose to buy a slightly out-of-the-money call option to cover them if the currency exchange rate falls. If it stays the same or rises, they will exchange at the spot exchange rate at the time the payment is due.
Trading on the Foreign Exchange Market establishes rates of exchange for currency. Exchange rates are constantly fluctuating on the forex market. As demand rises and falls for particular currencies, their exchange rates adjust accordingly. Instantaneous rate quotes are available from a service provided by Reuters. A rate of exchange for currencies is the ratio at which one currency is exchanged for another.
The foreign exchange market has no regulation, no restrictions or overseeing board. Should there be a world monetary crisis in this market; there is no mechanism to stop trading. The Federal Reserve Bank of New York publishes guidelines for Foreign Exchange trading. In their “Guidelines for Foreign Exchange Trading”, they outline 50 best practices for trading on the forex market.
Spot Exchange
The spot exchange is the simplest contract. A spot exchange contract identifies two parties, the currency they are buying or selling and the currency they expect to receive in exchange. The currencies are exchanged at the prevailing spot rate at the time of the contract. The spot rate is constantly fluctuating. When a spot exchange is agreed upon, the contract is defined to be executed immediately. In reality, a series of confirmations occurs between the two parties. Documentation is sent and received from both parties detailing the exchange rate agreed upon and the amounts of currency involved. The funds actually move between banks two days after the spot transaction is agreed upon.
Forward Exchange
The forward exchange contract is similar to the spot exchange. However, the time period of the contract is significantly longer. These contracts use a forward exchange rate that differs from the spot rate. The difference between the forward rate and the spot rate reflects the difference in interest rates between the two currencies. This prevents an opportunity for arbitrage. If the rates did not differ, there would be a profit difference in the currencies. That is, investing in one currency for a year and then selling it should be the same profit or loss as setting up a forward contract at the forward rate one year in the future. Investing in one currency would be more profitable than investing in the other. Thus there would exist an opportunity for arbitrage. Forward exchange contracts are settled at a specified date in the future. The parties exchange funds at this date. Forward contracts are typically custom written between the party needing currency and the bank, or between banks.
Currency Futures and Swap Transactions
Currency futures are standardized forward contracts. The amounts of currency, time to expiry, and exchange rates are standardized. The standardized expiry times are specific dates in March, June, September, and December. These futures are traded on the Chicago Mercantile Exchange (CME). Futures give the buyer an option of setting up a contract to exchange currency in the future. This contract can be purchased on an exchange, rather than custom negotiated with a bank like a forward contract.
A currency swap is an agreement to two exchanges in currency, one a spot and one a forward. An immediate spot exchange is executed, followed later by a reverse exchange. The two exchanges occur at different exchange rates. It is the difference in the two exchange rates that determines the swap price. There is also something called a currency swap. This is a method to exchange an income stream of one currency for another.
Currency Options
A currency option gives the holder the right, but not the obligation, either to buy (call) from the option writer, or to sell (put) to the option writer, a stated quantity of one currency in exchange for another at a fixed rate of exchange, called the strike price. The options can be American, which allows an option to be exercised until a fixed day, called the day of expiry, or European, which allows exercise only on the day of expiry, not before. The option holder pays a premium to the option writer for the option.
The option differs from other currency contracts in that the holder has a choice, or option, of whether they will exercise it or not. If exchange rates are more favorable than the rate guaranteed by the option when the holder needs to exchange currency, they can choose to exchange the currency on the spot exchange rather than use the option. They lose only the option premium. Options allow holders to limit their risk of exposure to adverse changes in the exchange rates.
Hedging
It is also common for currency options to be used to hedge cash positions. Companies are not typically in the business of gambling with their profits on deals. It is in the company’s best interest to lock in an exchange rate they can count on. They are motivated to insure that their profits are as expected. Two ways they might do this are to enter forward contracts or to buy options.
They would select an exchange rate that would be acceptable but not too expensive. They might choose to buy a slightly out-of-the-money call option to cover them if the currency exchange rate falls. If it stays the same or rises, they will exchange at the spot exchange rate at the time the payment is due.
Forex Tutorial: The Basics Of Forex Analysis
The Forex trading market is an around-the-clock cash market where the currencies of nations are bought and sold, typically via brokers. For example, you buy Euros, paying with U.S. Dollars, or you sell Canadian Dollars for Japanese Yen. Forex prices can change at any moment in response to real-time events, such as political unrest, crude oil prices, inflation, import and export prices, or industrial production.
Currency market players typically use “Forex analysis” as a tool in predicting currency price movements. Forex analysis itself is divided into two types: fundamental and technical. A fundamental analysis uses economic and political factors as a means of predicting currency movements. A technical analysis uses reliable historical data as a means of forecasting these movements. The purpose of this article is to discuss the basic principles of fundamental and technical analysis.
A fundamental analysis uses economic and political factors, such as housing starts, the unemployment rate, or inflation, as a means of predicting currency movements. Fundamental analysis is concerned with the reasons or causes for currency movements. Many Forex traders who rely on fundamental analysis plan their trading strategies around a number of key U.S. Government economic indicators. Some of these indicators are the Gross Domestic Product (GDP), Foreign Exchange Rates, Import and Export Prices, Industrial Production/Capacity Utilization, the Composite Index of Leading Indicators, Consumer Credit, the Consumer Price Index (CPI), Retail Sales, Housing Starts, the Employment Cost Index, and Consumer Confidence.
All of these Federal economic indicators have a marked effect on both the stock market and Forex. Some of these indicators are released weekly, while others are released monthly or quarterly. Their sources include the Federal Reserve Board, the U.S. Bureau of Labor Statistics, the U.S. Department of Agriculture, the U.S. Bureau of Economic Analysis (BEA), and the U.S. Census Bureau.
Forex traders must take other economic indicators into consideration as well. The world’s leading economies (for example, the United Kingdom, Japan, France, and Germany) also release their own economic indicators that will have an impact on the Forex market. For example, leading economic indicators in the United Kingdom include Housing Prices, Gross Domestic Product (GDP), Vehicles per 1,000 People, Telephones per 1,000 People, and the Percentage of People Employed in Agriculture.
A technical analysis uses historical data as a means of predicting currency movements. The technical analyst believes that history repeats itself over and over again. Technical analysis is not concerned with the reasons for currency movements (for example, interest rates or inflation). Instead, it believes that historical currency movements are a clear indication of future ones.
Investopedia states that “In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store.”
For example, during the back-to-school buying season, the technical analyst might observe that more people are going into clothing stores than into stores selling flowers. Likewise, the technical analyst might observe that more men are going into stores selling flowers on Valentine’s Day than into clothing stores.
Here is another example. Oil prices dramatically increase, thus creating inflation. Interest rates rise as a means of controlling inflation. One historical result of higher interest rates is less money to spend, thus slowing economic growth. Another historical result is increased foreign investment in the currency affected by the higher interest rates, thus strengthening it.
The technical analyst typically uses charts as a tool for predicting currency price movements. The three most popular kinds of charts are line charts, vertical bar charts, and candlestick charts.
Some Forex traders depend on fundamental analysis while others depend on technical analysis. However, many successful Forex traders use a combination of both strategies. However, the important point to remember here is that no one strategy or combination of strategies is 100% certain.
Currency market players typically use “Forex analysis” as a tool in predicting currency price movements. Forex analysis itself is divided into two types: fundamental and technical. A fundamental analysis uses economic and political factors as a means of predicting currency movements. A technical analysis uses reliable historical data as a means of forecasting these movements. The purpose of this article is to discuss the basic principles of fundamental and technical analysis.
A fundamental analysis uses economic and political factors, such as housing starts, the unemployment rate, or inflation, as a means of predicting currency movements. Fundamental analysis is concerned with the reasons or causes for currency movements. Many Forex traders who rely on fundamental analysis plan their trading strategies around a number of key U.S. Government economic indicators. Some of these indicators are the Gross Domestic Product (GDP), Foreign Exchange Rates, Import and Export Prices, Industrial Production/Capacity Utilization, the Composite Index of Leading Indicators, Consumer Credit, the Consumer Price Index (CPI), Retail Sales, Housing Starts, the Employment Cost Index, and Consumer Confidence.
All of these Federal economic indicators have a marked effect on both the stock market and Forex. Some of these indicators are released weekly, while others are released monthly or quarterly. Their sources include the Federal Reserve Board, the U.S. Bureau of Labor Statistics, the U.S. Department of Agriculture, the U.S. Bureau of Economic Analysis (BEA), and the U.S. Census Bureau.
Forex traders must take other economic indicators into consideration as well. The world’s leading economies (for example, the United Kingdom, Japan, France, and Germany) also release their own economic indicators that will have an impact on the Forex market. For example, leading economic indicators in the United Kingdom include Housing Prices, Gross Domestic Product (GDP), Vehicles per 1,000 People, Telephones per 1,000 People, and the Percentage of People Employed in Agriculture.
A technical analysis uses historical data as a means of predicting currency movements. The technical analyst believes that history repeats itself over and over again. Technical analysis is not concerned with the reasons for currency movements (for example, interest rates or inflation). Instead, it believes that historical currency movements are a clear indication of future ones.
Investopedia states that “In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store.”
For example, during the back-to-school buying season, the technical analyst might observe that more people are going into clothing stores than into stores selling flowers. Likewise, the technical analyst might observe that more men are going into stores selling flowers on Valentine’s Day than into clothing stores.
Here is another example. Oil prices dramatically increase, thus creating inflation. Interest rates rise as a means of controlling inflation. One historical result of higher interest rates is less money to spend, thus slowing economic growth. Another historical result is increased foreign investment in the currency affected by the higher interest rates, thus strengthening it.
The technical analyst typically uses charts as a tool for predicting currency price movements. The three most popular kinds of charts are line charts, vertical bar charts, and candlestick charts.
Some Forex traders depend on fundamental analysis while others depend on technical analysis. However, many successful Forex traders use a combination of both strategies. However, the important point to remember here is that no one strategy or combination of strategies is 100% certain.
Forex Trading - understanding commissions, spreads and trading costs
The forex market is quickly becoming one of the most popular markets for trading.
Not only are the experienced traders looking to this market to maximize their trading returns, but many new, individual investors are now able to trade the Forex market - just as they do stocks and futures.
More and more individuals are seeing Forex not only as a new way to diversify their portfolio, but are also finding that it is becoming the most profitable component of their investments.
And that’s because of the many advantages Forex offers over other markets like stocks or commodities. Here’s what you will typically see advertized about Forex:
- Unparallelled liquidity. It is the largest financial market in the world by far. Almost $2 trillion being traded daily!
- Excellent leverage potential. Individual investors have access to leverage of 100:1 and even 200:1
- No Commissions
- Low trading costs.
And yes, the Forex market really does offer all these advantages.
But the last two points above talk about costs, and that’s what we’d like to focus on in this article.
Like any trading, there are costs involved, and, while these may be much lower than they used to be, it is important to understand what those are.
Let’s start by looking at stock trading, something that most of us investors are pretty familiar with.
When trading stocks, most investors will have a trading account with a broker somewhere and will have investment funds deposited in that account.
The broker will then execute the trades on behalf of the account holder, and of course, in return for providing that service, the broker will want to be compensated.
With stocks, typically, the broker will earn a commission for executing the trade. They will charge either a fixed dollar amount per trade, or a dollar amount per share, or (most commonly) a scaled commission based on how big your trade is.
And, they will charge it on both sides of the transaction. That is to say, when you buy the stock you get charged commission, AND then when you sell that same stock you get charged another commission.
With Forex trading, the brokers constantly advertise “no commission”. And, of course that’s true - except for a few brokers, who do charge a commission similar to stocks.
But also, of course, the brokers aren’t performing their trading services for free. They too make money.
The way they do that is by charging the investor a “spread”. Simply put, the spread is the difference between the bid price and the ask price for the currency being traded.
The broker will add this spread onto the price of the trade and keep it as their fee for trading.
So, while it isn’t a commission per se, it behaves in practically the same way. It is just a little more hidden.
The good news though is that typically this spread is only charged on one side of the transaction. In other words, you don’t pay the spread when you buy AND then again when you sell. It is usually only charged on the “buy” side of the trades.
So the spread really is your primary cost of trading the Forex and you should pay attention to the details of what the different brokers offer.
The spreads offered can vary pretty dramatically from broker to broker. And while it may not seem like much of a difference to be trading with a 5 pip spread vs a 4 pip spread, it actually can add up very quickly when you multiply it out by how many trades you make and how much money you’re trading. Think about it, 4 pips vs 5 pips is a difference of 25% on your trading costs.
The other thing to recognize is that spreads can vary based on what currencies you’re trading and what type of account you open.
Most brokers will give you different spreads for different currencies. The most popular currency pairs like the EURUSD or GBPUSD will typically have the lowest spreads, while currencies that have less demand will likely be traded with higher spreads.
Be sure to think about what currencies you are most likely to be trading and find out what your spreads will be for those currencies.
Also, some brokers will offer different spreads for different types of accounts. A mini account, for example, may be subject to higher spreads than a full contract account.
And finally, because the spreads really are the difference between bid prices and ask prices as determined by the free market, it is important to recognize that they are not “guaranteed”. Most brokers will tell you that there may be times during periods of low demand, or very active trading when the spreads widen and you will be charged that wider spread.
These do tend to be rarer situations because the volume in the Forex market is so large and demand and supply are generally quite predictable. But they do occur, especially with some of the lesser traded currencies. So it’s important to be aware of that.
In summary then, when trading Forex, understand that the “spread” is truly your most important consideration for trading costs.
Spreads can vary significantly between brokers, account types and currencies traded. And small differences in the spread can really add up to thousands of dollars in trading costs over even just a few months.
So be sure to consider carefully what currencies you are going to be trading, how frequently, and in what type of account and use those factors to help you decide which broker can offer you the best trading costs and allow you to keep more of your returns as net profits!
Not only are the experienced traders looking to this market to maximize their trading returns, but many new, individual investors are now able to trade the Forex market - just as they do stocks and futures.
More and more individuals are seeing Forex not only as a new way to diversify their portfolio, but are also finding that it is becoming the most profitable component of their investments.
And that’s because of the many advantages Forex offers over other markets like stocks or commodities. Here’s what you will typically see advertized about Forex:
- Unparallelled liquidity. It is the largest financial market in the world by far. Almost $2 trillion being traded daily!
- Excellent leverage potential. Individual investors have access to leverage of 100:1 and even 200:1
- No Commissions
- Low trading costs.
And yes, the Forex market really does offer all these advantages.
But the last two points above talk about costs, and that’s what we’d like to focus on in this article.
Like any trading, there are costs involved, and, while these may be much lower than they used to be, it is important to understand what those are.
Let’s start by looking at stock trading, something that most of us investors are pretty familiar with.
When trading stocks, most investors will have a trading account with a broker somewhere and will have investment funds deposited in that account.
The broker will then execute the trades on behalf of the account holder, and of course, in return for providing that service, the broker will want to be compensated.
With stocks, typically, the broker will earn a commission for executing the trade. They will charge either a fixed dollar amount per trade, or a dollar amount per share, or (most commonly) a scaled commission based on how big your trade is.
And, they will charge it on both sides of the transaction. That is to say, when you buy the stock you get charged commission, AND then when you sell that same stock you get charged another commission.
With Forex trading, the brokers constantly advertise “no commission”. And, of course that’s true - except for a few brokers, who do charge a commission similar to stocks.
But also, of course, the brokers aren’t performing their trading services for free. They too make money.
The way they do that is by charging the investor a “spread”. Simply put, the spread is the difference between the bid price and the ask price for the currency being traded.
The broker will add this spread onto the price of the trade and keep it as their fee for trading.
So, while it isn’t a commission per se, it behaves in practically the same way. It is just a little more hidden.
The good news though is that typically this spread is only charged on one side of the transaction. In other words, you don’t pay the spread when you buy AND then again when you sell. It is usually only charged on the “buy” side of the trades.
So the spread really is your primary cost of trading the Forex and you should pay attention to the details of what the different brokers offer.
The spreads offered can vary pretty dramatically from broker to broker. And while it may not seem like much of a difference to be trading with a 5 pip spread vs a 4 pip spread, it actually can add up very quickly when you multiply it out by how many trades you make and how much money you’re trading. Think about it, 4 pips vs 5 pips is a difference of 25% on your trading costs.
The other thing to recognize is that spreads can vary based on what currencies you’re trading and what type of account you open.
Most brokers will give you different spreads for different currencies. The most popular currency pairs like the EURUSD or GBPUSD will typically have the lowest spreads, while currencies that have less demand will likely be traded with higher spreads.
Be sure to think about what currencies you are most likely to be trading and find out what your spreads will be for those currencies.
Also, some brokers will offer different spreads for different types of accounts. A mini account, for example, may be subject to higher spreads than a full contract account.
And finally, because the spreads really are the difference between bid prices and ask prices as determined by the free market, it is important to recognize that they are not “guaranteed”. Most brokers will tell you that there may be times during periods of low demand, or very active trading when the spreads widen and you will be charged that wider spread.
These do tend to be rarer situations because the volume in the Forex market is so large and demand and supply are generally quite predictable. But they do occur, especially with some of the lesser traded currencies. So it’s important to be aware of that.
In summary then, when trading Forex, understand that the “spread” is truly your most important consideration for trading costs.
Spreads can vary significantly between brokers, account types and currencies traded. And small differences in the spread can really add up to thousands of dollars in trading costs over even just a few months.
So be sure to consider carefully what currencies you are going to be trading, how frequently, and in what type of account and use those factors to help you decide which broker can offer you the best trading costs and allow you to keep more of your returns as net profits!
Making Money From Stock Market - Tips for Beginners
Making money from stock markets requires trading in the stock market. Cautious buying, holding and selling of stocks generate profits and money. Stock trading is the function that interacts and organizes in the stock market.
This market involves buying and selling of millions of shares all over the world, and generates profit.
As a beginner, you must understand in effect how the market works. You really don’t have to know all of the technicalities of buying and selling stocks.
The first and foremost you need to know is the functioning of the exchange floor, irrespective of whether you trade through the floor or electronically.
When the market opens, hundreds of people are seen fast moving about shouting and signaling to one another, staring at monitors, and entering data into terminals, or busy on cell-phones on the exchange floor. It looks like a complete fiasco. However, by the time the end of the day approaches, the market has worked out all the trades, and is all set for the next day.
These are the steps in a simple trade on the exchange floor of any major Stock Exchange:
You instruct your broker to buy a number of shares of a company at the current market price.
The broker’s order department passes the order on to their floor clerk, the dealing official, in the exchange.
From this person it goes to one of the firm’s floor traders whose task it is to find another floor trader wanting to sell that number of shares of the company you wanted. Each floor trader has particular knowledge of which floor traders deal in what stocks.
The two come together on a price and seal the deal. The notification process moves backward along the line and your broker gets back to you with the final price. You receive the confirmation notice in the mail after a few days.
Beginners should avoid complicating things trying to get rich in a day by venturing into every nook and cranny without knowing a thing or two about them.
To begin with, you need a broker to handle your trades – individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order. Choose the right broker rationally. This is a crucial point of money making from stocks.
Depend on your comprehension and your broker, who must be a professional. Never bypass understanding fully the cause(s) behind a bad result when it occurs. Learn from your experiences, document them, and keep reading them once in a while.
This market involves buying and selling of millions of shares all over the world, and generates profit.
As a beginner, you must understand in effect how the market works. You really don’t have to know all of the technicalities of buying and selling stocks.
The first and foremost you need to know is the functioning of the exchange floor, irrespective of whether you trade through the floor or electronically.
When the market opens, hundreds of people are seen fast moving about shouting and signaling to one another, staring at monitors, and entering data into terminals, or busy on cell-phones on the exchange floor. It looks like a complete fiasco. However, by the time the end of the day approaches, the market has worked out all the trades, and is all set for the next day.
These are the steps in a simple trade on the exchange floor of any major Stock Exchange:
You instruct your broker to buy a number of shares of a company at the current market price.
The broker’s order department passes the order on to their floor clerk, the dealing official, in the exchange.
From this person it goes to one of the firm’s floor traders whose task it is to find another floor trader wanting to sell that number of shares of the company you wanted. Each floor trader has particular knowledge of which floor traders deal in what stocks.
The two come together on a price and seal the deal. The notification process moves backward along the line and your broker gets back to you with the final price. You receive the confirmation notice in the mail after a few days.
Beginners should avoid complicating things trying to get rich in a day by venturing into every nook and cranny without knowing a thing or two about them.
To begin with, you need a broker to handle your trades – individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order. Choose the right broker rationally. This is a crucial point of money making from stocks.
Depend on your comprehension and your broker, who must be a professional. Never bypass understanding fully the cause(s) behind a bad result when it occurs. Learn from your experiences, document them, and keep reading them once in a while.
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