what is forex
FOREX (FOReign EXchange market) is an international foreign
exchange market, where money is sold and bought freely. In its present
condition FOREX was launched in the 1970s, when free exchange rates
were introduced, and only the participants of the market determine the
price of one currency against the other proceeding from supply and
demand.As far as the freedom from any external control and free
competition are concerned, FOREX is a perfect market. It is also the
biggest liquid financial market. According to various assessments,
money masses in the market constitute from 1 to 1.5 trillion US dollars a
day. (It is impossible to determine an absolutely exact number because
trading is not centralized on an exchange.) Transactions are conducted
all over the world via telecommunications 24 hours a day from 00:00
GMT on Monday to 10:00 pm GMT on Friday. Practically in every time
zone (that is, in Frankfurt-on-Main, London, New York, Tokyo, Hong
Kong, etc.) there are dealers who will quote currencies.FOREX is a more
objective market, because if some of its participants would like to
change prices, for some manipulative purpose, they would have to
operate with tens of billions dollars. That is why any influence by a
single participants in the market is practically out of the question. The
superior liquidity allows the traders to open and/or close positions
within a few seconds. The time of keeping a position is arbitrary and has
no limits: from several seconds to many years. It depends only on your
trading strategies. Although the daily fluctuations of currencies are
rather insignificant, you may use the credit lines, that are accessible
even to currency speculators with small capitals ($ 1,000 - 5,000), where
the profit may be impressive. (You can learn more about it in the
section: The main principles of trading.)The idea of marginal trading
stems from the fact that in FOREX speculative interests can be satisfied
without a real money supply. This decreases overhead expenses for
transferring money and gives an opportunity to open positions with a
small account in US dollars, buying and selling a lot of other currencies.
That is, on can conduct transactions very quickly, getting a big profit,
when the exchange rates go up or down. Many speculative transactions
in the international financial markets are made on the principles of
marginal trading.Margin trading is trading with a borrowed capital.
Marginal trading in an exchange market uses lots. 1 lot equals
approximately $100,000, but to open it it is necessary to have only from
0.5% to 4% of the sum.For example, you have analyzed the situation in
the market and come to the conclusion that the pound will go up
against the dollar. You open 1 lot for buying the pound (GBP) with the
margin 1% (1:1000 leverage) at the price of 1.49889 and wait for the
exchange rate to go up. Some time later your expectations become true.
You close the position at 1.5050 and earn 61 pips (about $ 405). For the
calculation of 1 pip click here.Everyday fluctuations of currencies
constitute about 100 to 150 pips, giving FX traders an opportunity to
make money on these changes.In FOREX, it's not obligatory to buy
some currency first in order to sell it later. It's possible to open
positions for buying and selling any currency without actually having it.
Usually Internet-brokers establish the minimum deposit such as $ 2000,
for working in the FOREX market, and grant a leverage of 1:100. That is,
opening the position at $100,000, a trader invests $1,000 and receives
$99.000 as a credit. The major currencies traded in FOREX, are Euro
(EUR), Japanese yen (JPY), British Pound (GBP), and Swiss Franc
(CHF). All of them are traded against the US dollar (USD).In order to
assess the situation in the market a trader has to be able to use
fundamental and/or technical analysis, as well as to make decisions in
the constantly changing current of information about political and
economic character. Most small and medium players in financial
markets use technical analysis. Technical analysis presupposes that all
the information about the market and its further fluctuations is
contained in the price chain. Any factor, that has some influence on the
price, be it economic, political or psychological, has already been
considered by the market and included in the price. The initial data for a
technical analysis are prices: the highest and the lowest prices, the
price of opening and closing within a certain period of time, and the
volume of transactions.A technical analysis is founded on three
suppositions:Movement of the market considers everything;Movement
of prices is purposeful;History repeats itself. That is, technical analysis
is a statistical and mathematical analysis of previous quotes and a
prognosis of coming prices.A number of technical indicators have been
installed into the PRO-CHARTS trading system. Analyzing the indicators
one can come to the conclusion about further movements of the quoted
currencies. For a more detailed description of the indicators, analyzing
price charts and volumes of trading, click here.Fundamental analysis is
an analysis of current situations in the country of the currency, such as
its economy, political events, and rumors. The country's economy
depends on the rate of inflation and unemployment, on the interest rate
of its Central Bank, and on tax policy. Political stability also influences
the exchange rate. Policy of the Central Bank has a special role, as
concentrated interventions or refusal from them greatly influence the
exchange rate.At the same time one should not consider fundamental
analysis just as an analysis of the economic situation in the country
itself. A far bigger role in the FOREX market belongs to the expectations
of the market participants and their assessment of these expectations.
Various prognoses and bulletins, issued by the participants, have a
strong influence on the expectations. Very often an effect of the so-
called self-filfilling prophecy occurs when market players raise or lower
the exchange rates according to the prognosis. But a deep and
thorough fundamental analysis is available only for big banks with a
staff of professional analysts and constant access to a wide field of
information.In spite of these different approaches, both forms of
analyses complement one another. Traders who act on the basis of a
fundamental analysis, have to consider some technical characteristics
of the market (the main rates of support, such as resistance and resale),
and supporters of the technical approach to the market must track the
main news (interest rates, important political events).
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