WHAT IS FOREX?

FOREX is the largest inter bank financial institution in the world that opens its doors to retail investors. FOREX was established in 1971 following the end of the Bretton Wood system of foreign exchange control and soon thereafter, the materialization of floating exchange rates. FOREX is the only financial market that operates on a 24-hour basis on Asian, European and American markets by virtue of their association in one global communication network. 24-hour access to the foreign exchange market allows investors to open and close positions at the most whenever they choose for the best possible advantage, and for the best deal.

Increasingly, individuals are affording themselves every opportunity to achieve financial gains. Currency, because of its minute by minute fluctuations in value is traded on the foreign exchange market. Banks and brokers grant investors an opportunity to participate in currency exchange operations, the returns of which regularly exceed the amounts invested. Investors may partake of this market with as little as $1000.

FOREX trades over one trillion dollars daily and makes currency purchase-sale contracts on terms from 1 day to one year in this round-the-clock, very liquid market. The largest foreign exchange activity occurs on the spot exchange between the US dollar and four other major currencies: the British Pound, the Japanese Yen, the Eurodollar and the Swiss Franc. These four currencies are bought and sold against the US dollar. The participants of the market are banks, brokers’ offices, corporations, export-import companies, various Fund providers, and individual investors.



Trading on the foreign exchange market is the single most effective source of income for banks worldwide. For instance, 80% of the revenues of the largest Swiss bank, “Union Bank of Switzerland” (UBS), were derived from convertible operations with currency, wherein only 20% of revenue profited from credits, securities selling, etc. (see financial report in “UBS Annual Report of 1994). Profit from foreign exchange operations are in much favor at banks such as Citibank, Chase Manhattan Bank, Barclays Bank, Sosiete Generale Bank & Trust, ABN-AMRO Bank.

A well known example of such transactions involves George Soros, who in 1992 realized a net profit of one million dollars within 2 weeks selling the British Pound (GBP) against the German Mark (DM) and the American Dollar (USD).

In order for banks to survive in highly competitive circumstances among bank operations, currency trading will be forcibly included into essential basis of bank operations by laws of market economy development.

Margin Trading

In order to attract investors to the FOREX market who wish to risk less than one million dollars at any given time (a standard lot for trading on the exchange market), it employs what is referred to as a margin trade.

"“Margin trading” was created for purposes of potentially advantageous trades of currency in 1985. This process, simply stated, involves a cash deposit, usually much smaller than the underlying value of the currency or commodity contract, is required in order to affect the trade.

The primary distinction between the FOREX trading system from other financial markets, is that foreign currency purchase-sale operations can be made without having a set required sum to perform trading operations. In order to conduct a purchase, a client needs to invest only a small start up amount, which is referred to as a “margin”. This gives him an opportunity to make deals in volumes that are 50-100 times greater the start up amount. This so-called “shoulder” or leverage, is granted by a bank or other credit institution, where the client deposits a guaranteed margin. For example, simply depositing a guaranteed amount of $100,000 in a bank or broker company, enables an individual to make financial operations in amounts of 5 to 10’s of millions of dollars. Therefore, even a modest gain on the FOREX market (relative to the input amount) is considered to be of significant size. Another advantage of FOREX is profit derived from any direction of price changing, regardless of the particular currency involved.

For a better understanding here is an example:

Let’s say, you have $2000 on your account. That means that with a credit “shoulder” 100:1, you are able to open a position in amount of $200,000. Dollar exchange rate against Swiss Frank was 1.4045 – 1.4050 at 11 AM. You think that this rate is not high enough and should rise. You place an order to buy $100,000 at the current rate. At 3 PM the exchange rate for same currencies is 1.4250 – 1.4255. Should you then decide to sell your $100,000 at the new, higher rate, your profit would be 2,000 Swiss Franks or $1,400, which is 140% of the input amount. After closing the position, money would then transfer into your account. You can determine the result of the transaction in the “Account History” of your Trade Terminal. The software allows you to handle all operations on the Internet, which give you currency correlation rates in ‘real time’ or exactly when they occur.

Exchange Rate Development

There are 3 major groups of factors that influence on exchange rate development:

Fundamental Factors

Technical Factors
Short-term unexpected factors
Fundamental trading strategies consist of macro-economic strategic assessments; these criteria often include the economic condition of the currency’s country of origin, the country’s monetary policy, and other "fundamental" elements.
Typically, on the world markets, the US economy has the greatest influence. Fully 80% of financial operations conducted in world markets are transacted in dollars. This causes the dollar rise or fall against all other currencies. The fundamental factors affecting world markets are:

exchange rate at parity of purchasing capacity

Gross national product
The level of real percentage
The level of unemployment
Inflation
An index of industrial production
Therefore, the common rule for a trader is to orient to the expectations and moods of the majority of investors in the market. Exchange rate movement tendency can be analyzed by reading publications, studying reviews of market situation in information systems such as Reuters, Bridge (Dow Jones), and CQG. Following the publication of the leading economic indicators, the market will inevitably begin to move. A trader’s primary task is to participate in such movement, which invariably will be lead by the majority in the market. The axiom is - “don’t miss the boat”

Technical analysis is a field of market analysis, which supposes that market has a memory and consists primarily of a variety of technical aspects, each of which can be interpreted to generate buy and sell signals or to predict market direction. During the past few years, in response to rapid growth of electronic analytical devices such as those offered by Reuters, Bridge (Dow Jones), CQG and others, greater numbers of traders make their decisions according to the technical analysis, which regularly increases its influence on any real rate movement.

Technical analysis is a method for price forecasting based on historical market movement studies. For the last 30 years, studies in the field of technical analysis have proven themselves a science with its own philosophical system and set of operative axioms.

Aside from the fundamental and technical factors, the influence of which can in fact be predicted, there are several short-term unexpected factors that can bring in essential amendments to the dynamic movements of the currency rate.