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. : ABOUT FOREX
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| . : Why FOREX? A World of Opportunities |
| Over the last three decades the foreign exchange market has become the world's largest financial market, with over USD2 trillion traded daily. FOREX is part of the bank-to-bank currency market known as the 24-hour Interbank market. The Interbank market literally follows the sun around the world, moving from major banking centers of the United States to Australia, New Zealand to the Far East, to Europe then back to the United States. |
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| Until recently, the FOREX market wasn't for the average trader or individual speculator. With the large minimum transaction sizes and often-stringent financial requirements, banks, hedge funds, major currency dealers and the occasional high net-worth individual speculator were the principal participants. These large traders were able to take advantage of the many benefits offered by the FOREX market vs. other markets, including fantastic liquidity and the strong trending nature of the world's primary currency exchange rates. |
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| › FOREX Market Summary of Benefits |
– FOREX is open 24 hours a day.
– FOREX is the most liquid market in the world.
– Up to 400:1 leverage.
Without appropriate risk management, a high degree of leverage can lead to large losses as well as gains.
– No restrictions on shorting which allows you to enjoy trading opportunities during any market condition.
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| . : Why FOREX? History of FOREX |
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The modern foreign exchange market (FX or FOREX) began to develop in 1973. However, money has been around in one form or another since the time of Pharaohs. The Babylonians are credited with the first use of paper bills and receipts, but Middle Eastern moneychangers were the first currency traders to exchange coins from one culture to another. During the middle ages, the need for another form of currency besides coins emerged as the method of choice. These paper bills represented transferable third-party payments of funds, making foreign currency exchange trading much easier for merchants and traders and causing these regional economies to flourish.
From the infantile stages of FOREX during the Middle Ages to WWI, the FOREX markets were relatively stable and without much speculative activity.
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| After WWI, the FOREX markets became very volatile and speculative activity increased tenfold. Speculation in the FOREX market was not looked on as favorable by most institutions and the public in general. The Great Depression and the removal of the gold standard in 1931 created a serious lull in FOREX market activity. From 1931 until 1973, the FOREX market went through a series of changes. These changes greatly affected the global economies at the time and speculation in the FOREX markets during these times was little, if any. |
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| › The Bretton Woods Accord |
The first major transformation, the Bretton Woods Accord, occurred near the end of World War II. The United States, Great Britain and France met at the United Nations Monetary and Financial Conference in Bretton Woods, N.H., to design a new global economic direction. The location was chosen because, at the time, the U.S. was the only country unscathed by war. Most of the major European countries were in shambles. Up until WWII, the British pound was the major currency by which most currencies were compared, but that changed when the Nazi campaign against Britain included a major counterfeiting effort against its currency. In fact, WWII vaulted the U.S. dollar, from a failed currency after the stock market crash of 1929 to benchmark currency, by which most other international currencies would become compared and valued. The Bretton Woods Accord was established to create a stable environment, leading to an onslaught of other global economies restoring themselves and their currencies. In fact, the Bretton Woods Accord established the pegging of currencies and the International Monetary Fund (IMF) in hopes of stabilizing the global economic situation.
Major currencies were now pegged to the U.S. dollar, fluctuating by one percent on either side of the set standard against the dollar. When a currency's exchange rate would approach the limit on either side of this standard, the respective central bank would intervene to bring the exchange rate back into the accepted range. At the same time, the U.S. dollar was pegged to gold at a price of $35 per ounce, further bringing stability to other currencies and world FOREX situation.
The Bretton Woods Accord lasted until 1971. Ultimately, it failed, but it did accomplish what its charter set out to do, which was to reestablish economic stability in Europe and Japan. The major reason it failed was because it continued to use a set standard to fix a currency against a smaller market, such as gold.
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| › The Beginning of the Free-Floating System |
After the Bretton Woods Accord came the Smithsonian Agreement in December of 1971. This agreement was similar to the Bretton Woods Accord, but allowed for a greater fluctuation band for the currencies. In 1972, the European community tried to move away from its dependency on the dollar. The European Joint Float was established by West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. The agreement was similar to the Bretton Woods Accord, but allowed a greater range of fluctuation in the currency values.
Both agreements suffered mistakes similar to the Bretton Woods Accord and, in 1973, collapsed. The collapses signified the official switch to the free-floating system. This occurred by default, as there were no new agreements to take their place. Governments were now free to peg their currencies, semi-peg or allow them to freely float. In 1978, the free-floating system was officially mandated.
In a final effort to gain independence from the dollar, Europe created the European Monetary System in July of 1978. Like the previous agreements, it failed in 1993, but what followed was an evolution from a combination of the EMS and the Bretton Woods Accord.
Today, the major currencies, such as the U.S. dollar, Euro, British pound, Swiss franc and the Japanese yen, move independently from other currencies. The currencies are traded by anyone who wishes, including an influx of speculation by banks, hedge funds, brokerage houses and individuals. Only on occasion do some of the central banks intervene to move or attempt to move currencies to their desired levels. The underlying factor that drives today's FOREX markets, however, is supply and demand. The free-floating system is ideal for today's FOREX markets. The supply and demand of currencies are driven by three factors, including interest rates and interest rate differentials, commodities and global trade. The FOREX market is the prime market of the world by all which all others can be considered derivatives (like futures and options).
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| . : Why FOREX? FOREX vs. Futures |
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| › Highly Trending markets |
| Because the foreign exchange market gaps are very limited (the market is closed briefly on weekends), it's not dramatically affected by buying programs that allow it to be easily manipulated. The FOREX market offers some of the smoothest trends available in any market. No other market can come close to the amount of monetary volume and participation as the FOREX market making it a haven for traders not having to deal with gaps and price movements, erratic spikes and other choppy market conditions more commonly experienced in the lower volume markets, like futures or options. |
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| › No Commissions or Hidden Fees |
| Though some speculators are unaware, all financial markets have a spread (the difference between the bid and ask price). In the futures market you are not only paying the spread, but you are also paying commission charges, clearing and exchange fees on top of the spread. Ticker prices in the futures market typically signify the last traded price, not the spread. Global FOREX Trading offers you commission-free trading on tradable prices (GFT is compensated by revenues from its activities as a currency dealer, including proceeds from buying, selling, converting as well as holding currencies and interest on deposited funds and rollover fees.). In a sense, what you see is what you get, allowing you to make quick decisions on your FOREX trades without having to account for fees that may affect your profit/loss. |
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| › Better Leverage |
| Trading in the spot currency markets provides advantages over trading currency futures contracts. One of the main advantages for traders trading spot currencies is the margin rate or leverage that clients are given. In spot currency trading, customers receive one low margin rate for trades done 24 hours a day. In currency futures trading, the client has one margin rate for "day" trades and one margin rate for "overnight" positions. This can become a hassle for traders and decreases the overall tradability of the currency futures markets. Margin rates in spot currency trading vary from around 1 to 5 percent depending on the size of transactions a particular trader initiates. Global FOREX Trading's spot currency trading gives the customer one rate all the time, no hassles and no margin calls. One rate so that the trader can manage their own risk efficiently and simply. |
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| › 24-hour Trading |
Since the FOREX market, in a sense, follows the sun around the globe the market, it rarely experiences periods of illiquidity. What this means is that any trader in any time zone can trade FOREX at any time during the day or night. You no longer have to wait for the market to open when news has already hit the streets or have to stop trading because the CME, CBOT or other American futures pits have closed for the day. This gives the FOREX trader added flexibility and continuous market opportunities that just aren't available in futures.
To explain the global effect on the FOREX market, there are three main economic zones that are linked throughout the world. For instance, when the Pacific Rim markets such as Japan and Singapore begin to slow, the European markets of England, Switzerland and Germany begin. These FOREX markets are followed by the North American markets of the United States, Canada and Mexico. As the North American markets begin to slow down for the evening, the Pacific Rim starts their trading day again. This example shows that you are no longer limited to trading using a comparatively short, trading day offered by U.S. markets only.
Foreign exchange is one of the few true 24-hour markets. When trading FOREX, clients enjoy unparalleled liquidity 24 hours a day. In many futures markets, however, the overnight access available to traders is simply window dressing. The lack of liquidity and restrictions on what types of orders a client can place make trading and protecting positions a nightmare.
A good example is the Globex market. While the Globex market is only closed for a 15 minute period each day, the liquidity available after the open outcry market is closed in Chicago is normally very low. Spreads are wider and the ability to place larger orders is non-existent. Because of this, most volume traders are forced into trading the exchange for physical market overnight. The EFP market is the spot market priced in futures pricing. EFP's, however, come with additional fees and are not available from an electronic interface. Electronic access, speed, no fees and unmatched liquidity, 24-hours-a-day makes spot FOREX the choice for the foreign currency trader.
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| › FOREX Methodology |
| Foreign exchange is the principal market of the world. If you study any market trading through the civilized world everything is valued in money, the root of all pricing. Global finance is the distribution and redistribution of money throughout different channels and different financial derivatives. Trading spot currencies can be done with many different methods and you will find many types of traders. From fundamental traders speculating on mid-to-long term positions based on worldwide cash flow analysis and fixed income formulas, to the technical trader watching for breakout patterns in consolidating markets or the Gann fanatic looking to duplicate the techniques of W.D. Gann, the methods for trading foreign exchange are many. Spot currencies are a great market for the "trader". It is where "big boys" trade and can provide both large profit potential as well as commensurate risk for the speculator. Currency trading is not conducted on a regulated exchange, and as a result there are associated risks with FOREX trading. |
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| . : Why FOREX? FOREX vs. Stocks |
| Historically, the majority of the general public has viewed the securities markets as an investment vehicle. In the last ten years securities have taken on a more speculative nature. This was perhaps due to the downfall of the overall stock market as many security issues experienced extreme volatility because of the irrational exuberance displayed in the marketplace. The implied return associated with an investment was no longer true. (If indeed it ever was.) Many traders engaged in the day trader rush of the late 90's only to realize that, from a leverage standpoint, it took quite a bit of capital to day trade, and the return while potentially higher than long-term investing was not exponential. After the onset of the day trader rush, many traders moved into the futures stock index markets where they found they could leverage their capital greater and not have their capital tied up when it could be earning interest or making money somewhere else. Like the futures markets, spot currency trading is an excellent vehicle for pattern day traders who desire to leverage their current capital to trade. Spot currency or FOREX trading provides more options, greater volatility and stronger trends than currently available in stock futures indexes. Former securities day traders have an excellent home in spot foreign exchange (FOREX). |
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| › No Middlemen |
| Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen. Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees. Spot currency trading does away with the middlemen and allows clients to interact directly with the market-maker responsible for the pricing on a particular currency pair. FOREX traders get quicker access and cheaper costs. |
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| › Buy/Sell programs do not control the market |
| How many times have you heard that "Fund A" was selling "X" or buying "Z"? Rumors has it that the funds were taking profits because of the end of the financial year or because today is "triple witching day", all as an explanation of why this stock is up or the market in general is down or positive on the session. No matter what your broker says the stock market is very susceptible to large fund buying and selling, and it is not uncommon for a fund to run a particular issue for a few days. In spot currency trading, the liquidity of the FOREX trading market makes the likelihood of any one fund or bank to control a particular currency very slim. Banks, hedge funds, FCM's, governments, retail currency conversion houses and large net-worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented. |
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| › Analysts and brokerage firms are less likely to influence the market |
| Have you watched TV lately? Heard about a certain Telecomm stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as "buy" when the stock was rapidly declining? It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it. IPO's are big business for both the companies going public and the brokerage houses. Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear. Foreign exchange, as the prime market, generates billions in revenue for the world's banks and is a necessity of the global markets. Analysts in foreign exchange don't drive the deal flow, they just analyze the FOREX trading market. |
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| › 8,000 stocks vs 4 major currency pairs |
| There are approximately 4,500 stocks listed on the New York Stock exchange. Another 3,500 are listed on the NASDAQ. Which one will you trade? Got the software? Got the time? In spot currency trading, you have 4 major markets, 24 hours a day 6 days a week. You have approximately 34 second-tier currencies to look at in your spare time (if you are so inclined). Concentrate on the majors, find your trade. Spend your afternoon on the golf course or with your kids (instead of with your eye doctor trying to diagnose why you are seeing double). |
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| › Commission-free |
| Simply put: no commissions, no clearing fees, no exchange fees, no government fees, and no brokerage fees. (GFT is compensated by revenues from its activities as a currency dealer, including proceeds from buying, selling, converting as well as holding currencies and interest on deposited funds and rollover fees.) |
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| › Same price for broker assisted trades |
| No premium for calling in orders, whether or not you trade FOREX via the phone, use market orders, stop orders, limit orders or even contingent orders. In spot currency trading you do not have to worry about extra charges. Ever wonder why a securities brokerage house charges you more if they have to guarantee you a price than if you give them a market order with no price qualifier? Well you don't have to worry about it if you trade the currency markets. |
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| › Trade off of your profits |
| Ever been up on a stock and wished you could leverage that profit and get in a little more of the issue? In spot currency trading you can. Use your open profits to add to your positions. As you gain experience, experiment with pyramid trading strategies. The options are endless because the market is cutting edge. |
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