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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.
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).
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.
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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The main merits of the FOREX market
are:
The biggest number of participants and the largest
volumes of transactions;
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Superior liquidity and speed of the
market: transactions are conducted within a few seconds
according to online quotes;
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The market works 24 hours a day, every
working days;
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A trader can open a position for any
period of time he wants;
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No fees, except for the difference
between buying and selling prices;
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An opportunity to get a bigger profit
that the invested sum;
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Qualified work in the FOREX market can
become your main professional activity;
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You can make deals any time you like.
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