Forex Education

The word FOREX is derived from Foreign Exchange; the Forex market is the largest financial market in the world. The market is open 24 hours per day, five days per week, and has an estimated $3 trillion daily turnover. This tremendous turnover is more than the combined trading activity of the world's main stock markets on any given day. This makes foreign exchange a very liquid market and a very desirable focus for financial trading. Unlike many other securities markets—securities are tradable financial instruments—the Forex marketplace does not have a fixed exchange. It is primarily traded through banks, brokers, dealers, financial institutions, and private individuals. It is known as an Over the Counter (OTC) market. For the retail client, trades are generally executed over the Internet. The market has generally required large deposits and high account margins that have precluded smaller investors, but in the last few years, such investors have been able to access the Forex marketplace. With the advent of the Internet, and with growing competition, it is now easily within the reach of most investors.

Valuable currencies today are:

• Monetary units of countries with indication of type (paper, gold, silver);
• Monetary units of a number of foreign countries, including payment and credit documents expressed in such monetary units and usable for international accounts (cheques, bank bills etc.)
• Basically, the Forex currency market is the sum of all transactions made by its participants (banks, exchanges, funds, investment, brokerage and external trading firms, as well as private persons, i.e. traders) to exchange some types of currency. Each second, the Forex market processes thousands of transactions, bringing profit to participants.
• The Forex currency market has the following classification of currency types:
• Freely convertible currencies have no limit on financial transactions of any kind, may be used by residents and non-residents of a country, and can be converted into any foreign currency;
• Partially convertible currencies are usually those with a number of restrictions on use by non-residents and a specific range of allowed transactions. Thus, most Western European currencies are partially convertible; restrictions on use by non-residents were removed in 1958, and now any amount on an account in such currencies may be converted to a freely convertible equivalent;
• Non-convertible currencies have restrictions for both residents and non-residents barring a number of financial transactions. They are not convertible and are used only inside their specific countries. For instance, non-convertible currencies are used in developing and dependent countries, and tied to the currency of a metropolitan country that sets exchange rates to give itself an advantage. Non-convertible currencies are not used on the Forex market.

The Forex currency market has two types of operations: buy and sell; each currency has demand and supply, allowing transactions with no real restrictions on volume or time. The Forex currency market also entails regulation of the exchange rates of various countries by balancing supply and demand.
The Forex currency market has a number of so-called primary currencies – most daily transactions are conducted in these:

USD – the U.S. dollar. No doubt the backbone of the Forex market. Traders often call the USD the buck, the greenback, the dolly.
EUR – the euro, common currency for the European space, second on Forex in terms of popularity. Before the euro, the DEM Deutschmark, Germany’s national currency, took its place.
GBP (Great Britain Pounds) – the pound sterling, Britain’s national currency. Financier slang also includes the names sterling, pound, and cable.
CHF – the Swiss franc. The slang term swissy is used alongside the official name.
JPY – the Japanese yen. The Forex currency market also uses:
AUD – the Australian dollar, often referred to as the aussie by financiers.
СAD – the Canadian dollar.
NZD – the New Zealand dollar, also known as the kiwi among Forex currency market traders.

Another incredibly important concept on the currency market is the currency exchange, which is a key link in the chain of currency market trading services. Essentially, the currency exchange is a place where transactions are made. In this case, the currency is in free trade, shaping the process of constant currency exchange fluctuations. The main characteristic of the currency exchange is that exchange rates are shaped and noted as part of its operation, through the effect of supply and demand on the selling and buying of currencies. This very process is the main objective of the Forex currency exchange: shaping the exchange rates based on objective effects of the economic factors of specific countries. The currency exchange essentially regulates exchange rates. With the development of technology, more and more people today use the currency exchange online, trading in real time via an internet connection. The online currency exchange fulfils a number of functions besides affecting exchange rates: it lays the technical groundwork for free trade, creates and applies the rules for trading participants to enter (covering e.g. funds, business reputation), and creates the conditions and rules for making the transactions themselves. The obligation of monitoring observance of these conditions lies with the currency exchange as well.

The largest currency exchanges are in London, New York and Tokyo. Thus, the online currency exchange can cover practically the entire world and provide nearly equal conditions for all currency market participants. This has made the Forex currency exchange the largest exchange in the world, with a turnover of more than several trillion dollars per day.

Currencies are traded in pairs and exchanged one for the other when traded. The rates at which they are exchanged are called the exchange rate. Around 70% of all trades involve the US Dollar. The four next most traded currencies are the Euro (EUR), Japanese yen (JPY), British pound sterling (GBP), and Swiss franc (CHF). These four currencies traded against the US Dollar make up the majority of the market and are called major currencies or the majors. Prices for Forex currency pairs are known as “quotes”. The bid (buy) and ask (sell) are always from reliable sources. These quotes are normally made up of the top 300 or so large institutions, ensuring that PERFEKT CAPITAL LIMITED can always place your order with an institution capable of fulfilling it.

How are Forex currency quotes developed? Currencies are traded in pairs, and each member of the pair is assigned a symbol. For example, the Japanese yen is JPY, the British pound sterling is GBP, the Euro is EUR, and the US dollar is USD. Expressed as pairs, EUR/USD is the Euro-Dollar pair, GBP/USD is the pound-dollar pair, and so on. You will frequently see the USD quoted first, with a some notable exceptions. The first currency quoted is called the base currency. Have a look at this chart for some examples.

Let's take a look at some examples, using the standard lot of 100,000. Due to the small size of pips, it is desirable to trade large amounts of a particular currency in order to see any significant profit or loss. Each currency has its own value, so it is necessary to calculate the value of a pip for each particular currency pair. We also want a constant so we will assume that we want to convert everything to US Dollars. 1. The majors – EUR/USD, GBP/USD, AUD/USD AND NZD/USD On all the majors, for a position of 1 lot (100,000 of the base currency), each pip is worth $10.

Majors against the US Dollar EUR/USD Open position: Buy 1 lot (100,000) EUR/USD at 1.29530 Close position: Sell 1 lot (100,000) EUR/USD at 1.29930 1.29930 – 1.29530 = 40 pips 40 pips * $10 = $400 profit b. GBP/USD Open position: Buy 5 lots (500,000) GBP/USD at 1.52270 Close position: Sell 5 lots (500,000) GBP/USD at 1.52990 1.52990 – 1.52270 = 72 pips 72 pips * $50 = $3600 profit (Remember: for 1 lot each pip is worth $10, for 5 lots each pip is worth 5 *$10 = $50)

Let’s now calculate the value of a pip where USD is the base currency (the first quoted currency). Here we take the last 1 pip and multiply it by the value of the trade. USD/JPY at an exchange rate of 97.503 (.01/97.503) X $100,000 = $10.26 per pip Let’s say you buy 1 lot of $100,000 at 97.503. A few hours later the price moves to 99.424 and you decide to close your trade. You ask for a new quote and are quoted 99.424 /99.450. As you are now closing your trade and you initially bought to enter the trade you must sell in order to close the trade. So the price to close the trade is 99.424 The difference between 97.503 and 99.424 is 1.921 or 192.1 pips. Using our formula from before, we now have (.01/99.424) X $100,000 = $10.06 per pip X 192.1 pips =$1932.53

Leverage allows you to use your money to make larger trades and hopefully realize greater profits. It increases both your risk and your potential profits. Leverage actually means the percentage of a trade that your broker will lend you when you open a trading position. However, unlike regular loans, there is no interest to be paid on leverage loans. Your leverage depends on the size of the trades you make relative to the amount of money in your trading account. PERFEKT CAPITAL LIMITED allows you to increase your trade size through leverage by using your deposits as margin. Margin is your protection against trades going against you. Your margin is the minimum amount of money required in your account. At PERFEKT CAPITAL LIMITED, the margin requirement is 0.5%; this means we require 0.5% of your trade size in order to lend you the amount you need for the trade. For example, if you are trading with a $100,000 position size, then you will need $500 (0.5%) in your account in order to make the trade The table below shows the minimum amount of money you need to trade a position of $100,000 using various common leverages (remember, the margin is the amount of money you must maintain in your account).

Leverage does come with greater risk. If you use leverage to make a trade and it moves against you, your loss is much greater than it would have been if the position had not been leveraged. Leverage magnifies both profits and losses.

A margin call is made when a trading account no longer has enough money to support the open trades. This happens when there are too many losing positions and occurs to protect you and the company from a negative balance—to stop you owing more money than you have in your account. With Perfekt Capital Limited you will receive a margin call when your account reaches 0.5% of the total of your open positions Here is a typical example: You have an account balance of $5,000, and open a position to buy $500,000 USD/JPY. The minimum amount you need in your account for such a position is: $500,000 * 0.5% = $2,500 If the USD/JPY goes down, you will lose money on the trade, reducing the equity in your account. If your account equity goes down from $5,000 to $2,500 you will receive a margin call. The margin call appears on your trading platform. At this time you have 3 choices

• Do nothing—if USD/JPY continues to go down you could lose all your money 2. Close the position—you may decide to exit the trade 3. Close part of the position—for example, sell $250,000 worth, leaving you with $250,000 open
• If you do nothing, at 20% of your margin requirement the platform will automatically close the position. In this case, your margin requirement was $2,500. If the position continues to go against you, the platform will close the trade automatically when you have $500 remaining in your account. The exact level is not guaranteed as the market can move quickly.
• If you close part of the position, your margin requirement will only be on the remaining open position. In our example, if you close $250,000 and are left with $250,000: $250,000 * 0.5% = $1,250 This option gives you more opportunity to either continue trading or to cut your losses at an acceptable level.

Rollover (or Swap) is the interest paid or earned for holding a Forex position overnight. Each currency has an interest rate associated with it. As Forex is traded in pairs, every trade involves not only two different currencies, but also their two different interest rates. If the interest rate on the currency you bought is higher than the interest rate of the currency you sold, then you will earn rollover (positive roll). If the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover (negative roll). Rollover can add a significant extra cost or profit to your trade. The PERFEKT CAPITAL LIMITED platform automatically calculates and reports all rollover for you.

As the world continued to tear itself apart in the Second World War, there was an urgent need for financial stability. International negotiators from 29 countries met in Bretton Woods and agreed to a new economic system where, amongst other things, exchange rates would be fixed.
The International Monetary Fund (IMF) was established under the Bretton Woods agreement, and started to operate in 1949. All exchange rates changes above 1% had to be approved by the IMF, which had the effect of freezing these rates. By the late 1960’s the fixed exchange rate system started to break down, due to a number of international political and economic factors. Finally, in 1971, President Nixon stopped the US dollar being converted directly to gold, as part of a set of measures designed to stem the collapse of the US economy. This was known as the Nixon shock, and lead to floating rate currency markets being established in early 1973. By 1976, all major currencies had floating exchange rates.
With floating rates, currencies could be traded freely, and the price changed based on market forces. The modern Forex market was born.

There are many different players in the Forex Markets. Some trade to make profits, others trade to hedge their risks and others simply need foreign currency to pay for goods and services. The participants include the following:

• Government central banks,
• Commercial banks
• Investment banks
• Brokers and dealers
• Pension funds
• Insurance companies
• International corporations
• Individuals

Unlike stock exchanges, which have limited opening hours, the Forex market is open 24 hours a day, five days a week. Banks need to buy and sell currency around the clock, and the Forex market has to be open for them to do this.

As with any market, the Forex market is driven by supply and demand: If buyers exceed sellers, prices go up If sellers outnumber buyers, prices go down The following factors can influence exchange rates: National economic performance

• Central bank policy
• Interest rates
• Trade balances – imports and exports
• Political factors – such as elections and policy changes
• Market sentiment – expectations and rumours
• Unforeseen events – terrorism and natural disasters
• Despite all these factors, the global Forex market is more stable than stock markets; exchange rates change slowly and by small amounts.

It’s already the world’s largest market and it’s still growing quickly, It makes extensive use of information technology – making it available to everyone, Traders can profit from both strong and weak economies, Trader can place very short-term orders – which are prohibited in some other markets, The market is not regulated, Brokerage commissions are very low or non-existent, The market is open 24 hours a day during weekdays.

The international Forex market is open to everyone. It doesn’t care about your age, education, nationality or where you live. As long as you’re willing to work hard and learn, you can be a Forex trader.

People often wonder where the Forex market is located. Is it in Tokyo? Are the headquarters in the City of London? In fact the Forex market isn’t located in any one place. The world’s largest financial market is decentralised and trading happens all around the world. Nearly 5.3 trillion US dollars are traded globally every day. Stocks and commodities are traded in dedicated buildings known as exchanges; for example, the New York Stock Exchange (NYSE) is on Wall Street. The Forex market is different. Because it deals with interbank transfers, it has no offices. All trades are carried out electronically or over the phone, so there’s no need for an exchange building. Trading starts in Sydney on Monday morning, and continues day and night until the Chicago session ends late Friday afternoon. Many world financial centres are involved in Forex trading, including the following:

• Tokyo,
• Hong Kong,
• Singapore,
• Frankfurt,
• London,
• New York,
• Chicago,
• Wellington,
• Sydney.

Forex trading is often carried out through brokers, who negotiate deals on their clients’ behalf. Brokers have dealing centres, which are physical offices. They provide their clients with trading terminals and support services, so that clients can get quotes and make trades.

Central banks are the apex financial institutions of their respective countries. In some countries, central banks are known as Reserve Banks. In addition to overseeing the commercial banking system in a country, a central bank is also in charge of printing of a nation’s legal tender as well as exerting monetary policy controls on a nation’s economy. Examples of central banks are the Federal Reserve Bank (US), the European Central Bank (ECB), the Bank of Canada (BoC), the Bank of Japan (BoJ) and several others. Every nation in the world has a central bank.

Monetary policy is the primary task of any central bank. Monetary policy refers to issues such as determining what currency a country will have, whether that currency will have a fixed or floating exchange rate, issues pertaining to determination of interest rates and foreign reserve maintenance policies. The central bank is also in charge of printing and circulation of a nation’s legal tender, as well as the control of the supply of a nation’s currency. A central bank is also in charge of maintaining a country’s foreign reserves, and in determining what currency a nation will hold reserves in. Stability of a nation’s financial system is another function of the central bank. In this role, a central bank becomes a lender of last resort. We saw this function exerted by the Federal Reserve Bank in the US in providing $700 billion bailout for the US banking and automobile sector under the Troubled Assets Relief Program (TARP) following the collapse of several banks in the US during the global financial meltdown of 2008.

Central banks provide emergency lending to commercial banks by providing a lending window at the interest rate it has determined. This is another way of functioning as a banker of last resort. Bank of Canada (BOC)

• Bank of England (BOE)
• Bank of Japan (BOJ)
• Central banks meeting dates
• European Central Bank (ECB)
• Federal Reserve System (Fed)
• Interest rates
• Reserve Bank of Australia (RBA)
• Reserve Bank of New Zealand (RBNZ)
• Swiss National Bank (SNB)