Forex glossary of terms
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FOREX stands for FOReign EXchange market. As the name may suggest, FOREX is an international foreign exchange market, where money is bought and sold freely. FOREX the way its conducted today was launched in the 1970s, upon exchange rates being introduced, where all participants of the market help to set the price of one currency against the other following the laws of supply and demand. In terms of free competition and having the freedom from being binded to some external control FOREX is a perfect market.
FOREX is composed of about 5000 trading institutions including central government banks (such as the US Federal Reserve), all international banks, and commercial brokers and companies for all types of foreign currency exchange. No central location of FOREX exists however major trading centers can be found in major cities such as Tokyo, New York, London, Hong Kong, Paris, Singapore, and Frankfurt, in addition trading is possible by telephone and the Internet. Businesses use FOREX to buy and sell products in other countries, but FOREX is mostly used by currency traders who attempt to make money from small changes in the market.
Forex trading can be accomplished from the comfort of one's home on a computer.
FOREX has many advantages over the futures market. Firstly, FOREX is more of a liquid market and is the biggest financial market in the world towering over the futures market in terms of daily exchanges. This leads to stop orders that can be performed easier and with less problems in the FOREX.
The FOREX is open 24 hours a day on all business days whereas most futures exchanges are only open 7 hours a day. This is one of the things that contributes to making FOREX more liquid allowing FOREX traders to seize advantage of trading opportunities instantly rather than having to wait for the market to open.
FOREX transactions are commission-free. Brokers make money by making a spread which is the difference between the value at which a specific currency can be bought at and sold at. Conversely, traders pay a commission or brokerage fee for each futures transaction they execute.
All FOREX brokers must be affiliated with some large financial institution, such as a bank, so that they may provide the currencies necessary for margin trading. In the U.S brokers should not be trusted unless they are registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) in order to protect against fraud and other malpractices.
Before commencing in trading FOREX one must establish an account with a FOREX broker. Indeed the number of brokers advertising their services online can be overwhelming. Beofore deciding on a broker it would be wise to conduct a little bit of research as it will give some insight into the amount of services that are available and the various fees each broker may charge their clients.
The two main purposes of the forex market are to establish exchange rates between currencies and to provide a vehicle for making cross-border payments. The major parts that compose Forex are the spot market which comprises 37 percent and is used by traders and speculators, swaps which comprise 43 percent and lastly options and forwards which comprise 20 percent. A forex trade has occurred when one currency has been sold as another one has been bought simultaneously.While almost all currencies are tradable, there are five dominant currencies (four currency pairs) which are traded the most of all currencies. The following are 4 currencies are all traded with the US dollar; The Japanese yen (USD/JPY), British pound or cable (GBP/USD), The euro (EUR/USD) and the Swiss franc (USD/CHF).
As previously stated one major difference between Forex and other financial markets is that Forex is open and available to be traded 24 hours a day. Each trading day begins in Sydney, Australia, on Monday mornings. At this time it is still Sunday night in North America and Europe. The trading week Concludes in New York on Friday which is Saturday morning in Australia. Commissions do not exist, rather point spreads which are measured in pips exist, with each pip equating to a tenth of one percent. Since the point spread, in pips, constitutes the cost of entry, it is advantageous to keep it to a low minimum. It is for this reason why the 4 currency pairs are so popular. They are the closest spreads with differences often being as small as three to four pips.
In FOREX, one need not buy currency first as a prerequisite to selling it at a later point in time. One can open positions for selling and buying in any currency without actually possessing it. Internet-brokers typically make $2000 the minimum deposit for working in the FOREX market, and allow a leverage ratio of 1:100. To illustrate, when one opens the position at $100,000, a trader might invest $1,000 and would then receive $990.00 as a credit. The major currencies traded in FOREX, are Japanese yen (JPY), Euro (EUR), Swiss Franc (CHF) and British Pound (GBP). All four of them are paired and traded against the US dollar (USD).
To properly assess the current situation in the market traders must use fundamental or technical analysis, in addition to making decisions with regards to up-to-date information regarding information of political and economic character. Technical analysis is used by a lot of players in the market. That all knowledge about the market and its fluctuations is contained in the price chain is assumed by technical analysis.
Any variable, be it economic psychological, or political, that may exert any kind of influence with regards to the price, has already been taken into consideration by the market and thus already been included in the price. The initial data for technical analysis are rates: both the lowest and the highest rates, in addition to the rate of the opening and closing in a certain time frame, as well as the amount of transactions.
Whereas the forex market may only impact some people to the extent that it informs them what their exchange rate will be when they travel, it has a large impact on others in their attempts to make large gains as well as an impact in their financial planning and future.
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