Complete Guide to Online Forex Trading Systems - Part 1

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This is Part 1 of a 5 Part Series.

Part 1 - Introduction
Part 2 - Market Mechanics
Part 3 - Leverage and Rollovers
Part 4 - Accounts and Statements
Part 5 - The Main Players

Forex Trading: An Introduction

The purpose of this article is to introduce the forex market to you. As with many markets there are many derivative of the central market such as futures, options and forwards. For the purpose of this book we will only be discussing the main market sometime referred to as the Spot or Cash market.

The word FOREX is derived from Foreign Exchange and is the largest financial market in the world. Unlike many markets the FX market is open 24 hours per day and has an estimated $1.2 Trillion in turnover every day. This tremendous turnover is more than the combined turnover of all the wordls’ stock markets on any given day. This tends to lead to a very liquid market and thus a desirable market to trade.

Unlike many other securities (any financial instrument that can be traded) the FX market does not have a fixed exchange. It is primarily traded through banks, brokers, dealers, financial institutions and private individuals. Trades are executed through phone and increasingly through the Internet. It is only in the last few years that the smaller investor has been able to gain access to this market. Previously the large amounts of deposits required precluded the smaller investors. With the advent of the Internet and growing competition it is now easily in the reach of most investors.

You will often hear the term INTERBANK discussed in FX terminology. This originally, as the name implies was simply banks and large institutions exchanging information about the current rate at which their clients or themselves were prepared to buy or sell a currency. INTER meaning between and Bank meaning deposit taking institutions normally made up of banks, large institution, brokers or even the government. The market has moved on to such a degree now that the term interbank now means anybody who is prepared to buy or sell a currency. It could be two individuals or your local travel agent offering to exchange Euros for US Dollars. You will however find that most of the brokers and banks use centralized feeds to insure reliability of quote. The quotes for Bid (buy) and Offer (sell) will all be from reliable sources. These quotes are normally made up of the top 300 or so large institutions. This insures that if they place an order on your behalf that the institutions they have placed the order with is capable of fulfilling the order.

Now although we have spoken about orders being fulfilled, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words the person or institution that bought or sold the currency has no intention of actually taking delivery of the currency. Instead they were solely speculating on the movement of that particular currency.

Source: Bank For International Settlements www.bis.org Extract From The Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity.

Currency	1989	1992	1995	1998	2001
US Dollar	90.0	82.0	83.3	87.3	90.4
Euro	-	-	-	-	37.6
Japanese Yen	27	23.4	24.1	20.2	22.7
Pound Sterling	15	13.6	9.4	11.0	13.2
Swiss Franc	10	8.4	7.3	7.1	6.1

For an updated version, go to page 11 from the report on Triennial Central Bank Survey, December 2007, Foreign exchange and derivatives market activity in 2007

As you can see from the above table over 90% of all currencies are traded against the US Dollar. The four next most traded currencies are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc(CHF). As currencies are traded in pairs and exchanged one for the other when traded, the rate at which they are exchanged is called the exchange rate. These four currencies traded against the US Dollar make up the majority of the market and are called major currencies or the majors.

Gold Falls in New York on Deflation Concerns, Stronger Dollar - Bloomberg

3 Dec 2008 at 1:52pm
Dec. 3 (Bloomberg) -- Gold fell in New York as the dollar strengthened and deflation concerns mounted, reducing the appeal of the metal as an alternative investment. Silver also declined. The dollar rose against the euro as economists forecast a rate ...

WRAPUP 1-S.Korea sees weaker growth; forex reserves slide - FXStreet.com

3 Dec 2008 at 12:23am
SEOUL, Dec 3 (Reuters) - A top South Korean official conceded on Wednesday that economic growth would fall below target next year and that the government did not have enough foreign exchange reserves to lift up the country's hammered currency ...

S.Korea to intervene marginally in forex market - FXStreet.com

2 Dec 2008 at 10:21pm
SEOUL, Dec 3 (Reuters) - South Korean authorities would make only make marginal interventions in the foreign exchange market due to a rapid depletion of the country's foreign currency reserves, a top government official said on Wednesday. "South ...

Stock & fund quotes - ninemsn

3 Dec 2008 at 6:49am
NEW YORK, Dec 3 (Reuters) - The yen extended gains across the board on Wednesday, reflecting heightened risk aversion as investors cut back on investments in higher-yielding assets while stocks fell around the world. Currency moves were subdued ahead ...

FOREX-Yen gains, risk aversion hits global equities - Forbes

3 Dec 2008 at 6:21am
LONDON, Dec 3 (Reuters) - The yen extended broad gains on Wednesday, reflecting heightened risk aversion as investors cut back on investments in higher-yielding assets while global equities fell. Currency moves were subdued ahead of interest rate ...

Latest News (external links)

BM&FBovespa, Entel, Homex, Molinos, SLC: Latin Equity Preview - Bloomberg

3 Dec 2008 at 6:13am

Gold, other precious metals prices fall - WTOP Radio

3 Dec 2008 at 3:25pm

UPDATE 1-Jefferies cutting jobs, closing offices - Reuters

3 Dec 2008 at 4:00pm

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May 18 2008 04:45 pm | Foreign Exchange Forex

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