What is Forex Trading ?

Forex, or Foreign Exchange (or FX The global foregin exchange ) market is the biggest market in the world. The Forex market is the simultaneous exchange of one country's currency for that of another. Traders in the Forex market wish to purchase or sell one country's currency for another country's currency with the hope of making a profit when the value of the currencies changes in favor of the Trader, whether from demand and supply imbalance or market news or events that take place in the world.

INTRODUCTION TO FOREX MARKET:

The Forex or the foreign exchange market is the market where exchange rates are determined. Exchange rates are the mechanisms by which world currencies are tied together in the global market place, providing the price of one currency in terms of another.

For example the US dollar/Euro exchange rate is the price of a Euro expressed in US dollars. IF it is expressed as 1. 18 USD/Euro it indicates that the exchange rate was 1.18 US dollars per Euro.

An exchange rate is just a price. The price of a KG sugar in our country is expressed as Indian Rs.22, or 22 INR/sugar using the above exchange rate market notation. When we price exchange rates, the denominator refers specifically to one unit of a currency.

Like in any other market, demand and supply determine the price of a currency. Atany point in time, in agiven country, the exchange rate is determined by the interaction of the demand for foreign currency and the corresponding supply of foreign currency. Thus the exchange rate is an equilibrium price determined by supply and demand considerations.

The Forex market is open 24 hours a days a week. Trading begins in New Zeland, followed by Australia, Asia, the middle east, Europe and America. The Forex market is the largest market in the world. The average daily turnover of the Forex market is around $1.9 trillion. (1.9 trillion US dollars). This is equivalent to more than 10 times the average daily turnover of global equity markets, 40 times the average daily turnover of the New York Stock Exchange, and if distributed it accounts to $300 aday for every man, woman, and child on earth! The spot market accounts for about one third of daily turnover.

The major Forex markets are London, New York and Tokyo. The US & UK account for more than 50% of turnover. Trading activity is heaviest when major markets overlap. In Forex market, an estimated 95% of transactions are speculative and more than 40% trades last less than two days. The US dollar is involved in approximately 90% of all foreign exchange transactions,equivalent to over $1.9 trillion a day. Euroaccounts for almost 37%, japanese Yen for nearly 20%, British pound for 17%, franc for 6% and Australian Dollar for 5.5%. Because two currencies are involved in each transaction, the sum of the percentage share of individual currencies totals 200% instead of 100%.

There are many reasons for the popularity of foreign exchange trading, but among the most important are, the high liquidity 24 hours a day and the very low dealing costs associated with trading. The market is so large that a handful of players can never influence its outcome.

THE WHOLESALE TIERAND
THE RETAIL TIER OF THE FOREX MARKET

The foreign exchange market is the generic term for the world wide institutions that exist to exchange or trade the currencies of different countries. It is loosely organized in two tiers. The wholesale tier and the retail tier.

The wholesale tier is an informal, geographically dispersed, network of about 1200 banks and currency brokerage firms that deal with each other and with large corporations. The retail tier is where the small agents buy and sell foreign exchange.

The foreign exchange market is open 24 hours a day, split over three time zones. computer screens continuosly show exchange rate prices. A trader enters aprice for the USD/CHF exchange rate on his machine and can then receive messages from any where in the world from people willing to meet that price. It does not matter to him whether the counter parties are sitting in london, mumbai or in New York.

The 24 hour inter-bank 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.

The Foreign Exchange market has no physical venue where traders meet to deal in currencies. When the financial press and economic text books talk about the foreign exchange market they refer to wholesale tier.

The plays in the foreign exchange market are speculators, corporations, commercial banks, currency brokers and central banks. corporations enter into the market primarily as hedgers. However corporations might also speculate. Central Banks tend to be speculators, that is, they enter into the market without covering their positions. Commecial banks and currency brokers primarilyact as intermadiaries. However, at different times, they might be also speculators, arbitrageurs and hedgers. All the parties in the foreign exchange market communicate through traders or dealers.

Commercial banks account for the largest proportion of total trading volume. In 1995,the BIS reported that 89 percent of all foreihn exchange trading was either inter-bank (74%)or between banks and financial institutions including investment houses and securities firms (15%). Only 11% of the trading was done between banks and corporations. The high volume of inter-bank trading is partially explained by the geographically ispersed nature of the market and the price discovering process.

Until the late 1990's large financial institutions dominated the forex market.Over the last several years the market has witnessed adramatic evolution, with mdependent firms offering direct access to the forex market via internet-enabled trading platforms. savvy individual investors are now tapping into the forex market's significant profit potential, with access to the same pricing, market data and tools used by institutions, hedge funds and professional traders.

The explosion in the participations of retail segment in the forex market can be attributed primarily to the accessibility and affordability of enabling technologies and equipments. with the cost of personal computers and internet accessibility crashing over the years, several established broker-dealer firms across the globe were able to offer forex Trading to their retail clients after building in required leverages.

The popularity of this investment avenue, attractted many new firms to offer these services to a larger population across the globe. theregulatory bodies like National futures Association and CFTC in USA, and FSA in UK contributed their bit by keeping the industry minimally regulated and hence the growth of this fairly new investment avenue for retail investors.

Today,there are several global broken dealers registered with regulatory bodies in different cuntries offering Retail Forex Trade to a clientele which is generally spread across 100to 110countries!

THE STRUCTURE OF THE
FOREX MARKET

The Forex market is an over-the-counter market with no centralized exchange.Traders have a choice between firms that offer trade -clearing service.
Unlike many major equities and futures markets, the structure of the Forex market is highly decentralized. In other words, there is no central location where trades occur.

In the Forex market there are multiple dealers mhose business is to unite buyers and sellers. Each dealer has the ability and the authority to execute trades independent of each other. This structure is inherently competitive as traders are faced with achoice between a variety of firms with an equal ability to execute their trades. The firm that offers the best services and execution will capitalize on this market efficiency by attracting more traders.

FOREX TRADING
OPENING ACCOUNT AND REMITTING MARGIN MONEY

As aretail investor you need to become client of some registered broking entity offering spot forex trading. Majority of the entities offering Forex trading facilities to their clients are either registered with National Futures Association, and CFTCin USA, FSA in UK, or other applicable regulatory bodies. (you should be very careful in selecting a broking company for forex trading. The companies that are not regulated by any federal agency are fly-night kind.your interest is best protected with regulated entities). The regulations governing Spot Forex Trading are generally not excessive or rigid.

The above regulated entities usually tie up with some reputed financial services firms to expand their business across physical boundaries.These tie ups enable them to service thir clients in a cost effective and timely manner.
Almost all the briker-dealers have some minimum criteria specified under the applicable regulations that an applicant needs to folfill before he/she is allowed to become a full fledged client. these criteria may be related to the applicant's previous trading experience, net worth, risk capital, education etc.,
An approved client is allowed to trade only after he/she remits the minimum margin amount required to make the account active. these minimum amounts should not be confused with minimum deposits. Most of the market players offer ''zero-minimum balance'' accounts. What ever you remit, is all tradable i.e., you can use all the transferred moneys to place trades.

On successful opening of Forex account, aclient can place trades either through a Trading plat form or through a ''call and trade center'' set up the service provider.

A forex trading plat form looks similar to an equity trading platform, only, it's much simpler to place trades. placing atrade usually is a three click business on most avilable trading platform. Several add-on features like charting, news and analysis is provided on the trading platform itself to aid the clients in taking informed trading decisions.

Whrn you choose to place your trade through the call-and-trad center, your identity is verified and the Forex dealer places the desired trade on your behalf, using his login I.D., and pass word. To maintain additional security and possible dispute resolution your telephonic conversation is recorded.

In Forex trading margin can be understood as collateral against an open position. It is the amont that is bloked from your existing trading equity when you place a trade. Different broker-dealers offer different margin requirements to their clients. Generally, margin requirement may vary from 0.5% to5%. i.e., clients may be allowed to take a position of US dollars 10,000 by committing some where between US dollars 50to 500.

For examole, imagine that you have remitted US dollars 1000 to your Forex Trading account as the fist step to start trading and your service provider offers you a margin requirement of 1%. You may want yo take a position of USD 10,000 by buying 10,000 USD/JPY at the market rate. For the above position 1% value of the total trade would be locked from your total account equity. The total value of the above trade is US dollars 10,000. So US dollars 100 would be locked from your total account equity of US dollars 1000. Hence, after the trade, you will have US dollars 900 (1000-100) is available in your account to take additional position.

So effectively, a margin of US dollars 100 allows you to trade value worth US dollars 10,000. this translates into a leverage hundred times.

Almost all trading platform allow their clients to view their account valuuation, account equity and margin requirements on a live basis.

Margin Trading enables a trader to leverage his position and trade considerably higher values than they would have done without leverage. But this is not without inherent risks. Margin trading gears up profit as magnifier losses. Hence a Trader should be disciplined while placing trades in Forex Market using Margin facility.

MARGIN CALLS:In case of running losses in their open position, a trader's account equity may fall below the margin requirement for the said position. In such a case, the trading system generates margin calls to be sent electronically to the trader so that he/she may top up the account by remitting additional funds.

Margin calls will be sent to traders if their account equity drops down to a level where the required margin is exactly equal to the account equity. A margin call would be generated as soon as Margin Required>Account Equity. The frequency of the margin calls vary from one service provider to another.

FOREX TRADING PLATFORM:

ORDER FUNTION: Order funtions provides traders with the ability to ''Auto Excute'' traders ''pre-specified'' price levels. Orders may be put to use forexecuting atrade, limiting down-side, booking profit when a particular price is reached, and so on. With the underlying tacnology getting more efficient day by day, trading platforms around the globe are providing their clients with aslew of ''order-choices''. Out of them the most relevant to retail traders are:

MARKET ORDERS: A market order is an order to buy or sell at the current market price.Traders can click on the buy or sell button after having specified their deal size. the execution of the order is intantaneous.This means that the price seen at the exact time of the click will be given to the trader. Placing amarket order by phone is quite similar but usually takes a few seconds more time.

ENTRYORDERS: Entry order constitute of pre-specified price and duration-essestially used to initiate a fresh position when the currency-pair reaches at acertain level.

Traders usually use entry orders when Tecnical analysis suggests srong support or resistance at certain price levels. for example, a trader might want to go long in a falling EUR/USD market when the rates have touched bottom/near bottom. In this case, the trader may place entry order to buy close to the suggested support level.

LIMIT ORDERS/TAKE PROFIT ORDERS: A limit order is an order placed to buy or sellatacertain price. The order essestially contains two variable, price and duration.
The trader specifies the price at which he wishes to buy/sell acertain currency pair and also specifies the duration over which the order should remain active. The specified duration time of the next trading day. When limit orders are used to book profit on an exiting position they are called ''Take profit Order'.

GTC (Good till cancelled): A GTC order remains active in the market untill the trader decides to cancel it. The dealer will not cancel the order at any time therefore it is the traders responsible to remember that he possesses the order.

GFD (G ood for the day): A GFD order remains active in the market until the end of the trading day. Since forgin exchange is an ongoing market the end of day must be a set hour.

STOP ORDERS/STOP LOSS ORDERS: A stop order is also an order placed to buy or sell at a certain price. The order contains the same three variables,price, amount and duration. The main difference between a limit order and a stop order is that stop orders are usually used to limit loss potantial on a transaction whilst limit orders are used to enter the market, add to a pre- existing position and profit taking. A stop loss order can be either GTC or GFD.

OCO( Order cancels other) ORDER: An OCO order is a mixture of both limit and stop orders. Two orders with identical amount and duration but different target prices (one take profit and/or one stop loss) are placed above and below the current traded price. When one of the orders is executed the other order is automatically cnacelled. OCOs are usually placed when the trader expects that currency movement may take either direction up or down, and he wishes to book profit at a certain level, while covering his possible downside.

PUTTING A MARKET ORDER THROUGH PHONE:

1. A trader specifies the currency pair and the deal size to the dealer.

2. The dealer gives a two way price (BID and ASK price{.

3. The customer his the dealer on Either the BIDor the OFFER. (He may ask for a re-quote).

4. The dealer confirms the trade. Under normal market conditions, dealers usually respond to market orders in about 5 to 10 seconds at most. Assuming the trader deals immediatly on the offered prices a phone deal can be made in 10 to 15 seconds on average.

You should be aware that it is a correct market practice for institutions to quote two way prices to a trader who wishes to trade. A firm that dose not do so is almost certainly taking advantage of their customer's ignorance as far trading procedures are concerned.