Introduction to Foreign Exchange Markets

Being the main force driving the global economic market, currency is no doubt an essential element for a country. However, in order for all the countries with different currencies to trade with one another, a system of exchange rate between their currencies is needed; this system, is formally known as foreign exchange or currency exchange.
In the early days, the system of currency exchange is supported solely by the gold amount held in the vault of a country. However, this system is no longer appropriate now due to inflation and hence, the value of one’s currency nowadays is determined through the market forces alone. In order to determine the value of a currency’s exchange rate, two main types of system is used which is floating currency and pegged currency.
For floating exchange rate, its value is determined by the supply and demand of the global market where the supply and demand is bound by all these factors such as foreign investment, inflation and ratios of import and export. Normally, this system is adopted by most of the advance countries like for example UK, US and Canada. All of these countries have a similarity where their market is well developed and stable in economic terms. These countries choose to practice this system due to the reason where floating exchange rate is proven to be much more efficient compared to the pegged exchange rate. The reason behind this is because for floating exchange rate, the market itself will re-adjust the exchange rate real-time in order to portray the actual inflation and other economic forces. However, every system has its own flaw and so does the floating exchange rate system. For instance, if a country suffers from economic instability due to various reasons such as political issues, a floating exchange rate system will certainly discourage investment due to the high risk of suffering from inflationary disaster or sudden slump in exchange rate.
Another form of exchange rate is known as pegged exchange rate. This is a system where the value of the exchange rate is fixed by the government of a country and not the supply and demand of the market. This system is called pegged exchange rate because the value of a country’s currency is fixed to another country’s currency. As a result, the value of the pegged currency will not fluctuate unlike the floating currency. The working principle behind this system is slightly complicated where the government of a country will fixed the exchange rate of their currency and when there is a demand for a certain currency resulting a rise in the exchange rate, the government will have to release enough of that currency into the market in order to meet that demand. However, there is a fatal flaw in this system where if the pegged exchange rate is not controlled properly, panics may arise within the country and as a result of that, people will be rushing to exchange their money into a more stable currency. When that happens, the sudden overflow of that country’s currency into the market will decrease the value of their exchange rate and in the end, their currency will be worthless. Due to this reason, only those under-developed or developing countries will practice this method as a form to control the inflation rate.
However, the truth is, most of the countries do not fully practice the floating exchange rate or the pegged exchange rate method in reality. Instead, they use a hybrid system known as floating peg. Floating peg is the combination of the two main systems where one country will normally fixed their exchange rate to the US Dollars and after that, they will constantly review their peg rate in order to stay in line with the actual market value.
The Foreign exchange market, or commonly known as FOREX, is the largest and most prolific financial market because each day, more than 1 trillion worth of currency exchange takes place between investors, speculators and countries. From this, we can deduce that the actual mechanism behind the world of foreign exchange is far more complicated than what we may already know, and that, the information mentioned earlier is just the tip of an iceberg.

Forex Market Development

Forex Market Development
The history of the Forex market as an international capital speculation market is much shorter compared the stock, the gold, the stock, the interest market, but it is developing in an astonishing speed. Today, the foreign exchange market daily trading volume has amounted to 150 billion US dollars, it’s scale has gone far beyond the stock, the stock and other finance commodity markets, it has became the world's most biggest sole finance market and the also the speculation market. Since the birth of the foreign exchange market, the fluctuation of the exchange rate of the Forex market is becoming bigger. In September 1985, 1 US dollar exchanged 220 Japanese Yen, but in May 1986, 1 US dollar only could exchange 160 Japanese Yen, in 8 months, the Japanese Yen has revalued 27%. In recent years, the foreign exchange market wave amplitude has been bigger, on September 8, 1992, 1 pound exchanged 2.0100 US dollars, on November 10, 1 pound exchanged 1.5080 US dollars, in the short two months, the pound exchanged US dollar exchange rate to fall more than 5,000, depreciated 25%. Not only that, presently, everyday the fluctuation of the exchange rate of the Forex market enlarges unceasingly, within a day the rise and drop 2% to 3% is commonly seen. On September 16, 1992, the pound exchanged US dollar from 1.8755 to fall to 1.7850, the pound on first lowers 5%. Due to the large fluctuation of the Forex market, it has created more opportunities for the investor, attracted more and more investors to join this ranks.

Foreign Exchange (Forex) Market

Foreign Exchange (Forex) Market:

Presently, there are various kinds of financial market, it is divided into: Stock market, interest market (including bond, commercial bill and so on), gold market (including gold, platinum, silver), futures market (including grain, cotton and kapok, oil and so on), option market and foreign exchange market or forex market and so on. The foreign exchange market is a place to trade foreign exchange currency, or it is also a place for the transaction of all foreign currency. The foreign exchange market therefore is existence, because of:
Trade and investment
Import and export business, people pays one kind of currency when doing business, but when earns another kind of currency when receive the commodity. This means that, when settling account, business people will pay and receive different currencies. Therefore, they must convert the currencies that they received into the currencies that they could buy commodities. With this similar, when buying a foreign property a company must use the concerned country's currency to make payment, therefore, it needs to convert the domestic currency is concerned country's currency.
Speculation
Currencies exchange rates could fluctuate according to the demand and supply between two currencies. A Forex trader buys up one kind of currency in an exchange rate, but up casts this currency in another more advantageous exchange rate, he may gain. Speculation has occupied most of the Forex market.
Hedging
Due to the fluctuation between two currencies, those companies who owns foreign asset (for example factory), when these companies convert these properties into cost country currencies, there consist of certain risks. When the value of a foreign asset which is estimated based on foreign currencies remained unchanged, if the exchange rate changes, when converting this property value according to the domestic currency, there could be profit and loss. The company may eliminate such hidden risk through hedging. This carries out a foreign currency trading, its transaction result just counterbalances the foreign currency property profit and loss which produces by the exchange rate change.

Forex trading

Forex trading isn’t strange words for those who looking forward to make quick profit in the financial market. Most investors will have at least hear or read about Forex trading. If Forex is a new term to you, please do read the Introduction to the Forex market before proceed reading this Forex trading article.
Forex trading is said to be the highest risk with highest return investment (or speculation game to be more accurate) in the financial market. The amount traded in the Forex market is much larger than any stock market or even combining few stock markets. Forex trading is simply a world wide trading market running 24 hours from Monday to Friday.
Everyday, there are new Forex traders entering into trading Forex. Some of them don’t even fully understand how Forex is traded but have already trading Forex. They are not idiot who want to burn their hard earned money, it’s just because Forex market is simply too lucrative market to enter with extreme high return. Any Forex traders can easily make a double return just in few minutes time trading Forex.
Forex trading is the trading of buying or selling certain currency. For example, buying US Dollar, then selling it later at a higher price to gain profit. Forex traders may also first sell US Dollar and later on buy it back at a lower price with the same gaining profit. It’s simple strategy of selling price minus buying price to make profit. In Forex trading, we just treat currency as a good, buy it and sell it.
You might now think how can Forex trading make huge profit just by selling and buying currency? Forex is traded using margin, Forex traders don’t need to full amount to buy any currency. For example, Forex traders just need 1000 Dollar to buy up 100,000 Dollar. This allows any Forex traders to make huge profit with little money.
Another important factor that any Forex traders can make huge profit is the high fluctuation for currency. Every day every seconds, the currency exchange rate is moving up and down, the Forex exchange rate fluctuate more heavily whenever there is any important economic data being released.
Forex trading is simply sounds too easy for anyone to make profit in very short time. But before you committed into Forex trading, it is strongly advised to have full understanding in Forex trading. Do read up other Forex trading articles in this website and share Forex trading knowledge in the Forex forums.

Characteristics of Forex Market

1st, It consists market but no trading field

The finance industry in the western countries consist two sets of systems, namely the centralism business central operation and there is no fixed place for such business network. Stock trading is being traded through stock exchange. Like the New York Stock Exchange, the London stock market, the Tokyo stock market, respectively is American, English, the Japanese stock main transaction place, it is a centralism business financial commodity, its quoted price, the transaction time and hand over to the procedure all consist of unification the stipulation, and has established the same business association, it has formulated the same business rules. The investor could buy and sells the commodity through the broker company, this is known as "consist of trading market and trading field".
But foreign exchange business is done without any unification operation market and business network, it has no centralism unified place like the stock transaction. But, the foreign currency trading network actually is globally, and it has formed a organization which has no formal organization, the market is relied through an approval way and the advanced information system, Forex traders do not consist any membership qualification for any organization, but must obtain colleague’s trust and approval. This kind of Forex market which has no trading field is known as "consist of market but no trading field". Each day, the trading volume in the global Forex market involves billions of U.S dollars, the so huge large amount fund, is being control under both the non-centralism place and non central governance system, plus it is settle based on non-government governance.

2nd, Circulation work

Due to the different geographical position of the various financial centre, the Asian market, the European market, the Americas market because of the time difference relations, it has become an entire day 24 hour continued operation whole world foreign exchange market.
Early morning 0830 (New York time) New York market opens, 0930 Chicago market opens, 1830 Sydney opens, 1930 Tokyo opens, 2030 Hong Kong, Singapore open, before dawn 1430 Frankfurt opens, 1530 o'clock London market opens. So 24 hours uninterrupted movements, the foreign exchange market becomes a day and night market, only on Saturday, Sunday as well as the various countries' significant holiday, the foreign exchange market only then can close.
This kind of continued operation, provided no time and spatial barrier ideal outlet for investors, the Forex trader may seek the best opportunity to carry on the transaction. For instance, Forex trader buys up the Japanese Yen in the morning at the New York market, in the evening Hong Kong market opens the Japanese Yen rises, the Forex trader sells in the Hong Kong market, no matter Forex trader in where, he all may participate in any market, any time business. Therefore, the foreign exchange market may say is does not have the time and the spatial barrier market.
3rd, Zero and Game

In the stock market, the rise or the drop of stock market could influence the value of the stock whether to rise or drop, for example the Japanese new date iron stock price falls from 800 Japanese Yen to 400 Japanese Yen, the value of this stock has been reduced to half. However, in the foreign exchange market, the value of a stock and a currency is being calculated differently, this is because the exchange rate is refers to the exchange ratio both countries currency, the exchange rate change will influence one kind of monetary value to reduce and at the same time another kind of monetary value increase. For instance in 22 years ago, 1 US dollar exchanges 360 Japanese Yen, at present, 1 US dollar exchanges 110 Japanese Yen, this explains the Japanese Yen currency value rise, but US dollar currency value drops, in the end the value will not reduce or increase. Therefore, some people described the foreign currency trading is "zero and the game", exactly said is the wealth shift.
In recent years, investment foreign exchange market fund has continuously increased, the exchange rate fluctuation expands day by day, urges the wealth shift to be larger, the daily trading volume of the global foreign exchange involves 150 billion US dollars, the rise or falls 1%, means that the 150 billion funds has been shifted. Although the foreign exchange rate change is very big, but, any kind of currency will not become waste paper, even if some kind of currency unceasingly falls, however, but generally it represents certain value, only if such currency has been abolished.

Base Currency and Variable Currency

Base Currency and Variable Currency
When you trade, you will always trade a combination of two currencies. For example, you will buy US dollars and sell euro. Or buy euro and sell Japanese yen, or any other combination of dozens of widely traded currencies. But there is always a long (bought) and a short (sold) side to a trade, which means that you are speculating on the prospect of one of the currencies strengthening in relation to the other.
The trade currency is normally, but not always, the currency with the highest value. When trading US dollars against Singapore dollars, the normal way to trade is buying or selling a fixed amount of US dollars, i.e. USD 1,000,000. When closing the position, the opposite trade is done, again USD 1,000,000. The profit or loss will be apparent in the change of the amount of SGD credited and debited for the two transactions. In other words, your profit or loss will be denominated in SGD, which is known as the price currency. As part of our service, Saxo Bank will automatically exchange your profits and losses into your base currency if you require this.
Dealing Spread, but No Commissions
When trading foreign exchange, you are quoted a dealing spread offering you a buying and a selling level for your trade. Once you accept the offered price and receive confirmation from our dealers, the trade is done. There is no need to call an exchange floor. There are no other time-consuming delays. This is possible due to live streaming prices, which are also a great advantage in times of fast-moving markets: You can see where the market is trading and you know whether your orders are filled or not.
The dealing spread is typically 3-5 points in normal market conditions. This means that you can sell US dollars against the euro at 1.7780 and buy at 1.7785. There are no further costs, commissions or exchange fees.
This ensures that you can get in and out of your trades at very low slippage and many traders are therefore active intra-day traders, given that a typical day in USDEUR presents price swings of 150-200 points.

Forex Trading Basics

The global foreign exchange market is the biggest market in the world. The 3.2 trillion USD daily turnover dwarfs the combined turnover of all the world's stock and bond markets.
There are many reasons for the popularity of foreign exchange trading, but among the most important are the leverage available, the high liquidity 24 hours a day and the very low dealing costs associated with trading.
Of course many commercial organisations participate purely due to the currency exposures created by their import and export activities, but the main part of the turnover is accounted for by financial institutions. Investing in foreign exchange remains predominantly the domain of the big professional players in the market - funds, banks and brokers. Nevertheless, any investor with the necessary knowledge of the market's functions can benefit from the advantages stated above.
In the following article, we would like to introduce you to some of the basic concepts of foreign exchange trading. If you would like any further information, we suggest that you sign up for a FREE Membership on this website, where you will be able to exchange views with other Forex traders and get answers to any questions you might have.
Margin Trading
Foreign exchange is normally traded on margin. A relatively small deposit can control much larger positions in the market. For trading the main currencies, Saxo Bank requires a 1% margin deposit. This means that in order to trade one million dollars, you need to place just USD 10,000 by way of security.
In other words, you will have obtained a gearing of up to 100 times. This means that a change of, say 2%, in the underlying value of your trade will result in a 200% profit or loss on your deposit. See below for specific examples. As you can see, this calls for a very disciplined approach to trading as both profit opportunities and potential risks are very large indeed. Please refer to our page Forex Rates & Conditions for current Spreads, Margins and Conditions.

Forex trading examples

Example 1
An investor has a margin deposit with Saxo Bank of USD 100,000.
The investor expects the US dollar to rise against the Swiss franc and therefore decides to buy USD 2,000,000 - 2% of his maximum possible exposure at a 1% margin Forex gearing.
The Saxo Bank dealer quotes him 1.5515-20. The investor buys USD at 1.5520.
Day 1: Buy USD 2,000,000 vs. CHF 1.5520 = Sell CHF 3,104,000.
Four days later, the dollar has actually risen to CHF 1.5745 and the investor decides to take his profit.
Upon his request, the Saxo Bank dealer quotes him 1.5745-50. The investor sells at 1.5745.
Day 5: Sell USD 2,000,000 vs. CHF 1.5745 = Buy CHF 3,149,000.
As the dollar side of the transaction involves a credit and a debit of USD 2,000,000, the investor's USD account will show no change. The CHF account will show a debit of CHF 3,104,000 and a credit of CHF 3,149,000. Due to the simplicity of the example and the short time horizon of the trade, we have disregarded the interest rate swap that would marginally alter the profit calculation.
This results in a profit of CHF 45,000 = approx. USD 28,600 = 28.6% profit on the deposit of USD 100,000.
Example 2:
The investor follows the cross rate between the EUR and the Japanese yen. He believes that this market is headed for a fall. As he is not quite confident of this trade, he uses less of the leverage available on his deposit. He chooses to ask the dealer for a quote in EUR 1,000,000. This requires a margin of EUR 1,000,000 x 5% = EUR 10,000 = approx. USD 52,500 (EUR /USD 1.05).
The dealer quotes 112.05-10. The investor sells EUR at 112.05.
Day 1: Sell EUR 1,000,000 vs. JPY 112.05 = Buy JPY 112,050,000.
He protects his position with a stop-loss order to buy back the EUR at 112.60. Two days later, this stop is triggered as the EUR o strengthens short term in spite of the investor's expectations.
Day 3: Buy EUR 1,000,000 vs. JPY 112.60 = Sell JPY 112,600,000.
The EUR side involves a credit and a debit of EUR 1,000,000. Therefore, the EUR account shows no change. The JPY account is credited JPY 112.05m and debited JPY 112.6m for a loss of JPY 0.55m. Due to the simplicity of the example and the short time horizon of the trade, we have disregarded the interest rate swap that would marginally alter the loss calculation.
This results in a loss of JPY 0.55m = approx. USD 5,300 (USD/JPY 105) = 5.3% loss on the original deposit of USD 100,000.
Example 3
The investor believes the Canadian dollar will strengthen against the US dollar. It is a long term view, so he takes a small position to allow for wider swings in the rate:
He asks Saxo Bank for a quote in USD 1,000,000 against the Canadian dollar. The dealer quotes 1.5390-95 and the investor sells USD at 1.5390. Selling USD is the equivalent of buying the Canadian dollar.
Day 1: Sell USD 1,000,000 vs. CAD 1.5390. He swaps the position out for two months receiving a forward rate of CAD 1.5357 = Buy CAD 1,535,700 for Day 61 due to the interest rate differential.
After a month, the desired move has occurred. The investor buys back the US dollars at 1.4880. He has to swap the position forward for a month to match the original sale. The forward rate is agreed at 1.4865.
Day 31: Buy USD 1,000,000 vs. CAD 1.4865 = Sell CAD 1,486,500 for Day 61.
Day 61: The two trades are settled and the trades go off the books. The profit secured on Day 31 can be used for margin purposes before Day 61.
The USD account receives a credit and debit of USD 1,000,000 and shows no change on the account. The CAD account is credited CAD 1,535,700 and debited CAD 1,486,500 for a profit of CAD 49,200 = approx. USD 33,100 = profit of 33.1% on the original deposit of USD 100,000.

How to Trade Forex?

How to Trade Forex?
Trading foreign exchange is exciting and potentially very profitable, but there are also significant risk factors. It is crucially important that you fully understand the implications of margin trading and the particular pitfalls and opportunities that foreign exchange trading offers. On these pages, we offer you a brief introduction to the Forex markets as well as their participants and some strategies that you can apply. However, if you are ever in doubt about any aspect of a trade, you can always discuss the matter in-depth with one of our dealers. They are available 24 hours a day on the Saxo Bank online trading system, SaxoTrader.
The benchmark of its service is efficient execution, concise analysis and expertise – all achieved whilst maintaining an attractive and competitive cost structure. Today, Saxo Bank offers one of Europe's premier all-round services for trading in derivative products and foreign exchange. We count amongst our employees numerous dealers and analysts, each of whom has many years experience and a wide and varied knowledge of the markets – gained both in our home countries and in international financial centres. When trading foreign exchange, futures and other derivative products, we offer 24-hour service, extensive daily analysis, individual access to our Research & Analysis department for specific queries, and immediate execution of trades through our international network of banks and brokers. All at a price considerably lower than that which most companies and private investors normally have access to.
The combination of our strong emphasis on customer service, our strategy and trading recommendations, our strategic and individual hedging programmes, along with the availability to our clients of the latest news and information builds a strong case for trading an individual account through Saxo Bank.
Terms of trading are agreed individually depending on the volume of your transactions, but are generally much lower in cost when compared to banks and brokers. Your margin deposit can be cash or government securities, bank guarantees etc. Large corporate or institutional clients may be offered trading facilities on the strength of their balance sheet. The minimum deposit accepted for an individual trading account depends on the account type. Trade confirmations and real-time account overview are built into SaxoTrader, while further account information can be produced in accordance with your specific requirements.

Why Trade Forex?

· 24 hour trading
One of the major advantages of trading Forex is the opportunity to trade 24 hours a day from Sunday evening (20:00 GMT) to Friday evening (22:00 GMT). This gives you a unique opportunity to react instantly to breaking news that is affecting the markets.
· Superior liquidity
The Forex market is so liquid that there are always buyers and sellers to trade with. The liquidity of this market, especially that of the major currencies, helps ensure price stability and narrow spreads. The liquidity comes mainly from banks that provide liquidity to investors, companies, institutions and other currency market players.
· No commissions
The fact that Forex is often traded without commissions makes it very attractive as an investment opportunity for investors who want to deal on a frequent basis. Trading the “majors” is also cheaper than trading other cross because of the high level of liquidity. For more information on the trading conditions of Saxo Bank, go to the Account Summary on your SaxoTrader and open the section entitled “Trading Conditions” found in the top right-hand corner of the Account Summary.
· 100:1 Leverage
Leverage (gearing) enables you to hold a position worth up to 100 times more than your margin deposit. For example, a USD 10,000 deposit can command positions of up to USD 1,000,000 through leverage. You can leverage the first USD 25,000 of your investment up to 100 times and additional collateral up to 50 times.
· Profit potential in falling markets
Since the market is constantly moving, there are always trading opportunities, whether a currency is strengthening or weakening in relation to another currency. When you trade currencies, they literally work against each other. If the EURUSD declines, for example, it is because the US dollar gets stronger against the euro and vice versa. So, if you think the EURUSD will decline (that is, that the euro will weaken versus the dollar), you would sell EUR now and then later you buy euro back at a lower price. In case that the EURUSD indeed declines, then you can take your profit. The opposite trading scenario would occur if the EURUSD appreciates.

Trading Forex

Trading Forex

A currency trade is the simultaneous buying of one currency and selling of another one. The currency combination used in the trade is called a cross (for example, the euro/US dollar, or the GB pound/Japanese yen.). The most commonly traded currencies are the so-called “majors” – EURUSD, USDJPY, USDCHF and GBPUSD.
The most important Forex market is the spot market as it has the largest volume. The market is called the spot market because trades are settled immediately, or “on the spot”. In practice this means two banking days.

Forward Outrights
For forward outrights, settlement on the value date selected in the trade means that even though the trade itself is carried out immediately, there is a small interest rate calculation left. The interest rate differential doesn't usually affect trade considerations unless you plan on holding a position with a large differential for a long period of time. The interest rate differential varies according to the cross you are trading. On the USDCHF, for example, the interest rate differential is quite small, whereas the differential on NOKJPY is large. This is because if you trade e.g. NOKJPY, you get almost 7% (annual) interest in Norway and close to 0% in Japan. So, if you borrow money in Japan, to finance the trade and buying NOK, you have a positive interest rate differential. This differential has to be calculated and added to your account. You can have both a positive and a negative interest rate differential, so it may work for or against you when you make a trade