Forex : The Foreign Exchange Market | All bout FX & Tranding Now

Broker Criteria # 9 | Leverage and margin call

2010-08-03T09:18:00.000-07:00

Staring To On Line Trading, Choose The Broker
9. Leverage and margin call policies
Foreign exchange traders tend to like higher leverages and sometimes choose a broker based only on this feature. However, traders should remember that although higher leverage can lead to higher profits, it also increases the level of risk. Also, take into account that there are brokers that offer fixed leverage levels, but some others adjust their leverage based on the currency that is being traded and may also have special policies for carrying a trade over the weekend.

Traders should also take into account their broker's margin call policy. Some companies follow the FIFO (first in first out) method to close trades when margin requirements are not met by current equity, others follow the LIFO (last in first out) procedure, and some simply close all the trades. Depending on one's preferences, this is an issue that should be clearly identified before opening an account.

Leverage levels are more of a concern for aggressive traders who like to use the highest possible leverage, whereas a moderate or conservative trader would be happy with the average leverage levels.

Broker Criteria #7 - 8 | Account Types & added-value services

2010-08-03T09:14:00.000-07:00

7. Account Types
Many brokers offer two or more types of accounts. These can be very small mini-accounts and even smaller micro-accounts, or standard accounts, depending on the lots traded. A lot consisting of 100,000 units is called a standard lot; a lot consisting of 10,000 units is called a mini lot; and a lot consisting of 1,000 units is called a micro lot. Some brokers even offer fractional unit sizes which allow you to establish your own position size.

The micro and mini-accounts allow you to trade with a very low minimum of capital, while the standard accounts often require a higher minimum initial capital, varying from broker to broker.
As you see, the account types differ from each other according to the minimum trading size requirements. Choosing a specific account type should be relative to your amount of capital. This concept may seem a bit nebulous if you are just starting out, but rest assured it will be made clear once you start learning about leverage and money management.

8. Is the broker offering any added-value services?
Easy access to real-time charts, news and economic data is a must for any trader. However, a trader must think of these and any other added-value service as part of the broker's package rather than as the most important feature on which to base a decision.
This is a point a trader of any nature should address correctly to make sure the firm complies with the basic standards of providing real-time charts, news and economic events.

Broker Criteria # 6 | Costs

2010-08-03T09:07:00.000-07:00

on line trading? choose the broker
6. Costs: Fee And Commission Structures

The Forex market, unlike other exchange driven markets, has a unique feature that many market makers use to entice traders to trade: they promise no exchange fees or regulatory fees, no data fees and, best of all, no commissions. In the previous chapter we have already mentioned that this advantage has to be well understood, because when it comes to evaluating costs, it much depends on your trading numbers such as frequency, ratios and other performance related statistics.

Basically, there are three commission structures used by Forex brokers: a fixed spread, a variable spread and/or a commission charge based on a percentage of the spread. Just a quick reminder: spread, usually calculated in pips, is the difference between buying and selling price.

So, which is the best choice?

On the one hand, you may think that the fixed spread is the right choice, because then you know exactly what to expect. On the other hand, you might think you are getting a good deal paying a variable but smaller spread.

First of all, consider that the best deal you can get is choosing a reputable broker who is well capitalized, has strong relationships with the large foreign exchange banks and can provide the liquidity you need to trade well. Second, you need to calculate the impact of all possible fee structures on your trading model to know which one is more favorable to you.

Some Forex brokers don't charge a commission, so the spread is how they make money. The lower the number of pips required per trade by the broker is, the greater the hypothetical profit that the trader makes is. Comparing pip spreads of half dozen brokers will reveal different transaction costs.

In the case of a broker who offers a variable spread, you can expect a spread that will, at times, be as low as 1 pip or as high as 7 pips on the most major pairs, depending on the level of market volatility. While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change.

While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change.

A lack of liquidity in the markets or very volatile market conditions can force the broker to apply a slippage on the pricing. Slippage, also called "requote", occurs when your trade is executed away from the price you were offered, when you end up paying more pips than the average spread. This is perhaps a cost that you don't want to bear if you are trading very short term or if you trade the news.

Asking your broker how they handle news times and if they have any devise to protect you from experimenting slippage is probably a good idea. You can decide to trade with fixed spreads, even if they are a little higher in average but receive, in exchange, an instant fill of your trades at the desired prices.

Some brokers even offer you the choice of either a fixed spread or a variable one.

Other brokers, like ECN brokers, may also charge a small commission, usually in the order of two-tenths of one pip. Whether you should pay a small commission depends on what else the broker is offering. For example, the broker may pass your orders on to a large market makers conglomerate. You might choose a broker with such an arrangement, if you look for very tight spreads only larger investors can otherwise get.

Broker Criteria # 5 | Customer support

2010-08-03T09:01:00.000-07:00

starting for on line Trading
5. Customer support One of the most imporant thing you should check in a broker is the support service. Forex is a 24-hour market, so ideally, the broker you choose should offer support at anytime.
Does it has support in your language? Which medium is used to contact the help desk: email, chat, or can you speak by phone to a live person? Do the representatives seem knowledgeable? How they respond to your questions can be key in gouging how they will respond to your needs in a real situation.
While trading you can run into technical problems. Therefore try to anticipate those critical situations and simulate those questions and requests to your broker. You can do this while experimenting on a demo account. The website should already explain things clearly, but be sure to check the quality and efficiency of their support before opening an account.

Brokers Criteria #4 | broker or dealer

2010-08-03T08:56:00.000-07:00

General criteria to choose a Forex Broker
4. Is the company a broker or a dealer?
Understanding the nature of a broker versus a dealer is always an important task, as there are currently a few different types of companies to work with for over-the-counter forex trading (OTC FX).

(a) Dealing directly with a market maker or "dealer." Each market maker has a "dealing desk," which is the traditional method that most banks and financial institutions use. Market makers provide two-way pricing to customers throughout the day. These prices sometimes are quoted on a "fixed" basis, meaning that they do not move throughout the day, while other firms use a dynamic spread system, which means the prices change as the liquidity in certain pairs change. The market maker interacts with other market makers banks to manage their global FX positions/risk. Each market maker offers a slightly different price in a particular currency pair based on their global FX book. Banks, investments banks, broker/dealers, and FCMs make up the majority of this category. Market makers are compensated by their ability to manage their global FX risk. This may include spread revenue, netting revenue, and revenue on swaps and conversions of residual profits or losses.

(b) Dealing with a broker. A broker acts as a conduit between a customer and a market maker/dealer. The broker sends the customer's order to another party to be executed by the dealing desk of the market maker. The spreads that the customer receives are dependant on the market maker or dealer that the broker routes the customer's transactions through, and either a fixed or dynamic system can be used. Brokers generally charge fees for this service and/or are compensated by the market maker for the transactions that they route to the market maker/dealing desk.

(c) ECN brokerage model. In OTC forex, there is currently a modified broker method labeled "ECN." This is not to be confused with the ECN term used in equities; they are different models altogether. The concept in OTC FX is very similar to point b above, except for the fact that the ECN acts as a broker to a variety of market makers or dealing desks. Each dealer sends a price to the ECN as well as a particular amount of volume that a quote is "good" for, and then the ECN distributes that price to the customer. The ECN is not responsible for execution, only the transmission of the order to the dealing desk from which the price was taken. In this system, spreads are determined by the difference between the best bid and the best offer at a particular point in time on the ECN. In this model, the ECN is compensated by fees charged to the customer plus a "kick-back" or "rebate" from the dealing desk based on the amount of volume or order flow that it is given from the ECN.

It is important to point out that an ECN usually shows the volume available for trading each bid and offer, so the trader knows what maximum trade can be placed. ECN volume is only a reflection of what is available on any one ECN, not in the overall market. The market maker still sets its volume based on its comfort with its liquidity at any one point in time. The market maker's responsibility is to provide liquidity under all conditions to its customers.

Broker Creteria #3 | Capitalization

2010-08-03T08:50:00.001-07:00

... choose a Forex Broker
3. Capitalization
As you already know, the better capitalized the market makers are, the more credit relationships they can establish with their liquidity providers and the more competitive pricing they can get for themselves as well as for their clients.

The OTC nature of the market makes extremely difficult for a broker to get competitive pricing without a margin deposited in a lending institution or bank. As a result, it is extremely important for individual investors to do extensive due diligence on the Forex broker with which they choose to trade.

If a broker-dealer states that they are safe to work with because they trade in the interbank market, you know what this means. To date, the interbank market is an unregulated and loose conglomerate usually traded by central banks, investment banks and extremely large corporations.

As a member of a regulatory authority, a broker must comply with a minimum capitalization level. This fact has a direct relationship with its ability to stay solvent and is also indicative of the size of the company.
The minimum capitalization required in the US is currently (Jan 09) at $ 10,000,000, and the trend is to gradually raise up to $ 20,000,000 over the next months. If the broker does not publish this information, it's a warning sign that could mean a lack of solvency.

Choose a Forex Broker 2 Choose The Broker

2010-08-03T08:45:00.000-07:00

General criteria to choose a Forex Broker

2. How reliable is the broker's trading platform?
Depending on an individual's hardware and software characteristics, one might prefer a desktop application or a web-based (java) application. Understanding which type of platform suits you best is critical for trading.
It is also important to make sure that the trading platform does not crash or freeze often, especially during times of global economic news or events, when traders needs stability. The reliability of a platform should be more of a concern than its look and feel.

An aggressive trader, or one who likes to make large, frequent trades, will always have to look for a stable platform that never or very rarely crashes. On the other hand, a passive and conservative trader who does not watch the market round-the-clock could be more flexible.

In trading terms, user-friendly means that placing an order or closing a trade can be done immediately. One-click trading and management of stop-loss, limit and other order types are advantages that a trader may want to take into account.
In addition, it is helpful for the overall navigation of a platform to be user-friendly. If a platform offers additional charts and tools, they should be fairly simple to access and apply.
This is a critical point for an aggressive trader (intraday/scalp) whose dependence on the trading platform is far greater than a moderate or conservative trader.

Brokers Criteria 1

2010-08-03T08:28:00.000-07:00

Before choosing the broker...
Brokers Criteria
General criteria to choose a Forex Broker to trade with:
Due to enormous competition between Forex broker-dealers, they offer different features and advantages. However, choosing a broker is not an easy task for any new or experienced trader.
There are some key aspects like regulation and capitalization which speak for the reliability and competence of the organization and which can be measured following certain objective criteria.

But the real challenge in choosing a broker comes when you have to determine what attributes you are looking for. Along with the outstanding features, you might find a potential weakness, depending on what you need for your trading style.

Here is the list of the questions you may ask yourself before choosing the broker for you:

1. Is the broker or dealer regulated? If so, in which country is it regulated?
Not all countries regulate the same way, nor do they have the same regulatory environment and requirements when it comes to financial registration. Therefore, it is important for any investor/trader to choose a foreign exchange broker that is based in a country where their activities are monitored by a regulatory agency. It is also important to know if the broker or dealer is regulated in an on- or off-shore country, as the latter can be more liberal with registration requirements.

Countries with dedicated regulatory agencies include:
* USA
* UK
* Eurozone
* Japan
* Australia
* Switzerland

All types of traders need to be aware of their broker or dealer's regulatory status and have a clear understanding of the regulatory body that governs forex activity where the selected broker or dealer does business.

Steps to choose A firm - Broker

2010-08-03T08:15:00.000-07:00

How To Choose The Best Broker

6 steps to choose a Firm or Broker
1. Read Brokers criteria section: List of criteria to take into account when choosing a Broker.
2. Use Brokers comparative table: One page view of principal Brokerage firms' features.
3. Use “+ info” links: When detailed information of a Broker is required.
4. Open a Demo Account: Direct link to Brokerage firms’ Demo Account Platform.
5. Chat with a Broker: Anonymous conversation with a Broker representative.
6. Be contacted by the Brokers of your choice: Completing this form will ensure you are contacted by the selected Brokers.

General criteria to choose a Firm
1. Is The Broker Or Dealer Regulated?
2. How Reliable Is The Broker's Trading Platform?
3. Capitalization
4. Is The Company A Broker Or A Dealer?
5. Customer Support
6. Costs: Fee And Commission Structures
7. Account Types
8. Is The Broker Offering Any Added-Value Services?
9. Leverage And Margin Call Policies

Effective Leverage vs. Maximum Leverage

2010-08-03T08:07:00.000-07:00

On one hand traders can exploit the maximum margin requirements that the broker-dealer provides, which can range from 100:1 to 400:1, but on the other hand we have the technical aspect of the mechanism. When asking what leverage you are using in your trading, you have to refer to the leveraged amount which you are effectively using to enhance your trading strategy.

The effective leverage is of paramount importance. There is nothing wrong in choosing the maximum level of leverage that the broker-dealer allows. What can put a trader in a dangerous situation is when the effective leverage comes close to the maximum displayed by the broker-dealer.

The effective leverage is calculated by dividing the value of open positions by the available balance of the account. In other words, the real leverage is the amount of capital you are really using compared to the amount in your account.

With a position worth of $20,000 (2 mini lots) and an account balance of $1,000, the real leverage is 20:1 (20.000/1.000 = 20). If this trade loses 50 pips, the account balance would go down by 10%. Remember, the pip value would be $2,00, multiplied by 50 pips, that is $100.

Should this loss happen, the real risk would increase with the next trade - now a loss of $100 is 11% of the account. This also means that the effective leverage rises even if the position size is kept the same, because the account balance is now lower. This is the typical dynamic of a losing spiral we mentioned when traders blow up their accounts - by doing the same, they lose more with each trade. This is because leverage increases each time.

To compound the issue, if the trader increases his/her leverage deliberately thinking in recovering losses faster, he/she is not acting in his/her best interest.

A leverage of 20:1 in a single position is quite high if we are to stay in the market for the long run. If our method is efficient in terms of consistency, then we can fine tune the leverage to get the maximum profit from it. This doesn't mean to exploit the maximum leverage offered by the broker-dealer, but instead, to use the maximum leverage that our method can sustain without the danger of a margin call.

For instance, you can have 5 open positions with an effective leverage of 4:1 each one. This way, you arrive at a leverage of 20:1 by adding 5 positions, and you will be eventually better protected with multiple positions over different currencies, than betting that leveraged amount in just one currency pair. The same leverage of 20:1 spread over several positions is a measure to diversify your risk.

How to bring this into practice will be discussed further when studying the development of trading systems and money management techniques. For now let's take one more step in the appliance of the mechanics you have just learned.

Margin Trading

2010-08-03T08:00:00.000-07:00

Margin Trading
When conducting a Forex transaction, you are not actually buying all that currency and depositing it into your account. Technically, you are speculating on the exchange rate and contracting with your broker-dealer that they will pay you, or you will pay them, depending if the exchange rate moves in your favor or not.
A trader who purchases a USD/JPY standard lot does not have to put down the full value of the trade (100,000 USD). But to gear up the trade size to institutional level, the buyer is required to put down a deposit known as "margin". The minimum deposit capital varies from broker to broker and can range from $100 to $100,000.
That is why margin trading can be seen as trading with borrowed capital– it's basically a loan from the broker-dealer to the trader, but based on the trader’s deposited amount. Margin trading is what allows leverage.

In the above example, the trader's initial deposit serves as a guarantee (a collateral) for the leveraged amount of 100,000 USD. This mechanism insures the broker-dealer against potential losses. As you see, you are not using the deposit as a payment or purchase of currency units. It is rather a good-faith deposit, made by the trader to the dealer or broker.

When executing a new trade, a certain percentage of the deposit in the margin account will be frozen as the initial margin requirement for the new trade. The quantity of required margin per trade depends on the underlying currency pair, its current exchange rate and the number of lots traded. Remember, the lot size always refers to the base currency. The frozen initial margin requirement may not be used in trading until the trade is closed.
The more positions are opened simultaneously the more margin is required until it eventually becomes a notable percentage of your account.

Margin Call - a Guaranteed Limited Risk
In the futures market, a losing position may go beyond the deposited margin, and the trader will be liable for any resulting deficit in the account. In Forex this will not happen as the risk is minimized through the mechanism of a "margin call".
Most online trading platforms have the capability of automatically generating a margin call when your margin deposits have fallen below the required minimum level because an open position has moved against you.

In other words, when the losses exceed the deposit margin, all open positions will be closed immediately, regardless of the size of positions held within the account. http://www.fxstreet.com/

Concept of Leverage

2010-08-03T07:53:00.000-07:00

Margin and Leverage

Concept of Leverage
A very extended and poor definition of leverage is that it's a tool that will help traders earn money fast and easy. And indeed, one of the most important advantages of the Forex market is given by the effect of leverage! Without leverage, it would be very difficult to accumulate capital by trading the market, especially for small investors. But leverage can also be very harmful if not properly understood. This duality is what makes this concept difficult to grasp and explains partly why there are so many misconceptions about it.

Financial leverage, meaning a purchase on a margin, is the only way for small investors to participate in a market that was originally designed only for banks and financial institutions. Leverage is a necessary feature in the Forex market not only because of the magnitude of capital required to participate in it, but also because the major currencies fluctuate on average less than 2% per day.

Without leverage, the Forex would not attract capital from the retail sector. It is designed to allow a greater market share to investors in accordance with their investment capacity.

Leverage is therefore a form of credit or loan, which allows us to trade with money from the broker-dealer. Financial leverage is also defined as the use of foreign capital per unit of capital invested.

In fact, the mechanism of leverage is what enables the existence of broker-dealers. They also have accounts in different banks which serve them as liquidity providers, thus acting as lenders of first resort for the broker-dealer's margin transactions. This means that the bank allows the broker-dealer to trade with larger amounts of capital and the broker-dealer, in turn, transfers this benefit to the user. The capital deposited in the bank guarantees limited risk, as does your deposit with the broker-dealer.http://www.fxstreet.com/

Lots and Position Sizes

2009-06-18T19:55:00.000-07:00

Margin and Leverage

Lots and Position Sizes
In Forex the minimum amount of currency you have to buy is called one "lot". That means that units of currencies are grouped and traded in lots. At a retail level, lots are divided into several categories: the so-called "full-size" or "standard" lots, "mini" lots, "micro" lots and "flexible" or "fractional" lots.

A standard lot consists of 100,000 units of whatever the base currency in the currency pair is. A mini lot consists of 10,000 units of the base currency and a micro lot 1,000 units of the base currency.
As you can see, a mini contract is one-tenth the size of a standard contract and the micro lot one-tenth of the mini lot.
Flexible lots, in turn, allow the trader to choose the exact amount of units of the base currency to buy or sell.

Differentiated by the lot sizes there are also several types of accounts that a trader can open with a retail broker-dealer. While a standard account controls 100,000 units per lot traded, a mini account and a micro account control one lot size lower respectively.

So for instance, when buying one micro lot on the GBP/USD, you would buy 1,000 British Pounds and sell an equivalent amount of US Dollars.

Let's suppose the current exchange rate for GBPUSD is 2.4500 and you want to buy 10,000 US Dollars worth of this pair. Here's the math:

For pairs with USD as the quote currency, take the Dollar amount you want to purchase and divide it by the exchange rate:
(desired position size) / (current rate) = # of units

that is:
10,000 US Dollars / 2.4500 = 4081.63 units of GBPUSD

As you can see, this is approximately 4 mini lots of British Pounds. If your broker-dealer doesn't offer fractional lot sizes you can always round up or down.

Buying a pair with USD as the base currency is much easier to calculate. Why? Because in these cases you just buy the amount of units you want because you are purchasing US Dollars, the base currency.

And in the case of a cross pair transaction, when buying 10,000 US Dollar worth of GBPCHF, for instance, we purchase 4081.63 units of GBPUSD at the above rate and sell 10,000 units of USDCHF.

Being able to choose among several lot sizes is a huge advantage retail Forex trading offers to the small investor. It allows you to tailor and fine tune your money management to better meet your trading style.

If you have a very small account size keep your risk profile low by choosing a dealer that offers micro or fractional lot sizes. Even many seasoned traders avoid standard contracts to be more precise in their position sizing. We will extensively talk about position sizing and money management in other units of the Learning Center.

NZD (New Zealand Dollar) - currency

2009-06-18T19:46:00.000-07:00

NZD (New Zealand Dollar) - Major characteristics
This currency behaves similar to the AUD because New Zealand's economy is also trade oriented with much of its exports made up of commodities. The NZD also moves in tandem with commodity prices.
As per estimates from the last BIS triennal survey, in 2007 the NZD accounted for a daily transaction share volume of 1,9% of total Forex transactions, after the Norwegian krone, the Hong Kong Dollar and the Swedish krone.
Along with the Australian Dollar, the NZD has been for many years a traditional vehicle for carry traders, which has made this currency also very sensitive to changes in interest rates. In 2007 the NZD was mainly used to conduct carry trades against the Japanese Yen accounting for a higher volume than the Australian Dollar against the Yen. Fxstreetdotcom.

AUD (Australian Dollar)

2009-06-18T19:39:00.000-07:00

Major characteristics the AUD (Australian Dollar)
Australia is a big exporter to China and its economy and currency reflect any change in the situation in that country. The prevailing view is that the Australian Dollar offers diversification benefits in a portfolio containing the major world currencies because of its greater exposure to Asian economies. This correlation with the Shanghai stock exchange is to be added to the correlation it has with gold. The pair AUD/USD often rises and falls along with the price of gold. In the financial world, gold is viewed as a safe haven against inflation and it is one of the most traded commodities. Together with the New Zealand Dollar, the AUD is called a commodity currency. Australia's dependency on commodity (mineral and farm) exports has seen the Australian Dollar rally during global expansion periods and fall when mineral prices slumped, as commodities now account for most of its total exports.
The interest rates set by the Reserve Bank of Australia (RBA) have been the highest among industrialized countries and the relatively high liquidity of the AUD has made it an attractive tool for carry traders looking for a currency with the highest yields. These factors made the AUD very popular among currency traders. It's the 6th most traded currency in the world accounting for an estimated 6.8% of worldwide FX transactions in 2007, far in excess of the economy's importance (2% of global economic activity). Fxstreetdotcom
The AUD is under a free floating regime since 1983. Before that it was pegged to a group of currencies called the trade weighted index (TWI).

CAD (Canadian Dollar)

2009-06-18T19:31:00.000-07:00

Major characteristics: CAD (Canadian Dollar)
Canada is commonly known as a resource based economy being a large producer and supplier of oil. The leading export market for Canada is by far the United States making its currency particularly sensitive to US consumption data and economical health.
Being a highly commodity dependent economy, the CAD is very correlated to oil - meaning that when oil trends higher, USD/CAD tends to trend lower and vice versa.fxstreetdotcom
If Canada is one of the world's largest producers of oil and is such a big part of the US economy, rising oil prices tend to have a negative effect on the USD and a positive effect on the CAD. Here you have two nice correlations.
But if you are willing to find a pair which is really sensitive to oil prices, then pick the CAD/JPY. Canada and Japan are at the extreme ends of production and consumption of oil. While Canada benefits from higher oil prices, Japan's economy can suffer because it imports nearly all of the oil it consumes. This is another interesting correlation to follow..

CHF (Swiss franc)

2009-06-18T19:26:00.000-07:00

CHF (Swiss franc)- major characteristics:
Several factors such as a lengthy history of political neutrality and a financial system known for protecting the confidentiality of its investors, have created a save heaven reputation for Switzerland and its currency. Being the worlds largest destination of offshore capital.

The Swiss franc moves primarily on external events rather then domestic economic conditions, and is therefore sensitive to capital flows as risk-averse investors pile into Franc-denominated assets, during global risk aversion times. Also much of the debt from Eastern European economies is denominated in Swiss Francs.

GBP (Pound Sterling) currency pair

2009-06-18T19:19:00.000-07:00

Major characteristics the GBP (Pound Sterling)
This was the reference currency until the beginning of World War II, as most transactions took place in London. This is still the largest and most developed financial market in the world and as a result banking and finance have become strong contributors to the national economical growth. The United Kingdom is known to have one of the most effective central banks in the world, the Bank of England (BOE).

The Sterling is one of the four most liquid currencies in the Forex arena and one of the reasons is the mentioned highly developed capital market.
While 60% of the volume of foreign exchange are made via London, the Sterling is not the most traded currency. But the good reputation of the monetary policy of Great Britain and a high interest rate for a long time contributed to the popularity of this currency in the financial world.
"Even though the economic unit using the Pound Sterling is technically the United Kingdom rather than Great Britain, the ISO currency code is GBP and not UKP as sometimes abbreviated. The full official name of the currency "Pound Sterling", is used mainly in formal contexts and also when it is necessary to distinguish the United Kingdom currency from other currencies with the same name such as the Guernsey Pound, Jersey Pound or Isle of Man Pound.
The currency name is sometimes abbreviated to just Sterling, particularly in the wholesale financial markets, while the term British Pound is commonly used in less formal contexts, although it is not an official name for the currency."

JPY (Japanese Yen) - Currency Pair

2009-06-18T19:08:00.000-07:00

JPY (Japanese Yen)- major characteristics:
The Japanese Yen, despite belonging to the third most important single economy, has a much smaller international presence than the Dollar or the Euro. The Yen is characterized by being a relatively liquid currency 24 hours.
Since much of the Eastern economy moves according to Japan, the Yen is quite sensitive to factors related to Asian stock exchanges. Because of the interest rate differential between this currency and other major currencies that preponderated for several years, it is also sensitive to any change affecting the so-called "Carry Trade". Investors were then shifting capital away from Japan in order to earn higher yields. However, in times of financial crisis when risk tolerance increases, the Yen is not used to fund carry trades and is punished accordingly. When volatility surges to dangerous levels, investors try to mitigate risk and are expected to park their money in the least risky capital markets. That means those in the US and Japan.

The concept of carry trade will be disclosed later in this chapter, but a short definition would be: a strategy which involves buying or lending a currency with a high interest rate and selling or borrowing a currency with a low interest rate.
Japan is one of the world's largest exporters, which has resulted in a consistent trade surplus. A surplus occurs when a country's exports exceed its imports, therefore an inherent demand for Japanese Yen derives from that surplus situation. Japan is also a large importer and consumer of raw materials such as oil. Despite the Bank of Japan avoided raising interest rates to prevent capital flows from increasing for a prolonged period, the Yen had a tendency to appreciate. This happened because of trade flows. Remember, a positive balance of trade indicates that capital is entering the economy at a more rapid rate than it is leaving, hence the value of the nation's currency should rise. Fxstreetdotcom
In some countries the fiscal year and calendar year are not identical. In Japan the start of a new fiscal year is April 1st. Japanese companies usually ‘dress up’ their balance sheets ahead of the fiscal year-end, by liquidating foreign holdings and bringing home the profits from overseas subsidiaries, in order to raise their bottom lines. This capital flows prior to the start of the new fiscal year, and the fact that banking trading desks lower their transaction volumes, condition the exchange rates and price action in all pairs containing the Yen.

EUR (Euro) - currency pair

2009-06-18T19:02:00.000-07:00

EUR (Euro) - The major characteristics
The European Monetary Union is the world's second largest economical power. The Euro is the currency shared by all the constituting countries which also share a single monetary policy dictated by the European Central Bank (ECB).
This currency is both a trade driven and a capital flow driven economy. Before the establishment of the Euro, central banks didn't accumulate large amounts of every single European national currency, but with the introduction of the Euro it is now reasonable to diversify the foreign reserves with the single currency. This increasing acceptance as a reserve currency makes the Euro very susceptible to changes in interest rates.
The effect of the Euro competing with the Dollar for the role of reserve currency is misleading. It gives observers the impression that a rise in the value of the Euro versus the US Dollar is the effect of increased global strength of the Euro, while it may be the effect of an intrinsic weakening of the Dollar itself.Fxstreetdotcom
Nickname: Fiber or Single Currency

USD (US Dollar) - Currency Pairs

2009-06-18T18:51:00.000-07:00

USD (US Dollar) - The major characteristics
The US Dollar is by far the most transacted currency in the world. This is due to several factors as you have already learned in the last chapter. First, it's the world's primary reserve currency, which makes this currency highly susceptible to changes in interest rates. Second, the USD is a universal measure to evaluate any other currency as well as many commodities such as oil (hence the term "petrodollar") and gold.
Today's other major currencies like the Euro, the British Pound, the Australian Dollar and New Zealand Dollar are moving against the American currency, and so do the Japanese Yen, the Swiss franc and Canadian Dollar.

70% of the U.S economy depends on domestic consumption, making its currency very susceptible to data on employment and consumption. Any contraction in the labor market has a negative effect on this currency.

All US Dollar denominated bank deposits held at foreign banks or foreign branches of American banks are known as "Eurodollars". Some economists maintain that the overseas demand for Dollars allows the United States to maintain persistent trade deficits without causing the value of the currency to depreciate and the flow of trade to readjust. Other economists believe that at some stage in the future these pressures will precipitate a run against the US Dollar with serious global financial consequences.FXStreet.com

Currencies & Currency Pairs

2009-06-18T18:26:00.000-07:00

Exchange Rate
The concept of buying and selling capital can be confusing because you're not buying anything in exchange for money, like you do in the stock market, for example. Instead you are simultaneously buying one currency and selling another.
In the stock market, traders buy and sell shares; in the futures market, traders buy and sell contracts; in the Forex market, traders buy and sell "lots". When you buy a currency lot, you are speculating on the value of one currency compared to another, on the exchange rate itself.

Currencies are traded in pairs. The pair is written in a particular format, best demonstrated by way of two examples. The Euro and the US Dollar: EUR/USD or the British Pound and the Japanese Yen: GBP/JPY.
Imagine if currencies would be traded single and you would want to buy 100 US Dollars. Do you think it would be easy to find someone offering more than 100 Dollars for the same amount? Probably not. The value of a currency does not change in itself, what changes is its value in relation to other currencies. This is a characteristic of a free floating exchange rate system, as you learned in the previous chapter.

If you hear another trader saying "I'm buying the Euro", he/she is expecting that the value of the Euro will rise against the US Dollar and speculates by buying the EUR/USD exchange rate. The trader's ability to anticipate how the exchange rate will move will determine if the trade will represent a win or a loss.

The first member of every pair is known as the "base" currency, and the second member is called the "quote" or "counter" currency. The International Organization for Standardization (ISO) decides which currency is the base and which one is the quote within each pair.

The exchange rate shows how much the base currency is worth as measured against the counter currency. For example, if the USD/CHF rate equals 1.1440, then one US Dollar is worth 1.1440 Swiss francs. Remember, the value of the base currency is always quoted in the counter currency member within the pair (hence the name "quote currency"). A simple rule to understand the exchange rates would be to think of the base currency as one unit of that currency being worth the value of the exchange rate expressed in the quote currency.

Following the example above, one US Dollar is worth 1.1440 Swiss Francs.

Therefore, any unrealized profit or loss is always expressed in the quote currency. For example, when selling 1 US Dollar, we are simultaneously buying 1.1440 Swiss francs. Likewise, when buying 1 US Dollar, we are simultaneously selling 1.1440 Swiss francs.

We can also express this equivalence by inverting the USD/CHF exchange rate to derive the CHF/USD rate, that is:

CHF/USD = (1/1.1440) = 0.874
This means that the quote of one Swiss franc is 0.874 US Dollars. Note that CHF has now become the base currency and its value is accrued in USD.

In spot Forex, not all pairs have the US Dollar as the base currency. Primary exceptions to this rule are the British Pound, the Euro and the Australian and New Zealand Dollar.

GBP/USD, EUR/USD, AUD/USD, NZD/USD
When looking at a chart you can see if a currency pair, or in other words, the exchange rate between two currencies, is rising or falling.

In the above example the chart illustrates the strength of the base currency, the Euro, relative to the quote currency, the US Dollar. Remember, the quote currency is the one in which the exchange rate is quoted.

The next chart shows the same base currency but this time relative to the Australian Dollar. Both charts comprise the same period and as you can see, the value of the Euro has shown a different behavior towards the USD than towards the AUD.
In a free floating system, there are two main factors that can affect exchange rates every day: international trade (import/export of commodities, manufactured goods and services) and capital flows (following certain interest rates, equity performance, government debt instruments like bonds).

It is by buying and selling a currency, therefore exchanging it with other currencies, that it becomes stronger or weaker, independently from the fact that this transaction was speculative or not.

Currencies reflect the performance and policies of entire economies, sovereign governments and industry. It is the comparison of different currencies and their economies that drives exchange rates up and down.

Basically there are two main methods to estimate where a currency is heading: the fundamentals and price action.

The first refer to the economic and political factors that influence the value of currencies, such as the release of economical data and news. The second are graphical representations of the exchange rates like you see above. Graphs show offer and demand levels and price patterns which can be recognized visually. And as a numerical sequence, prices can be also technically analyzed using mathematical formulas. -fxstreet.com

Trading Forex : is in fact like trading entire economies. A huge difference compared to equities - where companies are traded - is that trends in Forex can last very long. Due to the fact that macroeconomic events can continue to influence the market over a time frame of months and years, an economy that is weak tends to stay weak for a long time. A company that is in trouble can be turned around fairly quickly, but not an entire economy.

Many retail traders feel the need to buy and sell bottoms on the charts, hopping for a turn-around, but the fact is that a currency that has been weakening can always go lower in value, and one that has been gaining strength can always go higher too. The lesson here is that if you want to fight trends in the Forex world, be sure to have a sound and tested method able to capitalize on such circumstances.

True And False Myths

2009-05-16T00:05:00.000-07:00

Forex Trading Broker :
True And False Myths
Some traders do not feel comfortable with their broker being on the other side of their trades as they feel it presents a kind of conflict of interest. This is a worthwhile concern, certainly, but the fact of the matter is that the majority of Forex brokers are forced by competition to remain honest. There is no way for a broker to survive in the business unless the company keeps up its end of the deal.

As you already know, most countries have their own body or association that serves to regulate the sector in that country and ensure that clients' rights are protected. This body will insist on its members accepting the decisions of their arbitration panel in case of disputes. This should address the question about the safety of the funds and the lack of overall regulation. There is a lot being done recently in this regard and expect new regulations to come which will provide traders with more protection.

There is another common tendency amongst some retail currency traders to claim that Forex brokers trade against you and their main agenda is to wipe out your account hunting for stops. For an aspiring trader this information is very discouraging.

What happens is that, precisely because of the high leverage effect, most retail traders are forced to trade with stop losses. Otherwise, there is a risk of a forced liquidation in the form of a margin call.
As most of the stop orders are programed on the platform, the broker's dealing desk has access to this information. Not that the broker is watching your particular position, but rather the entire positions of the entire client base. This includes seeing where the most stop orders are clustered.

It's true that Forex broker-dealers, as market makers, can expand the spreads at any time. But more than often that is not what happens. You see, the information about price levels where stop orders are clustered is passed into the interbank market in the case of a non-dealing-desk broker. And the fact is that the market will react to those orders. In the Forex market stop losses are interpreted as orders, that is as a willingness from market participants to take action at a certain price level. A stop order always corresponds to a sell or buy order, and the market will react to it. This subject will result clearer to you studying the next chapters, as more pieces of the puzzle will be revealed.

It should not be considered stop hunting when the price simply goes against you by 30or 40 pips all the way to hit your stop order. To move the price by so many pips, the broker would have to accumulate a position of millions of Dollars in the process. Besides, their agenda is to get you to trade more and therefore earn more via spreads, commissions, rollovers, etc. If you wipe out your account they probably loose a costumer.

The hole in the story is that an artificial movement of the exchange rate represents a huge risk for the broker as well, as this position may have to be compensated in the real market. A different situation is, like Boris Schlossberg points out, that strong market players, like banks or hedge funds, coordinate their actions around key price levels. In such a case, a cascade of stop orders can eventually accelerate momentum and change the direction of a trend.

The question is: is such a myth really unbiased or is it written by traders who emptied their accounts because of lack of experience? After all, we only tend to complain when things go bad!

Taking responsibility not only for your wins, but also for your losses is a personal trait any trader should develop. Learn from your losses and accept them as valuable lessons and you will progress faster on your journey to become a trader.

There is also the myth that a broker without dealing desk or an ECN broker is more likely to be honest about the trades since it passes your trading orders off to the interbank.

The question is: is such a myth really unbiased or is it written by traders who emptied their accounts because of lack of experience? After all, we only tend to complain when things go bad!

Taking responsibility not only for your wins, but also for your losses is a personal trait any trader should develop. Learn from your losses and accept them as valuable lessons and you will progress faster on your journey to become a trader.

There is also the myth that a broker without dealing desk or an ECN broker is more likely to be honest about the trades since it passes your trading orders off to the interbank.

John Jaggerson and Wade Hansen explain why NDD brokers and ECNs are not necessarily better then market makers:
A dealing desk is the place at an institution where contracts are bought and sold. Your dealer may imply that by trading with them you will not have to work through a dealing desk, giving you better pricing. This is not true. It may be correct that your order won't be handled by your dealer's own dealing desk, but your order will eventually wind up on someone's dealing desk at one of your dealer's broker banks. If it is going to cost you the same amount of money in the end, does it matter to you whether your order is handled on your dealer's own dealing desk or Goldman Sachs' dealing desk? The dealer you work through and your dealer's broker banks will be compensated for the service they offer, and it will be a cost to you.
To every dark side, there is a plus. In the case of retail brokers, they provide an advantage: you can open an account with very little investment and get very high leverage. With an ECN Forex broker the leverage is generally much lower and the minimum account deposits are higher.

These are some criteria that you can follow on your due diligence and that will protect you from the rare but possible event you experience major problems with a broker-dealer. Another measure you can adopt is to split your funds among few brokers. Sometimes even apparently good companies go bankrupt and it can catch you unprepared. Besides, by working with more than one broker, you can profit from more features and get to know which of them make you feel comfortable. Fxstreet

Taking responsibility not only for your wins, but also for your losses is a personal trait any trader should develop. Learn from your losses and accept them as valuable lessons and you will progress faster on your journey to become a trader.

Finding the right broker-dealers (forex)

2009-05-15T23:52:00.000-07:00

How to Choose the best Forex Broker
Margin Requirements and Leverage
Another thing that you should check in a Forex broker-dealer is leverage options and the margin call policy.
Foreign exchange traders, specially aspiring traders with limited capital, tend to like higher leverages and sometimes choose a broker based only on this feature. However, traders should remember that although higher leverage can lead to higher profits, it also increases the level of risk. Understand that leverage is like a loan. It might be just as beneficial as detrimental to your capital. Low margin requirements (meaning high leverage) are great when you make profits, but not so great when you loose.
Some brokers offer fixed leverage levels, while others adjust their leverage based on the currency that is being traded and may also have special policies for carrying a trade over the weekend. For example, less leverage (and therefore less risk) may be preferable if you trade highly volatile (exotic) currency pairs.

Leverage is, expressed as a ratio between total capital available to actual capital, is the amount of money a broker will lend you for trading. For example, a ratio of 100:1 means you can trade $1000 for every $10 of capital deposited in your account. Many brokerages offer as much as 200:1.

Traders should also take into account their broker's margin call policy. Some companies follow the FIFO (first in first out) method to close trades when margin requirements are not met by current equity, others follow the LIFO (last in first out) procedure, and some simply close all the trades. Depending on one's preferences, this is an issue that should be clearly identified before opening an account.
Maximum leverage levels are more of a concern for aggressive traders who like to use the highest possible leverage, whereas a moderate or conservative trader would be happy with the average leverage levels.

Most brokers pay interest on a trader's margin account. The interest rates normally fluctuate with the prevailing central bank's interest rates of the countries whose currencies you are trading. This is an interest which the margin capital in your account accrues. Ask your broker if there is a minimum margin requirement that allows you to accrue the interest.

Finding the right broker-dealers is a critical part of the process to become a trader and requires some real work on your part. Many of the mentioned criteria will be very relative until you define your trading profile and methodology. Therefore, don't forget to come back to this chapter as you progress in modeling your trader's profile.

Just to summarize: investigate, interrogate and cross-examine a series of Forex brokers before you jump in! Test broker's platform with demo accounts and make sure to scrutinize their terms and conditions to be fully aware of all the nuances that a specific broker may impose on your trading.
Here is a checklist you can use in your due diligence:
* How well capitalized is the broker/dealer?
* Is the company registered, and where? Get the firm's registration ID number and look it up at the above mentioned websites.
* How long has it been in business?
* Who manages the firm and how much experience does this person have?
* Does the firm have partner companies?
* Which and how many banks does the firm have relationships with?
* What is their capitalization level?
* What kind of platform does it offer- web based or client software?
* What is their margin policy?
* What rollover policy does the broker have?
* Does the firm guarantee stop loss execution?
* Does it have the order types that you need for your trading?
* Can you speak to the dealing desk if they have one?
* Do they guarantee liquidity also for big order sizes?

Fxstreet.com
"Does lower leverage mean lower risk of a margin call? Generally speaking yes, but there are cases when an excessive low leverage can be detrimental to your trading. We will cover a case study in the practice chapter at the end of this Unit."
'Not many traders consider the rollover and interests payed and charged by the broker into their trading performances. If you take this factor into account, you can add substantial profits to your trading revenues, by choosing the right instruments and platforms.' ...Learn Fx4 Previous

Broker Trading platforms

2009-05-15T23:45:00.000-07:00

Trading forex Platforms
The existing Forex brokers offer different trading platforms for their clients along with extensive tools and research. These trading platforms almost always feature real-time quotes for several currency pairs, integrated charting and news, technical analysis tools, a deal log and even integration for automated trading systems.
Real-time exchange rate quotes are not the only feature a retail platform should provide. Closely examine the screen layout in search for an account summary with your current account balance with realized and unrealized profit and loss; the margin available and locked in open positions; leverage; rollover charges in open positions; open position sizes, and performance reports.

One of the reasons why some of the trading software applications look similar is because some dealers, instead of creating their own software, prefer to offer other platforms for client use which were created by the same manufacturer and "white labeled". Regardless who is the creator, the important factors are always the same: intuitive design, ease of use, speed and reliability.

Most trading platforms are either Web based (in Java), or download trading platforms you can install on your computer.
Which one is better? This is something you should decide by yourself. Web based software is hosted on your broker's server. You won't have to install any software on your own computer and you'll be able to log in from any computer that has an Internet connection.

It should be pointed out that, in most cases, you will only find trading platform applications to run on Microsoft Windows. Using another operating system, you won't be able to install the application and a web based or Java-based trading platform is the solution for those cases.

Java-based software tends to be less vulnerable to attacks from viruses and hackers during transmissions than client-based software. But on the other hand, the client-based programs run faster.
A client-based software will only allow you to trade on your own computer, unless you install the program on every computer you use.

Whether download or web-based, make sure that the trading set-up has every trading tool you need, including charts, news, available currencies etc., and that you have a high speed Internet connection. The Forex market is a fast moving market and you will need up-to-the second information to make informed trading decisions.

Speed is thus a little bit more subjective and can depend on the speed of your computer and Internet connection. But the actual technology is probably less important than knowing how fast someone will pick up the phone should you have a problem with the software and need to get out of a trade.

You are free to use a charting platform and an execution (trading) platform from two different providers, and even add a news feed from a third source.
Nearly all brokers align their hours of operation to coincide with the hours of operation of the global Forex market: 5:00 pm EST Sunday through 4:00 pm EST Friday.

Perhaps other valuable differentiators for you are trailing stops to lock in profits, real-time news, wireless trading, or pattern recognition charting.

One of the backbones of any trading platform is the ordering system, whether you can hedge positions, increment or reduce the size of a position, trail stop loss orders, close and invert a position, etc. Get a feel for the options that are available by trying out different demo accounts. Order types will be covered in next chapter in more detail, but for now remember that the decision about what order types are best depend on each trading style.
Brokers usually also provide technical and fundamental commentaries, economic calendars and other research as part of their service. Ask them if the information is freely available or only to costumers, and compare it with other sources.

Before committing to any broker and opening a real account, be sure to request free trial accounts, so-called "demo" accounts, to test the platforms and its many features. The demo account should be free at least for 30 days, so you can paper trade the platform and test if it fits your needs.... next
Broker Trading platforms
" Speed is thus a little bit more subjective and can depend on the speed of your computer and Internet connection. But the actual technology is probably less important than knowing how fast someone will pick up the phone should you have a problem with the software and need to get out of a trade".

Choosing Forex trading Broker

2009-05-15T23:37:00.000-07:00

Forex Trading Broker
Costs: Fee And Commission Structures
The Forex market, unlike other exchange driven markets, has a unique feature that many market makers use to entice traders to trade: they promise no exchange fees or regulatory fees, no data fees and, best of all, no commissions. In the previous chapter we have already mentioned that this advantage has to be well understood, because when it comes to evaluating costs, it much depends on your trading numbers such as frequency, ratios and other performance related statistics.
Basically, there are three commission structures used by Forex brokers: a fixed spread, a variable spread and/or a commission charge based on a percentage of the spread. Just a quick reminder: spread, usually calculated in pips, is the difference between buying and selling price.

So, which is the best choice?
On the one hand, you may think that the fixed spread is the right choice, because then you know exactly what to expect. On the other hand, you might think you are getting a good deal paying a variable but smaller spread.
First of all, consider that the best deal you can get is choosing a reputable broker who is well capitalized, has strong relationships with the large foreign exchange banks and can provide the liquidity you need to trade well. Second, you need to calculate the impact of all possible fee structures on your trading model to know which one is more favorable to you.

Some Forex brokers don't charge a commission, so the spread is how they make money. The lower the number of pips required per trade by the broker is, the greater the hypothetical profit that the trader makes is. Comparing pip spreads of half dozen brokers will reveal different transaction costs.
In the case of a broker who offers a variable spread, you can expect a spread that will, at times, be as low as 1 pip or as high as 7 pips on the most major pairs, depending on the level of market volatility. While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change.

While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change.

A lack of liquidity in the markets or very volatile market conditions can force the broker to apply a slippage on the pricing. Slippage, also called "requote", occurs when your trade is executed away from the price you were offered, when you end up paying more pips than the average spread. This is perhaps a cost that you don't want to bear if you are trading very short term or if you trade the news.
Asking your broker how they handle news times and if they have any devise to protect you from experimenting slippage is probably a good idea. You can decide to trade with fixed spreads, even if they are a little higher in average but receive, in exchange, an instant fill of your trades at the desired prices.
Some brokers even offer you the choice of either a fixed spread or a variable one.

Other brokers, like ECN brokers, may also charge a small commission, usually in the order of two-tenths of one pip. Whether you should pay a small commission depends on what else the broker is offering. For example, the broker may pass your orders on to a large market makers conglomerate. You might choose a broker with such an arrangement, if you look for very tight spreads only larger investors can otherwise get.
Nevertheless, the spread with an ECN broker is not fixed, and it always depends on the current market depth. Besides, their platforms may not be so user friendly as retail platforms and they usually lack charting tools. In addition, payment and withdrawal options are less efficient when compared to retail brokers and accounts openings require higher minimum amounts.

But if a broker offers, in exchange of a commission, access to a superior proprietary software platform or some other benefit like a real time news feed, in this case, it may be worth paying the small commission for this additional service.
So what is the bottom line effect of each type of spread or commission on your trading? Given that it much depends on your trading profile, this is a difficult question to answer. There are some factors to take into account when weighing what is most advantageous for your trading and that depends on your trading capabilities and preferences.

An important and not very discussed aspect when considering trading costs are the rollover charges. These are determined by the difference between the interest rate of the country of the base currency and the interest rate of the other country. The greater the interest rate differential between the two currencies, the greater the rollover charge. We will cover these concepts in more detail in the next chapter, but as a matter of broker choice, take into account that not all brokers charge the same rollovers for the same pairs.

However, before you jump in and choose a broker based on the type of commission structure, consider the total broker's package, otherwise you may be sacrificing other benefits. For example, some brokers may offer excellent spreads but their platforms may not have that personal preference feature you need for your trading to work.
The information you gathered up to this point will make you enjoy the following webinar, in which John Jagerson teaches not only about the different spread typologies, but also shares a great amount of useful market knowledge for your broker-dealer research. ... next
" While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change."

Doing Brokers Due Diligence (Choosing Forex trading Broker)

2009-05-15T23:20:00.000-07:00

Doing Brokers Due Diligence
Due to enormous competition between Forex broker-dealers, they offer different features and advantages. However, choosing a broker is not an easy task for any new or experienced trader.
There are some key aspects like regulation and capitalization which speak for the reliability and competence of the organization and which can be measured following certain objective criteria.

But the real challenge in choosing a broker comes when you have to determine what attributes you are looking for. Along with the outstanding features, you might find a potential weakness, depending on what you need for your trading style.
For example, if your trading performance depends on guaranteed liquidity but you can account for variable spreads, this may be what you should look for. On the other hand, you might prefer a fixed pip spread if you know you are getting instant executions despite of market conditions, if this is essential for your trading.
With so many Forex broker-dealers out there, it may be a little confusing finding the one that fits your needs and financial capabilities.

Support
One of the first thing you should check in a broker is the support service. Forex is a 24-hour market, so ideally, the broker you choose should offer support at anytime.

Which medium is used to contact the help desk: email, chat, or can you speak by phone to a live person? Do the representatives seem knowledgeable? How they respond to your questions can be key in gouging how they will respond to your needs in a real situation.
While trading you can run into technical problems. Therefore try to anticipate those critical situations and simulate those questions and requests to your broker. You can do this while experimenting on a demo account.
The website should already explain things clearly, but be sure to check the quality and efficiency of their support before opening an account.
Capitalization

As you already know, the better capitalized the market makers are, the more credit relationships they can establish with their liquidity providers and the more competitive pricing they can get for themselves as well as for their clients.
The OTC nature of the market makes extremely difficult for a broker to get competitive pricing without a margin deposited in a lending institution or bank. As a result, it is extremely important for individual investors to do extensive due diligence on the Forex broker with which they choose to trade.

If a broker-dealer states that they are safe to work with because they trade in the interbank market, you know what this means. To date, the interbank market is an unregulated and loose conglomerate usually traded by central banks, investment banks and extremely large corporations.

As a member of a regulatory authority, a broker must comply with a minimum capitalization level. This fact has a direct relationship with its ability to stay solvent and is also indicative of the size of the company.

The minimum capitalization required in the US is currently (Jan 09) at $ 10,000,000, and the trend is to gradually raise up to $ 20,000,000 over the next months. If the broker does not publish this information, it's a warning sign that could mean a lack of solvency.
As an auxiliary data you could try to find out if the broker has big clients such as hedge funds or corporations. Some of these data are public as regulated and audited hedge funds have to mention their access gates to the market. A broker chosen by a large hedge fund is normally indicative that the broker is reliable, complies with all regulations and has enough liquidity.
Regulation
Not all countries supervise the Forex brokers and dealers the same way, nor do they have the same regulatory environment and requirements when it comes to financial registration. Therefore, it is important for any trader to choose a broker that is based in a country where their activities are monitored by a regulatory agency. It is also important to know if the broker or dealer is regulated in an on- or offshore country, as the latter can be more liberal with registration requirements.

You want to be aware of the broker or dealer's regulatory status and have a clear understanding of the regulatory body that governs Forex activity where the selected broker or dealer does its business.
The authority of a regulated Forex broker is located in the country where the broker is registered in. For example, Forex brokers in the US should be registered as a futures commission merchant with the Commodity Futures Trading Commission. The CFTC ensures that the broker meets strict financial standards. The broker should also be a member of the National Futures Association (NFA).
US companies supervised by these three organizations are more likely to be legitimate than those that are not. In addition, there is a lot of information that can be found with these organizations that can help you further your broker research.
Usually, you can spot the registered status of the broker and other financial information on its own website. A regulated Forex broker will not hide the fact of being regulated and who is the authority in charge.

Dealing with a Forex broker-dealer that is registered with the CFTC and the NFA is one way to minimize your vulnerability, but this isn't to say that you should dismiss firms that are based outside the United States or subject to non-US regulators. The Financial Services Authority (FSA) in the United Kingdom and the Investment Dealers Association of Canada are also strident in their defense of the rights of retail Forex traders.
The point is to do your due diligence on a regular basis verifying that the firm is registered and in good standing with the regulator in place. Also, make certain that you understand your rights and the enforcement mechanisms available to you should you have difficulty with the broker-dealer. fxstreet.com

On the Commodity Futures Trading Commission (CFTC) website you can find out the capitalization level of your broker-dealer versus other dealers in the market and compare if they comply with the net capitalization requirements. Compare the firm's Net Capital Requirement with its Excess Net Capital as well. Clearly, the more there is the better signal is.

the forex trader

2009-05-07T21:57:00.000-07:00

Main Players In The Forex Market

Online Retail Broker-Dealers
In the previous sections you have come to understand how the Forex market works. Now let's see how its inner workings can affect your trading by learning more about retail Forex brokers.

If you want to exchange one currency for another and make some profit, just like most individuals, you are unable to access the pricing available on the interbank market. You can't just barge into Citigroup or Deutsche Bank and start throwing Euros and Yen around, unless you are a multinational or hedge fund with millions of Dollars. To participate in the Forex, you need a retail broker, where you can trade with much inferior amounts.

Brokers are typically very large companies with huge trading turn over, which provide the infrastructure to individual investors to trade in the interbank market. Most of them are market makers for the retail trader, and in order to provide competitive two way prices, they have to adapt to the technological changes afoot in the industry, as we have seen above.

What does it mean to directly trade with a market maker? Every market maker has a dealing desk, which is the traditional method that most banks and financial institutions use.
The market maker interacts with other market maker banks to manage their position exposure and risk. Every market maker offers a slightly different price in a particular currency pair based on their order book and pricing feeds.

As trader, you should be able to produce gains independently if you are using a market maker or a more direct access through an ECN. But nevertheless, it's always essential to know what happens on the other side of your trades. To gain that insight, you first need to understand the intermediary function of a broker-dealer.

The interbank market is where Forex broker-dealers offset their positions, but not exactly the way banks do. Forex brokers don't have access to trading in the interbank through trading platforms like EBS or Reuters Dealing, but they can use their data feed to support their pricing engines. Enhanced price integrity is a major factor traders consider when dealing in off-exchange products, since most prices originate in decentralized interbank networks.

In order to quote prices to their costumers and offset their positions in the interbank market, brokers require a certain level of capitalization, business agreements and direct electronic contact with one or several market maker banks.

You know from chapter A01 that the Forex spot market works over-the-counter, which means there are no guarantors or exchanges involved. Banks wanting to participate as primary market makers require credit relationships with other banks, based on their capitalization and creditworthiness.
The more credit relationships they can have, the better pricing they will get. The same is true for retail Forex brokers: depending on the size of the retail broker in terms of capital available, the more favorable pricing and effectiveness it can provide to its clients. Usually this is so because brokers are able to aggregate several price feeds and always quote the tighter average spread to its retail customers. 1, 2, 3,

The Main Players In The Forex Market

2009-05-07T21:52:00.000-07:00

Main Players In The Forex Market

Businesses & Corporations
Not all participants have the power to set prices as market makers. Some just buy and sell according to the prevailing exchange rate. They make up a substantial allotment of the volume being traded in the market.

This is the case of companies and businesses of any size from a small importer/exporter to a multi-billion Dollar cash flow enterprise. They are compelled by the nature of their business - to receive or make payments for goods or services they may have rendered - to engage in commercial or capital transactions that require them to either purchase or sell foreign currency.

Fund Managers, Hedge Funds and Sovereign Wealth Funds
With Forex trading surging in recent decades, and as more individuals earn their living trading, the popularity of riskier investment vehicles like hedge funds has increased. These participants are basically international and domestic money managers. They can deal hundreds of millions, as their pools of investment funds tend to be very large.

Because of their investment charters and obligations towards their investors, the bottom line of the most aggressive hedge funds is to achieve absolute returns besides of managing the total risk of the pooled capital. Foreign exchange advantage factors like liquidity, leverage and relatively low cost create a unique investment environment for these participants.

Generally speaking, fund managers invest on behalf of a range of clients including pension funds, individual investors, governments and even central banks. Also government-run investment pools known as sovereign wealth funds have grown rapidly in recent years.

Internet Based Trading Platforms
One of the great challenges to the institutional Forex and how exchange related businesses are being handled has been the emergence of the Internet-based dealing platforms. This medium contributed to form a diverse global market where prices and information are freely exchanged.

As evidenced by the emergence of electronic brokering platforms, the task of customer/order matching is being systematized as these platforms act as direct access points to pools of liquidity. The human element of the brokering process - all the people involved between the moment an order is put to the trading system until the moment it is dealt and matched by a counter party - is being reduced by the so called "straight-through-processing" technology.

Similar to the way we see prices on a Forex broker's platform, a lot of interbank dealing is now being brokered electronically using two primary platforms: the price information vendor Reuters introduced a web based dealing system for banks in 1992, followed by Icap's EBS - which is short for "electronic brokering system"- introduced in 1993; replacing the voice broker.

Both the EBS and Reuters Dealing systems offer trading in the major currency pairs, but certain currency pairs are more liquid and are traded more frequently over either EBS or Reuters Dealing. For instance, EUR/USD is usually traded through EBS while GBP/USD is traded through Reuters Dealing.
Cross currency pairs are generally not quoted on either platform, but are calculated based on the rates of the major currency pairs and then offset through the legs. Some exceptions are EUR/JPY and EUR/CHF which are traded through EBS and EUR/GBP which is traded through Reuters. 1, 2 , 3 , next

Central Banks

2009-05-07T21:48:00.000-07:00

The Main Players In The Forex Market
Central Banks
The majority of developed market economies have a central bank as their main monetary authority. The role of central banks tends to be diverse and can differ from country to country, but their duty as banks for their particular government is not trading to make profits but rather facilitating government monetary policies (the supply and the availability of money) and to help smoothen out the fluctuation of the value of their currency (interest rates).

Central banks hold foreign currency deposits called "reserves" also known as "official reserves" or "international reserves". This form of assets held by central banks is used in foreign-relation policies and indicates a whole lot about a countries' ability to repair foreign debts and also indicates a nation's credit rating.

While in the past reserves were mostly held in gold, today they are mainly held in Dollars. It is common for central banks nowadays to possess many currencies at once. No matter what currencies the banks own, the Dollar is still the most significant reserve currency. The different reserve currencies that central banks hold as assets can be the US Dollar, Euro, Japanese Yen, Swiss franc, etc. They can use these reserves as means to stabilize their own currency. In a practical sense this means monitoring and checking the integrity of the quoted prices dealt in the market and eventually use these reserves to test market prices by actually dealing in the interbank market. They can do this when they think prices are out of alignment with broad fundamental economic values.

The intervention can take the form of direct buying to push prices higher or selling to push prices down. Another tactic that is adopted by monetary authorities is stepping into the market and signaling that an intervention is a possibility, by commenting in the media about its preferred level for the currency. This strategy is also known as jawboning and can be interpreted as a precursor to official action.
Most central bankers would much rather let market forces move the exchange rates, in this case by convincing market participants to reverse the trend in a certain currency. 1 , 2 , next

Commercial And Investment Banks

2009-05-07T21:43:00.000-07:00

Commercial And Investment Banks
The Main Players In Forex (the big trader)
There are hundreds of banks participating in the Forex network. Whether big or small scale, banks participate in the currency markets not only to offset their own foreign exchange risks and that of their clients, but also to increase wealth of their stock holders. Each bank, although differently organized, has a dealing desk responsible for order execution, market making and risk management. The role of the foreign exchange dealing desk can also be to make profits trading currency directly through hedging, arbitrage or a different array of strategies.

Accounting for the majority of the transacted volume, there are around 25 major banks such as Deutsche bank, UBS, and others such as Royal bank of Scotland, HSBC, Barclays, Merrill Lynch, JP Morgan Chase, and still others such as ABN Amro, Morgan Stanley, and so on, which are actively trading in the Forex market.

Among these major banks, huge amounts of funds are being traded in an instant. While it is standard to trade in 5 to10 million Dollar parcels, quite often 100 to 500 million Dollar parcels get quoted. Deals are transacted by telephone with brokers or via an electronic dealing terminal connection to their counter party.
Many times banks also position themselves in the currency markets guided by a particularly view of the market prices. What probably distinguishes them from the non-banking participants is their unique access to the buying and selling interests of their clients. This "insider" information can provide them with insight to the likely buying and selling pressures on the exchange rates at any given time. But while this is an advantage, it is only of relative value: no single bank is bigger than the market - not even the major global brand name banks can claim to be able to dominate the market. In fact, like all other players, banks are vulnerable to market moves and they are also subject to market volatility.

Similar to your margin account with a broker, the banks have established debtor-creditor agreements between themselves, which make the buying and selling of currencies possible. To offset the risks of holding currency positions taken as a result of customer transactions, the banks enter into reciprocal agreements to quote each other throughout the day on preset amounts.
Direct dealing agreements can include that a certain maximum spread will be upheld, except under extreme conditions, for example. It can further include that the rate would be supplied in a reasonable amount of time.

For instance, when a costumer wants to sell 100 million Euro, the procedure is as follows: the bank's sales desk receives the costumer's call and inquires the dealing desk at which exchange rate they are able to sell to the costumer. The costumer can now accept or deny the offered rate.
As a market maker, the bank has to handle the order in the interbank market and assume the risk for that position as long as there is no counterpart for that order.

Let's assume that the customer accepts the bank's buy price then the Dollars are immediately credited to the customer. The bank has now an open short position over 100 million Euro and has to find either another costumer order to match with this order, or a counter party in the interbank market. To do such transactions, most banks are nourished by electronic currency networks in order to offer the most reliable price for each transaction.

The interbank market can therefore be understood in terms of a network, consisting of banks and financial institutions which, connected through their dealing desks, negotiate exchange rates. These rates are not just indicative, they are the actual dealing prices. To understand the uniformity of prices, we have to imagine prices being instantaneously collected from crossed prices of hundreds of institutions across an aggregated network. page 1 , central bank

The Forex Player (big trader)

2009-05-07T21:36:00.000-07:00

The Main Players In The Forex Market
When the US Dollar went off the gold standard and began to float against other currencies, the Chicago Mercantile Exchange began to create currency futures to provide a place where banks and corporations could hedge the indirect risks associated with dealing in foreign currencies.

More recently, currency gyrations have centered on a massive move away from currency futures to more direct trading in the Forex spot markets where professional currency traders, alongside with forwarding contracts, derivatives of all kinds, deploy their various trading and hedging strategies.

The idea of currency speculation has been actively marketed, and this is having a profound effect on the foreign exchange planning not only of nations - through their central banks - but also of commercial and investment banks, companies and individuals. These are the main categories of participants - a geographically disperse Forex clientele - and as a consequence so is the market as a whole. In practice, the foreign exchange market is made up of a network of players clustered in various hubs around the globe.
The key difference among these market participants is their level of capitalization and sophistication, where the elements of sophistication mainly include: money management techniques, technological level, research abilities and level of discipline.

Among the market players it is the individual trader who has the least amount of capitalization. In the absence of this strength, besides of emulating those other elements of sophistication of the institutional players, individual traders are forced to impose discipline on their trading strategies.
Those who can impose discipline will gain the ability to extract positive returns from the Forex markets. fxstreet.com

What is a market maker? To be considered a foreign exchange market marker, a bank or broker must be prepared to quote a two-way price: a bid price which is the market makers' buying price and an offer price is their selling price to all inquiring market participants, whether or not they are themselves market makers.
Market markers capitalize on the difference between their buying price and their selling price, which is called the "spread" . They are also compensated by their ability to manage their global FX risk using not only the mentioned spread revenues but also netting revenues and revenues on swaps and conversions of residual profits or losses.
The exchange rates can be declared through foreign exchange dealers across the globe over the telephone or electronically via digital dealing platforms. next

A revival of Bretton Woods

2009-05-07T21:27:00.000-07:00

A revival of Bretton Woods?
( Global Trade And The Currency Market - The Big Picture Matters )
Much of the arrangements the Bretton Woods system brought into existence continue to be relevant in today's global market. Some observers call it the "Bretton Woods II" making reference to the system of currency relations in which currencies, particularly the Chinese renminbi (Yuan), remained pegged to the US Dollar. The argument is that a system of pegged currencies is both stable and desirable although this notion causes considerable controversy and opens the question: how long a system of heavily managed exchange rates as seen in many emerging market economies will last?
The answer depends on the expectations of the US creditors, mainly the Asian economies. The similarities between the original system and Bretton Woods II are evident: the US deficit, the US loose monetary policies, the fixed pegs to the US, and the massive ongoing reserve accumulation by Asian central banks. These exchange rate policies can lead to an inflation rise in those emerging economies forcing them to abandon the pegs and/or letting currencies appreciate at a faster rate as a necessary step to control inflation.

Over the very long term, economies move in cycles and what were yesterday's emerging economies, like Japan or Germany, become today's stable, mature markets while other countries step into the role of the emerging countries and join the globalization party, such as the case of China, India, or Brazil. Suddenly it was 1944 all over again: what made economic sense for the emerging markets of yesterday continues to make sense for those of today and likely for those of tomorrow.

Just like their predecessors, many of these countries, particularly China and other Asian economies, believe today that keeping undervalued currencies is a key to grow and sustain their exports to the developed markets of the US and Europe and thus to increase domestic wealth. This shows why fixed-rate systems never died out completely. These countries' central banks see a weak currency as a critical element of the country's export-oriented economic policy. But on the other side the inflationary pressures derived from this monetary policy are creating serious problems to their economies.

The US trade deficit grew to unprecedented highs throughout the so-called Bretton Woods II, supported by strong US consumer demand and the rapid industrialization of China and other emerging economies. As of today, the US Dollar is still the most extended reserve currency and the form in which many countries hold US debt instruments.
Clearly, any dramatic moves on the part of the countries that have accumulated large holdings of US Dollar reserves to change the status quo arrangement would have the potential to create turbulence in international capital markets. For instance, the political relationship between the US and China is also a significant part of this equation and of the big picture itself. This has always been a sensitive political topic and of much importance when considering the current monetary system.

Asian economies seem to be willing to perpetuate this status quo because the US consumer has supported the growth of their economy during the last decades. But at this point you are surely raising questions like: What happens if they don't want that debt anymore? Or, what if one or another member of this arrangement concludes that its self-interest lies in abandoning the system? These are certainly questions that belong to a broad analysis and for which you should try to find objective answers. previous
Joseph Trevisani writes in one of his market views:
The funds will be borrowed from foreign governments with their own political and economic agendas. For China the logic is clear. China is the world's largest holder of US Treasury securities with $653 billion in their vaults. Joseph Trevisani is one of our contributors. Read all you can from this author to get a clear view of the big picture. sourceFxstreet.com

The Big Picture Matters

2009-05-07T21:18:00.000-07:00

Global Trade And The Currency Market
Whereas in the original Bretton Woods the greatest limiter was the availability of gold, now it has become and remains to be the whim of the US governments monetary authorities.

Once the monetary system discussed in the Bretton Woods conference was configured according to the US plan, the chance of having a means of payment to cover the needs of international transactions and to establish reserves to address potential deficits, that is, to have the necessary international liquidity, was given by the gold reserves and US Dollars of those countries with some power over the International Monetary Fund.
As many economies grew, more Dollars were demanded to be used in international trade. The fundamental dilemma was: on the one hand, the US had to print more Dollars and run a balance-of-payments deficit in order to satisfy that growing liquidity demand; on the other hand, a continued deficit led the US Dollar to a loss of credibility as a sound reserve currency.
After the WWII, the United States was the only country able to provide all the material needs for the reconstruction. European countries did not have enough Dollars and, since their reserves were low, they had to become debtors of the United States, which meant that their balance of payments would have a surplus. There was no other solution than to "beg" the Unites States to run a balance-of-payments deficit, which by the way was also in the interest of the US.
The perpetuation of US deficits year after year would inevitably entail substantial risks for the gold convertibility which was the backbone of the system. But the only way to provide international liquidity, given the limited flexibility in the extraction of new gold, was deficits in the north-American balance-of-payments or, put in another way, that other countries would deliberately run a surplus in their balance-of-payments by accumulating Dollars.
To this contradiction between the need for Dollars (hence need for US deficits), and the confidence in the Dollar's convertibility to gold (based on US metal reserves), we must add another aspect of the system. This aspect discriminates different countries in relation to the US creating an asymmetry in their economical decision taking processes: if a country had a deficit in its balance-of-payments and expected the situation to continue, that country was under the obligation to proceed with an internal deflationary policy. Ultimately, because the lack of sufficient reserves, the country had to take contractionary measures to devalue its currency. But the US, being the creator of the system's underlying currency, was not forced to take that kind of action. previous , next

Global Trade And The Currency Market

2009-05-07T21:00:00.000-07:00

Global Trade And The Currency Market (forex) - The Big Picture Matters
Before going into the interbank world and then examine the dealing processes, let's have a second look at some key underlying economic principles of the modern history of global trade and capital flows, partly covered in the previous chapter, and see why these developments still matter today.
As you learned in chapter Forex 1, representatives from 44 different nations who converged at the Bretton Woods conference in 1944 were determined to cobble together a system that would prevent additional depressions and to ensure a fair and orderly market for cross-border trading conditions. Most countries agreed that international economic instability was one of the principal causes of WWII, and that a new system was needed to facilitate the reconstruction process.

At that time the US was not prepared to pay with their surplus the debt of the countries ruined by war. And these, in turn, did not want to depend forever on the US economy. As a result, an agreement was reached halfway: the conference produced a new exchange rate system which was partly a gold exchange system and also a reserve currency system, with the US Dollar as a de facto global reserve currency.

While in the early 70s many economists supported the idea that the gold-US Dollar peg was not the best regime for a growing international economy, a completely free floating exchange rate system was neither seen as favorable as it could end up in competing devaluations, the destruction of cross-border trade and ultimately lead to a global depression. The Smithsonian Agreement was an attempt to reestablish a fixed rate system but without the backing of gold.

The value of the Dollar could fluctuate in a range of 2.25%, unlike the previous range of 1% during the Bretton Woods. However, this agreement also failed in the end. Under heavy speculative attacks, the price of gold shot to 215 US Dollars per ounce, the US trade deficit continued to rise and the Dollar, therefore, could be devalued more than the 2.25% limit band set in the agreement. Because of this, the currency markets were forced to close in February 1972.

Currency markets reopened in March 1973, when the Smithsonian agreement was already history. The value of the US Dollar would be determined by market forces, and not be confined to a trading band or be tied to any other asset. This allowed the Dollar and other currencies to adjust themselves to the global economic reality and paved the way for an inflationary period never seen before in modern times.

The political understanding that underpinned Bretton Woods is of importance here, as the United States made itself the core of the new system, agreeing to become the trading partner of first and last resort. This has obviously tremendous implications on monetary matters. Although this has apparently no direct implications on your daily trading, it is a key aspect to understand the market flows and many of the monetary decisions taken by nations through their monetary authorities.

While nothing that has been discussed in the previous chapter is wrong, it is only part of the story. For you as a trader and investor, there is a political dimension of the current system that matters, as it can condition your career at some point. If you learn to identify the underlying forces that move the capital flows, you will be able to develop trading strategies that fit the big picture.

Without an explicit mechanism like a gold exchange, the similarities between the original Bretton Woods system and its more recent counterpart are interesting and instructive. Not only the system still relies on the willingness of the participants to actively support it, but also today's system is characterized by the economic and political relationship the US has with rapidly emerging economies.

For a time, the original Bretton Woods system seemed to favor all nations involved. Considering the desperation and destitution of European countries and Japan, ruined by the war, they were willing to accept nearly whatever was on offer in the hope of their rebuilding process. They were totally dependent upon US willingness to remain engaged. On the other side, in view of the unprecedented and unparalleled US economic strength, economic aid packets were the obvious way to go.

These emerging countries rebuilt their economies on the backs of their growing export markets. The United States would allow Europe nearly tariff-free access to its markets. The sale of European goods in the US would then help Europe develop economically and, in exchange, the United States would receive deference on political and military matters: remember, NATO was born.

In the US growing affluence increased the demand for an ever-growing array of products from overseas markets. Predictably US imports grew and so did the US trade deficit. A trade deficit increases when the value of imports exceeds that of exports, the opposite of a trade surplus. In textbook economic theory, market forces of supply and demand act as a natural correction for trade deficits and surpluses. One would expect the value of a currency to appreciate as demand for goods denominated in that currency increases.

What happened however with the Bretton Woods arrangements was that the exchange rate system mandated the foreign central banks to intervene in order to keep their currencies from exceeding the Bretton Woods target levels.
They did this through foreign exchange market purchases of Dollars and sales of other currencies like British Sterlings, German Marks and Japanese Yen.
This procedure resulted in lower export prices from these countries than what market forces would predict, making them still more attractive for US consumers, thus perpetuating a mutual dependency on the system. source Fxstreet.com next

Bretton Woods system

2009-05-04T01:18:00.000-07:00

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.

Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944.

Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.

The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing financial strain, the system collapsed in 1971, after the United States unilaterally terminated convertibility of the dollars to gold. This action caused considerable financial stress in the world economy and created the unique situation whereby the United States dollar became the "reserve currency" for the states which had signed the agreement.
Free trade relied on the free convertibility of currencies. Negotiators at the Bretton Woods conference, fresh from what they perceived as a disastrous experience with floating rates in the 1930s, concluded that major monetary fluctuations could stall the free flow of trade.

... The liberal economic system required an accepted vehicle for investment, trade, and payments. Unlike national economies, however, the international economy lacks a central government that can issue currency and manage its use. In the past this problem had been solved through the gold standard, but the architects of Bretton Woods did not consider this option feasible for the postwar political economy. Instead, they set up a system of fixed exchange rates managed by a series of newly created international institutions using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency. more information visit wikipedia.org

Advantages and Disadvantages (forex)

2009-05-04T00:58:00.000-07:00

There are some significant differences between Forex and other markets like the equity markets or futures. While a good trader may be able to handle any market, structural differences in Forex can force a different approach. Moreover many of the so called "advantages" bring some inherent risks with them.
Superior Liquidity

With such a tremendous daily trading volume, the Forex market can absorb trading sizes that dwarf the capacity of any other market. This means a lot of trading liquidity and flexibility specially at London time, New York and Tokyo (in this descending order).

There are always participants willing to buy or sell currencies in the Forex markets. Its liquidity, particularly in major currencies, helps ensure price stability and market efficiency. Traders can almost always open or close a position at a fair market price.

While it is true that currency markets have superior liquidity, it is also a fact that there are periods when liquidity dries up. This can happen during very volatile times or periods of market uncertainty. A volatile movement in price does not necessary mean a lot of volume, it can be just the opposite: fewer traders in the market means a thiner liquidity, which can lead to a big imbalance between buyers and sellers, resulting in a quick price movement in form of a spike or gap.

Because of the lower trade volume during the Asian session or even more during holiday seasons, investors in the Forex market are also vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction happening during these times.
High Leverage

The subject on leverage will thoroughly explained in chapter 3 and you will be taught how to take advantage of it. Leverage trading means, in short, that you are permitted to trade up to 100 times your margin deposit. This is primarily attributed to the higher levels of liquidity explained before.

A leverage of 1:100 means: in order to buy and benefit from one lot of 10,000 US Dollars you only have to commit your 100 Dollars, the rest of the amount is leveraged by the market maker/broker.

While certainly not for everyone, the substantial leverage available with most online retail brokers in the Forex market is an essential attribute of this market. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in the Forex market. This is because the average daily percentage move of a major currency is less than 1%, whereas a stock can easily have a 10% price move on any given day.

A 100:1 leverage is commonly available from online Forex dealers, and sometimes even higher. This is a both way weapon: on one hand it lets traders profit from a lot size much larger than their investments. But on the other hand, it exposes them to losses of equal magnitude. You can win or lose quicker - that's right - but that's not all: a too small leverage can be equally dangerous as you will learn in chapter 3.

The most effective way to manage the risk associated with leveraged trading (also called margin trading) is to diligently implement a risk management in your trading plan. You have to devise and adhere to a system where your controls kick in when emotion might otherwise take over.
Margin Trading

The Forex market is a 100% margin-based market. This concept is strongly associated with the previous one of leverage. Online Forex brokers offer many opportunities to open smaller accounts than in other markets. That sort of flexibility opens the door to essentially anyone who wants to explore financial trading. This isn't to say that all brokers are that flexible. There are, however, a great many which offer so-called mini-contracts and even smaller accounts traded with micro-lots.

In fact, spot Forex trading is essentially trading a 2-day delivery transaction. This trade involves a cash exchange between two currencies rather than a contract. For that, your broker requires a capital deposit to provide surety against any losses you may incur. How much of a deposit can vary. Some brokers will ask for as little as 0,5%. That is fairly aggressive, though. Expect 1%-2% on the value of the position in most cases.

Note that margin trading does not mean margin loans. Your broker will not be lending you money to trade currencies (at least not the way a stock broker does). As such, there is no margin interest charged. In fact, since you are the one putting money on deposit with your broker, you may earn interest in your margin funds. This is what is referred to as the interest rate carry (or rollover).

When opening a position, one is essentially borrowing a currency, exchanging it for another, and depositing it. This is all done on an overnight basis, so the trader is paying the overnight interest rate on the borrowed currency and at the same time earning the overnight rate on the currency being held.
If you are holding your position longer than one day, your broker rolls you forward into a new position for the next trading day. This is generally done transparently and automatically, but it also means that at the end of each day you will either pay or receive the interest differential on your position.
Some brokers will not apply the day's interest differential value on positions closed out during the trading day. In this case, if you open a position with a negative interest rate differential, but you close it during the same day, the differential is not applied.
Lower Transaction Costs

The over-the-counter structure of the Forex market eliminates exchange and clearing fees, which in turn lowers transaction costs. There are usually no commissions in Forex retail trading because the trader deals directly with a market maker.
You may ask, if Forex brokers don't charge commissions, how do they make money?
The broker makes money from the spread, which is the difference between what he pays for a currency and the higher price at which he sells it. In other words, the spread is the width between the bid and ask prices, which can be quite small in the major currency pairs, ranging between 2 and 5pips.

Because of the currency market round-the-clock liquidity and the competition among market makers, you receive tight, competitive spreads both intra-day and night.

The question if it is more cost-efficient to trade Forex in terms of both commissions and transaction fees depends not only on your broker's conditions but also on your trading style. Forex is more efficient if you know how to balance the number of trades and the earnings ratios. The usual lack of commissions is another factor that, despite being an advantage, has to be well understood to make it work in your benefit.
Profit Potential in Both Rising and Falling Markets

Every open Forex position has two sides because currencies are quoted in terms of their value against each other. This is because currencies are traded in "pairs" (for example, US Dollar vs. Yen or US Dollar vs. Swiss franc), one side of every currency pair is constantly moving in relation to the other.
When a trader is short in one currency he/she is simultaneously long on the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means that potential exists in a rising as well as in a falling market.
some of the equity markets it is much more difficult to establish a short position due to the zero uptick rule, which prevents traders from shorting a stock unless the immediately preceding trade was equal to or lower than the price of the short sale.
This ability to sell currencies without any limitations can be seen as another distinct advantage of the Forex market. You have equal potential to profit in both a rising or falling market, as there is no structural bias to the market. Previous

Advantages and Disadvantages

2009-05-04T00:45:00.000-07:00

Advantages and Disadvantages

There are some significant differences between Forex and other markets like the equity markets or futures. While a good trader may be able to handle any market, structural differences in Forex can force a different approach. Moreover many of the so called "advantages" bring some inherent risks with them.
Not Regulated
The global nature of the interbank market, without an unified or centrally cleared market for the majority of FX trades, make difficult to apply a cross-border regulation.

Central banks such as the Federal Reserve Bank of the US or the European Central Bank provide to some degree oversight. But in general, the currency markets are much more lightly regulated than equity or bond markets.
There are, nevertheless, several associations and institutions which supervise and regulate key players at a national level. We will cover these subject in the next chapter.

No Exchanges
While it is true that there is exchange-based Forex trading in the form of futures, the opposite condition occurs in the OTC market via the spot market.

Trading in a decentralized environment may be seen as having advantages or not:
In a decentralized market, trading does not take place on a regulated exchange. It is not controlled by any central governing body, there are no structured clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes. All members trade with each other based upon credit agreements. Essentially, business in the largest and most liquid market in the world depends on the so called "margin" accounts, a concept similar to good faith deposits. This fact can be considered as a disadvantage, while the lack of clearing fees or other exchange fees can be seen as an advantage. Most brokers don't make you pay fees to maintain an account regardless of your account balance or trading volume.

Besides, the lack of an exchange means a difference in how the exchange is actually done. In spot Forex much of the trading done by individuals is actually directly executed with their broker/dealer. That means the broker takes the other side of the trade. This is not always the case but it is the most common approach.

This doesn't mean the broker is deliberately trading against you - he still has to offset his risk in the overall market. We will talk extensively on false and true myths about brokers in the next chapter.

In a centralized market, you have the benefit of seeing real volume information, for example, and you might find comfort in knowing that there is a regulated mechanism backing your market participation.
Besides, the lack of a centralized exchange can lead to a discrepancy among price information from one market maker to the next, leading to the possibility of unfair trading activities.

At first glance, this ad-hoc arrangement can look like the wild west to investors who are used to organized exchanges. But be reassured, this arrangement works exceedingly well in practice: because participants in Forex must both compete and cooperate with each others, self regulation provides very effective control over the market.

Furthermore, reputable retail Forex broker/dealers in many countries are supervised by their national financial authorities, and agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through a regulated firm.
We will extensively talk about broker/dealers in the next chapter and how to inform and protect yourself.

Instantaneous Order Execution and Market Transparency
In the Forex world, fast order execution and instant fill confirmation is usually routine because you'll be trading via an Internet-based platform. Market transparency is highly desired in any trading environment. With no exchanges, there are no traditional open-outcry pits, no floor brokers and, consequently, no delays. Obviously, you might have to absorb some slippage if you trade during news announcements or if you trade a high volume, but normally all the prices on your broker platform are executable and your profit potential is not compromised.

Given the multi million-Dollar exchange that takes place every day in the currency markets, manipulation of the price is rather inexistent compared to other less liquid markets. However combined actions may occur in which several of the major participants - like central banks - force the market in a certain direction. That being said, this is not a rule but rather an exception.

In this regard, you should be informed of the market hours that tend to be more or less liquid as well as of the dates and times of the year in which the major trading places are less active. During low liquidity times the market is more vulnerable to erratic volatility or manipulation, like during the Asian session, or during longer periods such as holiday seasons.

In the stock market there are restrictions imposed on selling short that you don't have in the Forex. It is just as easy to take a short position as it is to take a long one. In chapter 3 you will learn the mechanics to trading.

24-Hour Trading
The Forex is the only market which can truly be viewed as a 24-hour market, which is one of the notorious differences you will notice if you came from another market. There is trading activity in all time zones during the week, and sometimes even on the weekends as well. In other markets traders must wait until the market opens the following day in order to open a new position.

However each hour of the day has a certain level of liquidity and each currency is associated with the trading session normally corresponding to its time zone and business hours. The Yen, for example, may show a greater liquidity during the Asian session. In contrast, a currency outside of its normal business hours can display more erratic movements in a chart.
A market operating 24 hours is surely attractive but you can easily fall into overtrading, taking far too many trades. Exercising some discipline will help you avoid falling into this trap. This 24 hour nature is an attribute you want to transform into an edge in your favor. As a trader, you can put on or take off positions literally any time of the day or night. That opens the game up to you if you don't have otherwise available time to trade. next, forex history, time session

Traded Instruments

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The trading departments in larger banks consider various factors when determining exchange rates: besides taking into account their inventory positions, they also watch for volumes and recent price action and apply their particular analysis to see where each currency is headed. Usually they will quote more favorable rates to their counter-parties in the opposite direction they think the price is going for any particular currency.

They do this trading several Forex financial instruments. A financial instrument is a medium which can be traded, commonly categorized into two categories: cash instruments and derivative instruments. The first being such financial instruments like securities, loans, and deposits. These are readily transferable and their value is determined directly by the market. And the later, the derivatives, can be divided into two further categories: over the counter (OTC) derivatives and exchange-traded derivatives.

Foreign Exchange instruments and transactions have their own category in which: standard derivatives are Foreign Exchange futures; main OTC derivatives are Foreign exchange options, forwards and swaps; and cash instruments is the spot.

Many folks tend to think strictly of the spot market, but it is not the only one. An array of other investment vehicles have been popping up in the Forex world, providing traders even more ways to take positions in this market. These are the most traded ones:

Outright Forwards
In the case of forwards it is a transaction in which money does not actually change hands until a specific (and a previously agreed-upon) future date. In this case, the exchange rate is one which the buyer and the seller have agreed upon any future date, and it is not necessarily based on current market rates, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a few days, months or years.

The most common type of a foreign exchange forwards transaction is a currency swap. At the end of which the transaction is reversed. Currency swap is not traded via an exchange.

Futures
The currency futures are transactions with standard contract sizes and a maturity date (usually of three months). Futures are standardized and are usually traded via an exchange created for this purpose and usually include an interest amount. The futures market has become a bit more attractive for small speculators with the expansion of e-mini currency contracts.

It should also be noted that although some folks will claim there is no rollover in forex futures, the interest rate spread is definitely factored in. You can see this when comparing the futures prices with the spot market rates. As the futures contracts approach their delivery date their prices will converge with the spot rate so that the holders will pay or receive the differential just as if they had been in a spot position.

Currency Options/Warrants
A foreign exchange option is another Forex instrument belonging to the derivatives, where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.

Currency Swaps
Contract which commits two counter parties to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity.

ETFs
Among the Forex instruments you can also find the exchange traded funds (ETFs) typically traded on an exchange as baskets of securities with an underlying index. ETFs are open ended investment companies that can be traded now replicating investments in the currency markets. These funds track the price movements of world currencies versus the US dollar, and increase in value directly counter to the US dollar, allowing for speculation.
As an investment, currency ETFs closely resemble savings accounts; the ETFs hold cash and invest it with banks to get interest. So when measured in the appropriate foreign currency, your shares are unlikely to gain or lose much value -- a share worth 100 Euro now will probably be worth 100 Euro next month or 10 years from now. Each deposit account will pay slightly less than the currency overnight interest rate, and is subject to fund expenses.

Spot
Finally, the currency spot, the instrument most covered in the Education Center: In the spot market currencies are sold for cash and delivered immediately and prices reflect what one currency is currently worth in terms of another currency. In the most cases it's technically a two-day "maturity" transaction, in which two currencies are traded with cash (rather than a contract). Spot has the second largest share by volume in FX transactions among all instruments accounting for an average daily turnover of 1.005 trillion. The spot is traded over-the-counter, meaning it is traded through a dealer network and not through an exchange.

There are many currencies traded on a day-to-day basis on the spot market. You will notice that is always a currency moving up or down. From a price-action perspective, currencies rarely spend much time in tight trading ranges and tend to develop strong trends. Remember, most of the currency trading volume is speculative in nature and, as a result, the market frequently overshoots and then corrects.

This volatility will assure endless short-term and long-term cashing opportunities, allowing you to profit in both rising and falling markets. Forex also allows highly leveraged trading with low margin requirements relative to equity markets. We will cautiously consider all the so-called "advantages" of currency trading in more detail below.
Many of the instruments utilized in Forex will appear similar to those used in the equity markets. Since the instruments on the Forex often maintain minimum trade sizes in terms of the base currencies (the spot market, for example, requires a minimum trade size of 100,000 units of the base currency), the use of margin is absolutely essential for the person trading these instruments.
The growth in retail Forex has been very rapid, especially as equity and futures traders realized the approaches they've been using for years in their respective markets, particularly price-based techniques based on technical and quantitative analysis are equally applicable to Forex.

History, structure, time session.

Time (opening & end) Forex

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Opening and end of trading sessions as per time zones:
GMT
Tokyo: 0.00 - 9.00
London: 8.00 - 17.00
New York: 13.00 - 21.00
Eastern Standard Time
Tokyo: 19.00 - 4.00
London: 3.00 - 12.00
New York: 8.00 - 16.00

The time zones, by stating:

Generally speaking, the first market to begin trading is in the Asia-Pacific zone with the New Zealand and Australian markets. Their opening is followed by Asian financial centers in Japan, Singapore, and Hong Kong. Then, the European markets open in Switzerland, Germany and London. When the Asia-Pacific and Asian markets end their business day, the market activity flows into the opening hours of Canada, followed by the New York session. Just before the New York session ends, another trading day begins in the Asia-Pacific zone.

Thus, it is important to strategize your local time according to the around-the-clock activities of the Forex markets, in order to maximize your potential profits from the market movements.

The two most active times through a full 24-hour market day are the London and New York sessions. The reason is that the major currencies like the Pound (GBP), Euro (EUR) and Dollar (USD) move most frequently in these two sessions. This coincides with the impact of each currency's regularly released of economic figures.

In summary, we may conclude that the first market to begin operation every week is the New Zealand market early Monday morning and the last market to close at the end of the week on Friday afternoon is the New York market. In Asia, this means that the weekly round-the-clock operation of the Forex market begins in the wee hours of Monday morning and runs to Saturday morning. Dar Wong comments fxstreet.com

Interbank Market

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Interbank Market ; When speaking of Forex at a governmental level (central banks) and institutional level (commercial and investment banks), we refer to a market which, nowadays, negotiates over 3 trillion Dollars a day. At this level, exchanges of 5 to 10 million are frequent, but also amounts of 100 to 500 million are traded between major participants.

It's an interbank or over the counter market (OTC) and spot market, meaning it is not done through an exchange. Unlike most other exchanges, the Forex market is not a centralized market where each transaction is recorded by price dealt and volume traded. There is no central place back to which all trades can be traced and there is not onemarket maker but many.

Each market maker records his or her own transactions and keeps it as proprietary information. The primary market makers who make bid and ask spreads in the currency market are the largest banks in the world. That literally means banks constantly dealing with each other either on behalf of themselves or their customers. This is why the market on which banks conduct transactions is called the interbank market.

Larger speculators also operate in the interbank market where they can execute multi-million Dollar trades with ease.
Individual traders, who generally trade in much smaller sizes, primarily do so through brokers and dealers.

The volume negotiated is particularly focused in London, but also in New York and Tokyo. These cities are also major trading and decision centers for monetary matters because of their sheer size in turnover and number market participants also because the happenings in these places tend to influence other dealing centers around the world. Other important locations at this level are Sydney, Switzerland, Frankfurt, Singapore and Hong Kong.

Many of today's major currencies fluctuate freely between each others and are negotiable virtually throughout the world. This has resulted in increased speculation by banks, hedge funds, brokers and individuals. Central banks occasionally intervene with the intention to move the currency towards desired levels, however, the underlying factor that leads the Forex market are the forces of supply and demand.

The lack of physical change enables the exchange market to operate 24 hours a day, 5 days a week, covering different areas across the most important financial centers. Its tremendous volume of transaction makes it very liquid and therefore highly desirable to trade. Currencies are the most traded assets in the world - any commercial or financial flow across borders may involve a currency exchange.

Until the popularization of Internet trading, Forex was primarily the domain of government central banks and commercial and investment banks. With the increasingly widespread availability of electronic trading networks and matching systems, trading on the foreign exchange is now more accessible than ever.

The market has been rendered feasible to non-banking international corporations like hedge funds, which can now trade via intermediaries thanks to those networks. They are the high level that really moves the currency market buying or selling huge amounts in the mid to long term: their time frame is generally weeks to months, possibly years. Their transactions unbalance the market, requiring price adjustment to rebalance demand and supply.

The volume negotiated is particularly focused in London, but also in New York and Tokyo. These cities are also major trading and decision centers for monetary matters. Other important locations at this level are Sydney, Switzerland, Frankfurt, Singapore and Hong Kong.

The presence of such heavy weight entities may appear rather discouraging to any aspiring trader. But the fact is that the presence of such powerful entities and their massive volume in transactions can also work to your benefit as a trader.

It is important to note that even high-level financial institutions are vulnerable to market movements and are also subject to market volatility as all the other smaller participants. In practical terms, this means that the market is too big for a single participant to control it and that the alleged insider information that large banks have is of very relative value compared to the size of the market.

Individual traders, in turn, do not move the currency market so much. Their time frame is usually much shorter and so is their investment horizon. Therefore they do not impact the demand/supply equilibrium in the aggregate in the same way, nor their positions have a lasting effect on the currency prices. But on the other hand, their trading models and lower volumes allow more flexibility to enter and exit the market.

At this point it's interesting to note that the trading activity of each financial center will determine the behavior of the market. Thus when the London markets open and the session starts, it's still overlapped with the last two hours of activity in Tokyo. Position openings done by London traders and the closure of positions in Tokyo coinciding in a interval of two hours may explain the increase in activity and volatility around this time. Later the European and the US session match during 4 hours in a combination of players, significantly increasing liquidity.fxstreet.com . Market Structure, history

Market Structure (Forex)

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Market Structure
Although we track the start of the Forex in the early 70's, the lack of a central marketplace for transacting foreign exchange made difficult for importers and exporters to accurately track daily movements in the currencies. In fact they had no prior experience with floating exchange rates and therefore no in-house expertise. They were at the mercy of the banking industry, specially the big banks for whom foreign exchange became a huge source of revenue.

The first foreign exchange brokers came on stage in the mid 70's to offset a significant customer foreign exchange business for medium and small banks, which needed continuous exchange rates in the major currencies.

Initially the foreign exchange brokers installed direct lines to all the banks willing to participate. Generally a major bank made a rate and the brokers showed the rate to all the banks at about the same time. The first bank to deal on the rate completed a transaction. The others waited for the next rate. Any bank could make a rate; show a bid or an offer. Soon, with the aid of new technologies, the brokers became quite sophisticated and efficient at putting together a continuous two-way price and using the banks as their primary liquidity providers. interbank market, history

Forex explaining

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Introduces the Forex by explaining (Scott Owens):
Since currencies are valued differently, there is a market in place to set those values. Where a market exists speculation inevitably follows. In this case, the market is hyper-active. Banks sending deposits around the world, corporations hedging their exposure to currency risk in different countries, government banks forwarding national economic goals through monetary policy, and massive investment funds playing the role of speculator. Not long ago, that was the extent of the market. It was the domain of the professional trader or banker.

The word "market" usually invokes the idea of a central market place like the New York or London exchanges. This is not the case in forex. Instead, forex functions through what is known as the "interbank" market. Interbank is a fancy way of saying that banks trade with each other, absent a central market place. This is one major reason why volume data is not available for forex. It's also the reason why retail investors and smaller traders were left on the sideline for so long.

In the 90's, a series of events unfolded that made forex available to retail investors. Deregulation led many companies to form pools of liquidity where retail investors could take advantage of the huge speculative opportunity in forex. These dealers offered high leverage, low minimums, and a new way to trade - 24/7From:fxstreet.com
Forex History, etc

the Speculative

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Speculative turnovers in currency exchange
The volume traded in Forex today is so high that no data is available, but every three years, the BIS (Bank of International Settlements) publishes the results of a survey made among major market participants and creates an estimate based on the responses obtained.
The most recent report, completed in 2007, estimated the average global daily volume at about 3.2 trillion traded in the world's main financial markets, of which an estimated 95% is speculative. Its daily transaction volume is about 100 times that of all the stock-exchanges together. The fact that 95% of the market is speculative means that most of the participants buying a currency really have no intention of receiving that particular currency. They're watching their price movement to sell it back for a profit when it has increased in value.

The other 5% of the daily turnover come from companies hedging their exposures and governments exchanging foreign currencies and reserves.
85% of the turnover is done in the major currencies against the Dollar where there is the most important liquidity, allowing fast fills in and out of the market. You can find just above a link to a table excerpted from the last Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity of 2007.

In the most recent results in which the BIS classifies exchange volume by country, London remains the capital of the FOREX market. The EUR/USD pair is the most traded, and it is not a coincidence that the pair has the lowest spreads - the width between bid and offer price. Generally, in the interbank market, the higher the volume, the lower the spreads are.

In the next chapters you will learn what spreads are and all about the market mechanics, but for now we will show you how this market is composed and who moves and shakes it!

page 1, 2, 3,,

Bye Bye Gold

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2. Good Buy/ Bye Gold?
The most fundamental answer why gold was needed to establish an international monetary system is perhaps that even fluctuations in the value of money caused by the supply and demand of gold are better than experimenting hyperinflation or deep devaluation because of irresponsible monetary policy.

But history shows that there were serious problems associated with the gold-money peg and that it was impossible to keep the linkage. Difficulties arrived when the supply of gold oscillated, causing short term price fluctuations. Moreover, the rapid growth of the world economy was faster than the supply of new gold, and a long term shortage of gold became a constraint to maintain the peg.

The abandonment of the convertibility to gold was the start of the Forex market. The US Dollar, already under serious pressure due to the US trade deficit, was allowed to float and all currencies were set adrift to find their place in the global economy. From there on many speculative opportunities started to afloat.

Since the early 70's the major world currencies started to float freely, mainly controlled by offer and demand on the exchange market, and has kept floating for almost 4 decades now. Among these currencies, there were the Deutsche Mark, the British Pound and the Yen, and their prices were calculated on a daily basis. The volumes, velocity and volatility started to increase and new financial instruments were created. Since then, exchange rate instability among major currencies has been the norm

Transformation Of Currency Exchange In The '70s

The following decades saw the FOREX being transformed by far in the largest and less regulated financial market in the world thus abolishing restrictions on capital flows in almost all countries, and allowing market forces to move exchange rates.

But the idea to fix exchange rates did not disappear. Some major economies attempted to move back to a peg or valuate currencies relatively to something: it happened during the 70's and 80's when Asian communities tried to group together as the west Europeans did. During these years currencies exhibited short-term volatility, medium-term misalignment and long-term drift. While after the breakdown of Bretton Woods the majority of policy makers thought the free floating system had an automatic adjusting mechanism, the fact was that exchange rate instability itself became a serious threat to the world economy.

In December 1971, there was an international effort to re-establish the fixed exchange rate system at adjusted levels: the monetary authorities of major countries gathered in Washington, DC to set their mutual exchange rates at new levels and the Smithsonian Agreement is signed, similar to the previous Bretton Woods, but allowing higher foreign exchange fluctuations.

In 1972, the European Community, in an attempt to gain independence from the influence of the Dollar, created the European Joint Float formed by the German Federal Republic, France, Italy, Holland, Belgium and Luxembourg. This was another initiative to revise and redesign the international monetary system. However the agreement is abolished a year later and a shift to a floating rate system occurred by default, since there was no alternative agreement at the time. As a result, new markets emerged along with new financial instruments, market deregulation, market systems and trade liberalization.

Governments could thereafter set semi-pegged or leave their currencies fluctuate freely. In fact, in 1978, the free floating system is installed between the main industrialized countries, which meant, once again, that the relative value of currencies would be determined by the forces of supply and demand.

One of the major catalysts for the acceleration of currency exchange was the rapid increase in US Dollar deposits in banks outside the control of US authorities. Revenues from Russian oil sales, for example, were deposited in Dollars, but out off of the United States, due to the fear of being frozen by the regulatory authorities of the United States.

The US government imposed laws to restrict Dollar lending to foreigners. Euromarkets were particularly attractive because they had far fewer regulations and offered higher yields. The US government restricted lending Dollars to foreigners in response to the explosive growth in the number and size of deposits abroad.

This was a precursor of the Eurodollar market (a market where assets are deposited in a currency different from the currency of origin). Later in 1978 Europe created the European Monetary System, based on the Eurodollar market which first emerged in the 50's.

Within this context, and because of its convenient location - which permits to operate simultaneously with the Asian and American markets - and its ability to connect these two markets, London became, and still remains, the world capital of the foreign exchange market.
In the 80's it became the key center of the Eurodollar market when British banks began lending Dollars as an alternative to Pounds in order to maintain its leadership position in global finance.

Until 1985, the Dollar gradually appreciated damaging the international competitiveness of US firms. In September 1985, the Plaza Agreement was signed between the G5 countries (US, Japan, Germany, France, UK) to lower the US Dollar which was clearly overvalued.

The joint intervention of the G5 was very effective, however, the US Dollar continued to lose ground beyond acceptable levels for Japan and Germany. In February 1987, the economic leaders of the G7 countries (G5 plus Italy and Canada) met in Paris to stop the further fall of the Dollar, known as the "Louvre Accord". This cooperation era was about managing free floating exchange rates through coordinated interventions.
From the late 80's onwards US companies began to borrow foreign currencies, finding in the Euromarkets an attractive investment opportunity where to channel their excess of liquidity, and a source of short-term financing for foreign trade.

This movement of capital across borders skyrocketed foreign exchange transactions to about US$ 70 million a day in the early 80's with the development of computational tools. These tools accelerated the international flow of capital, bringing the market spread throughout Asia, Europe and America. These same tools allowed the participation of private investors in a market that was traditionally the exclusive domain of banks and large institutions.

In 1991 the Maastricht treaty was signed. It was meant to converge the exchange rates, inflation and fiscal balance between several European currencies. However, the unification of West and East Germany conducted at a 1 to 1 exchange rate, put an upward pressure on the Deutsche Mark which was the anchor currency for the future Euro. This put a downward pressure on other currencies, the British Pound started to fall and England abandoned the group, unwilling to import high interest rates from Germany. In 1992-93 the European monetary system almost collapsed when economic pressures were threatening with a weaker currency devaluation.
But the pursuit of monetary stability in Europe, which started in Europe in the 1970s, continued with a renewed attempt not only to fix the European currencies, but also to replace them with a single currency. Finally, in 2001, the project to establish a regionally common currency completed and the Euro surged stronger against the US Dollar. page 1,2, 3, 4,

Oversupply of Dollars

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The expansion of international trade and the massive capital movements led to a Dollar shortage.
Later, during the 50's, the Bretton Woods system was under enormous pressure and needed help to function properly when the major economies started to evolve in different directions. While the classical gold standard collapsed because of external forces (the outbreak of WWI), the Bretton Woods regime failed due to internal inconsistency. US monetary policy was the system's anchor and the growing inflation in the US destabilized the system until it started to disintegrate.
After WWII, Europe and Japan needed to import from US all kinds of manufactured goods and machinery for its own reconstruction while US wanted to favor Western European countries in front of the menace of Eastern European countries and the USSR. But there were not enough Dollars in circulation. So in 1948 the US decided to give west Europe an economic aid, under the name of the Marshal Plan, officially called the European Recovery Program.

In the 60's the situation started to revert and an oversupply of Dollars in circulation gradually appears. The Vietnam war, welfare expenditure and the space race with the USSR were the major reasons for the increased US government spending. When US inflation began to accelerate, other countries refused to import it into their economies. This whole situation destabilized the exchange rates agreed upon in Bretton Woods.

Shortage in international currencies and abundance of US Dollars rise some doubts about its convertibility to gold. The already high trade deficit of the US led to speculative pressures awaiting a strong devaluation of the US Dollar versus gold. A series of readjustments held the system for a while but finally, on August 15, 1971, everything changed. US President Nixon suspended the gold convertibility standard and in 1973 the US formally announced the permanent floating of the US Dollar, thereby officially ending the fixed exchange rate regime and the Bretton Woods system.
The system became an open US-Dollar-based world payments arrangement.
Let's define some of the concepts that we have learned so far:
For instance, if you are a European wanting to travel to the US and the exchange rate for EUR 1.00 is USD 1.50 this means that for every Euro, you can buy one and a half US Dollar.

You have also seen that there are different ways the price of a currency can be determined against another:
Through a fixed, or pegged, rate which is a rate the central bank sets and maintains as the official exchange rate. In this case a set price will be determined against a major world currency (usually the US Dollar, but also other major currencies such as the Euro, the Yen, or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return of the currency to which it is pegged. To do this, the central bank must keep enough foreign reserves to release or absorb into or out of the market.

Some governments may also choose to have a semi-peg whereby the government periodically reassesses the value of the peg and then changes the peg rate accordingly. Usually the change is devaluation but one that is controlled so that market panic is avoided. This method is often used in the transition from a peg to a floating regime.

Although the peg has worked in creating global trade and monetary stability, it was only used at a time when all the major economies were a part of it.
And while a floating regime has its flaws, it has proven to be an efficient means of determining the long term value of a currency and creating equilibrium in the international market.

You may now ask: "Why the need to fix a currency?" It has to do with the aim to create a stable atmosphere for foreign investment, specially among developing nations. If the currency is pegged, the investor will always know what its value is and will not fear hyperinflation. However the peril exists that such countries experience financial crisis as well, like Mexico in 1995 and Russia in 1997.

An attempt to maintain a high value of the local currency to the peg can result in the currencies eventually becoming overvalued. This means that the governments could no longer meet the demands to convert the local currency into the foreign currency at the pegged rate. With speculation and panic, investors would start to convert their currency into foreign currency before the local currency is devalued against the peg, depleting the central bank's foreign reserves.

There is also a floating condition, which allows the Forex market to function as we know it nowadays with most of the major currencies. A floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self-correcting", as any differences in supply and demand will automatically be corrected in the market.
A floating exchange rate is constantly changing as a decrease in demand for a currency will lower its value in the market. This in turn will make imported goods more expensive and stimulate demand for local goods and services. As a consequence, more jobs are created, and hence an auto-correction occurs in the market.
In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation; however, compared with a fixed system, it is less frequent that the central bank of a floating regime interferes.

A country can also opt to implement a dual or multiple foreign exchange rate system, where both modalities run in parallel. Unlike a pegged or floating system, the dual and multiple systems consist of different rates, fixed and floating, running at the same time. The fixed rate is usually a preferential rate and the floating a more discouraging one.
While the fixed rate is only applied to certain segments of the market, like the import/export of essential goods, the floating rate is set by the forces of supply and demand in the market and is applied to non-essential goods like luxury imports.

This system is also usual in transitional periods as a means by which governments can quickly implement control over foreign currency transactions. In those cases, instead of depleting its foreign reserves, the government diverts the heavy demand for foreign currency to the free-floating exchange rate market.
As with the other solutions, a multiple exchange rates system is not free from negative consequences: creating artificial conditions for certain market segments is one of them. But it could also be used as an effective means to address the problem in the balance of payments developed under the conditions of a completely free floating system.

Note that none of these systems are perfect, but that all are thought as mechanisms to deal with those underlying problems in economic crisis and inflation periods. Their aim is to eventually keep the equilibrium in the monetary system.

Just to summarize, these are the four exchange rate systems, or regimes:

* Pegged exchange rate system: the value of the currency is tied to another currency, to a basket of currencies or to the price of gold. The purpose of a fixed exchange rate system is to maintain a country's currency value within a very narrow band.
* Semi-pegged exchange rate system: the central bank periodically readjusts the fixed (pegged) value of its currency.
* Floating exchange rate system: the value of a currency changes freely and is determined by supply and demand in the Forex market.
* Multiple exchange rate system: both systems are simultaneously used in different segments of the economy.
Previous,3, 4,

ABSOLUTE & ESSENTIALS of Forex

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Topics 1 : History, Monetary, structure, Advantages and disadvantages
* Historical background which gave birth to the Forex market is made by the same milestones which compose the history of a broader international regime.
* Floating exchange rates are not the only possible monetary system. Over time, international monetary systems exhibit oscillation between fixed and free floating regimes. We may think that the prevailing system is a normal condition and is here to stay, but whether it is permanent or not is an interesting and open question which can affect your trading carrer.
* The global market structure and the main financial centers
* Other instruments besides the spot Forex
* Advantages and disadvantages of the Forex market.
What is an exchange rate? An exchange rate is the rate at which one currency can be exchanged for another. In other words, it is the value of one country's currency compared to that of another. When traveling abroad you need to "buy" the local currency. Just like the price of any asset, the exchange rate is the price at which you can buy that currency.
Foreign exchange market

You don't have to be a trader to participate in the foreign exchange market: every time you travel and need to exchange your currency into a foreign currency, you are participating in it.

It also happens when companies from different countries buy and sell goods and services across national borders which require payments in non-domestic currencies. Either way, importing or exporting, there is going to be a transaction which takes one currency being swapped for another.

Nevertheless, in order to trade actively in this market, you should know how it came to be. The current market's shape and conditions are relatively new in the large history of money and that is what you are going to learn in this first chapter.
Despite your curiosity to jump directly into the more practical knowledge, you should know that an understanding of the historical circumstances from which this market emerged will gear you up with more insight when it comes to plan your future business in FX trading.

What about a little historical background about the largest financial market in the world?

1. The Origins
The FOREX (FOReign EXchange) Market is a cash-bank market established in 1971 when the US went off the gold standard adopted in the 1930's. At that time the US had to drop the gold standard after the 1929 crash and the British Pound became the currency of choice and the world's currency.

There have been other times before in Western History when paper money could be exchanged for gold. Throughout most of the 19th century and up to the outbreak of WW1, the world was on so-called "Classical Gold Standard" with all major countries participating in it. A gold standard meant that the value of a local currency was fixed at a set exchange rate to gold ounces. This allowed unrestricted capital mobility as well as global stability in currencies and trade

The participating countries were required to observe some rules: for example, it was particularly important that no country would impose restrictions on the importation or exportation of gold as a commodity nor a payment method. This was a guarantee for a free capital mobility based on supply and demand conditions.

Under this model, in which most central banks backed their paper money with gold, the currencies were supposed to enter in a new phase of stability, without the danger of an arbitrary manipulation of its value to increase inflation.
During the interwar period the world powers tried to return to the gold standard at the exchange rates previous to 1914, which seemed to offer prosperity and stability, but the attempt did not succeed and exchange rates ended mostly floating. The classical gold standard was shattered by the outbreak end of WWI and collapsed under its violence. Private trade and financial transactions were suspended, gold exports were banned, and each country started to print money to finance the war effort. The 1920s-30s were characterized by recessions and the Great Depression. There was a hegemonic power shift from the UK to the US.

After WWII the system became a US-centered fixed rates under a new international gold standard and the world economy experienced high growth, price stability and movement toward freer trade. Unlike the classical gold standard days, however, there were severe restrictions on private capital mobility.

The gold standard had its inefficiencies the way it was handled: the combination of a greater supply of paper money without the gold to back it led to devastating inflation and resulted in political instability.

The problem with gold is that its quantity is too constraining: the world supply of gold was insufficient to make the Bretton Woods system workable -particularly as the use of the Dollar as a reserve currency was essential to create the required international liquidity to sustain world trade and growth. As economies grew stronger and needed more money to pay imported goods, there was no sufficient gold reserves to pay for it. As a result the monetary mass decreased, the interest rates increased and the economic activity slowed down and the economy entered in a recession.
In such cases, the low prices of manufactured goods were then attractive for other nations. These started to import massively and by doing so they contributed to the increase of the monetary mass in the exporting country. This, in turn, allowed to ease the interest rates and subsequently the economy to grow. It was evident that the mechanism linking inflation/deflation with gold flows was not able to adjust macroeconomic imbalances. It was thought that under a gold standard, a country with a current account deficit would imply an outflow of gold. The loss of gold means less money supply, so the country would experience a price deflation. This would make its goods become cheaper in the global markets, making imports rise and exports fall, improving the current account again.

These peak-bottom periods alternated until the WWI interrupted the commercial flow and the gold exchange. Until WWII, currency speculation was almost inexistent and even not very much favored by institutions. The Great Depression and the abolition of the gold standard in 1931 led to a pause in the exchange activity. But later, after the transition period of 1971-73, the market suffered a series of changes which shaped the actual global monetary system: the major currencies started to float.

The Bretton Woods Era

After WWII the world needed a stable currency and a monetary agreement was reached by July 1944: seven hundred and thirty delegates from forty-four allied nations came together in Bretton Woods, NH, US The reason for the gathering was the United Nations Monetary and Financial Conference. For the first time in history monetary relations amongst the world's major industrial states were governed; it was the first time a system was implemented, in which the rules for commercial and financial relations were negotiated and agreed upon.
conference

It is said that many political reasons ended up resulting in the Bretton Woods agreement. Just to name a few: the two world wars and the interwar years, which was followed by the need to rebuild international economy; the Great Depression; the strong and shared belief in capitalism; USA.'s status of dominant power; the need for an economic system that would act as security.
Pegged, Semi-Pegged And Floating Condition

Considering the outcome of floating rates in the 1930's, which had negative worldwide consequences, the participants of the conference were eager to adopt basic rules with which to regulate the international monetary system as well as to create a policy in which the exchange rate of each currency would have a fixed value.

And indeed such measures were implemented: new international institutions were established to promote foreign trade and to maintain the monetary stability of the global economy.

The Bretton Woods system was an effective system that controlled conflict for many years. It could achieve the common goals that were set, however, its lifespan was finally short as by 1971 it collapsed.

It was also agreed that currencies would once again be fixed, or pegged, but this time to the US Dollar, which in turn was pegged to gold at 35 USD per fine ounces of gold. This meant that the value of a currency was directly linked to the value of the US Dollar. At that time if you needed to buy British Pounds, the value of the Pound would be expressed in US Dollars, whose value in turn was determined by the value of gold. If a country needed to readjust the value of its currency, it could approach the IMF to change the pegged value of its currency.
washington_hotel

Mount Washington Hotel, in Bretton Woods, New Hampshire, where in 1944, the United Nations Monetary and Financial Conference was celebrated, gathering representatives of 44 countries.

The peg was maintained until 1971 when the US Dollar could no longer hold the value of the pegged rate. From then on major governments adopted a floating system and all attempts from major economies to move back to a peg were eventually abandoned.

The Bretton Woods agreement was also meant to accomplish several other purposes: to avoid the capital evasion between nations, to restrict speculation with currencies, and to prevent each country from pursuing selfish policies, such as competitive devaluation, protectionism and forming trade blocks More generally speaking, to create a new world economic order. In fact, this new model brought two main advantages to the US: in on hand the revenues from the money creation itself calledseigniorage and on the other hand the possibility to hold a trade deficit for a very long time.

John Maynard Keynes, chairman of the Bank Commission at the Bretton Woods conference, and one of its intellectual founding fathers, envisaged an international monetary clearing union that in reality would have been a world central bank creating and using a world currency he called 'bancor'.

The problem, as Keynes well understood, was that an international trade and payments system - that relied on flexible exchange rates system with multiple currencies - would be inherently unstable. Keynes' proposal for a clearing union would penalize both deficit and surplus countries. Each country would have an official account in this mechanism, and all balance of payments surpluses and deficits would be recorded and settled through these accounts. There would be an incentive for both types of economies to run balanced trading systems as each country would bear the responsibility for correcting its imbalance.

This truly visionary proposal to create a mighty settlement union for all countries was seen as negative from US point of view.
Keynes' plan was not fully adopted but, in recognition of the pragmatic validity of his proposed solution, the exchange rates were fixed relative to the US Dollar and the Dollar backed by gold reserves. All other currencies could not deviate more than 10% to both sides of the fixed rate.

The US proposal, which was finally adopted, meant that each country would contribute to a common fund and member countries with surplus or deficit imbalances would have to purchase hard currencies from this fund. At the time, the UK was a deficit country and the US a surplus country, and only deficit countries would bear the responsibility for correcting the imbalance.

In case of such a fundamental imbalance, the central bank responsible of the currency had to ask authorization to the International Monetary Fund (IMF) to bring the value of its currency back to accepted levels. The IMF and what has evolved to be today the World Bank, the International Bank for Reconstruction and Development, emerged at that time to administer the new system.

At this point let's summarize the main features of the Bretton Woods system:

* It's a Dollar-based world payments arrangement: officially, the Bretton Woods system was a gold-based system which worked symmetrically for all countries. But in reality, it was a US-dominated system, which means the US provided domestic price stability (or instability) that other countries could (or should) "import". As the US did not itself engage in exchange rates intervention, which would have been desirable, all other countries had the obligation to intervene themselves in the currency market to fix their exchange rates against the US Dollar.
* It was a semi-pegged exchange rate system: this means that exchange rates were normally fixed but permitted to be infrequently adjusted under certain conditions. Members were obligated to declare a par value (a 'peg') for their national currency and to intervene in currency markets to limit exchange rate fluctuations within maximum 'band' of one per cent above or below parity. At the same time, members also retained the right, whenever necessary and in accordance with agreed procedures, to alter their peg to correct a 'fundamental disequilibrium' in their balance of payments. This arrangement was thought to combine exchange rate stability and flexibility, while avoiding mutually destructive devaluation.
* Tight capital mobility: by contrast to the classical gold standard of 1879-1914, when there was free capital mobility, member countries could impose capital-account regulations and severe exchange controls.
* Macroeconomic growth reached historically unprecedented highs: this was achieved through global price stability and trade liberalization from the mid 1950s to the late 1960s. page : 2, 3, 4, Market Structure, trade instrument , Advantages and Disadvantages,

Source: http://en.wikipedia.org,fxstreet.com