The FOREX market is a global interbank market of currency exchange at a certain rate. FOREX was formed in the 1970s, after the system of fixed international currency rates was changed by the system of 'floating' rates in 1971. This market is a telecommunication net of brokers, who work as one whole system 24 hours a day.
Currency trading in the international market allows to widen the specter of financial instruments, thus giving a possibility to get a profit, which is higher than the profits received from trading other actives. There appears a possibility to diversify investment portfolio in order to lower the risks. In the currency market there are permanent fluctuations of currency rates due to the changes in demand and supply of some concrete currency, which is the basis of the profit from the invested capital. Political, social, and economic factors of a certain country also influence the change of currency rates against other currencies (development tempo in comparison to that of other countries) - employment of the population, inflation, productivity, etc.
The volume of the FOREX market is up to four trillions dollars a day, which is tens times more than the whole daily volume of trading on the USA markets of securities.
Companies and governments, which buy and sell goods and services in some other country, do about 5 per cent of daily trading, or they have to convert the earned profit into their national currency. Speculators with the aim of getting profit do the rest 95 per cent of daily trading.
The major participants of the currency market are:
- Central banks
- Exchange stock markets
- Broker companies
- Commercial banks
- Investment foundations
- Firms, making transactions with currency
- Private persons
Thanks to the break-through in the sphere of the Internet technology, small investors have an opportunity to deal with buying and selling currency. Moreover, there appeared a unique possibility to enter the FOREX market via the Internet. Today the major currencies, composing 85 per cent of the daily volume in the FOREX market (therefore, they are the most liquid currencies) are the US Dollar, Euro, British Pound, Swiss Franc, Japanese Yen, Canadian and Australian Dollar.
Today the biggest investment and commercial banks use currency operations as a major source of profit. Among major traders on the FOREX market there are such world renown banks as Merrill Lynch, JP Morgan Chase, Citibank, Barclays Bank, etc. The advantages of trading in the FOREX market are in the fact that the banks can insure themselves against the changing rate of the dollar or of any other currency, offering a bigger set of services for the client in order to survive in the competition.
As an example of a successful individual currency trading one can give the operation conducted by George Soros, when he 'sank' the Bank of England by selling the British Pound. As a result of this transaction, Soros not only made millions of dollars, but he proved to the whole world that it is possible to earn money on currency trading, making the basis for creating the successful Quantum Foundation.
To open a position in the FOREX market, an investor should have at least 1 million dollars. However, to attract small investors (those without such means), the principle of the so-called margin trading has been introduced. The point of this principle is that for making a transaction a potential participant of the market has to pay only a part of the whole sum of the contract, which is called margin or security deposit. Brokers and banks, thanks to the system of margin trading, after the client has paid the deposit, give him an opportunity to buy/sell currency in the sum that exceeds the deposit tens or hundreds times. Therefore, there's an opportunity to earn money, operating with the sum, which is bigger than the paid deposit, and even a modest profit may be a significant sum if compared to the made deposit. The deposit is the broker's insurance, and a participant of the market carries all the risks, connected with the losses from trading. You can not only buy, but also sell currency in the FOREX market (i.e. trade on expectations of rising and falling of the currency rates), even if this currency is not on your account.
Still, what is the basis of the expectations of the market participants? What factors influence the trend of the currency rate and, consequently, the changes of demand and supply of a concrete currency? These are fundamental and technical factors.
As it has been already mentioned, the changes in the currency rate are influenced by political, social, and economical factors, such as rates of employment and unemployment, inflation, productivity. All these factors are called fundamental factors, and they characterize the situation of the state's national economy and, therefore, the currency of the state. Among other important fundamental indicators one can name the GNP, real interest rates, etc. As operations with the US dollar make up about 70 to 80 per cent of the turnover, the investors are greatly interested in the macroeconomic indicators of the USA.
To make trading in the FOREX market profitable, a market participant has to know the direction of the market movement. The means of technical analysis (indicators, oscillators, etc.) can be helpful, as well as the fundamental factors (news, statements of political leaders, publications of economic indicators, etc.).
But one must not build up one's strategy according to only one of these approaches. A successful trader is the market participant, who uses the subtle co-relation of the two factors, which is known only to him.
Below there are listed the major advantages of the FOREX market, which attracts more and more participants every year, and for some of them trading becomes the major source of income.
Profitability.
As transactions on the FOREX market are carried out with the help of leverage, this is the only legal source of income, where one-day profit can be bigger than the initial investment into one transaction.
Permanent and continuous trading.
At any time, 24 hours a day, according to your wish, you can conduct a transaction, without postponing the made decision for working hours. The FOREX market is closed only on Saturday and Sunday. All the rest weekdays it works 24 hours a day.
Openness.
Working in the FOREX market does not involve any hidden or unexpected expenses.
Liquidity.
Perhaps the most attractive feature of the FOREX market is an opportunity to buy and sell any amount of currency. And the transaction volume is limited only by the size of the security deposit.
FOREX
