With over $3 trillion[1] in average daily turnover, the foreign exchange market (forex or FX for short) is five times the size of the U.S. futures market, making it the largest market in the world. Surprisingly, this market is unfamiliar terrain for most individual traders and investors until the popularization of Internet trading a few years ago. Forex was primarily the domain of large financial institutions, multinational corporations, and hedge funds. However, times have changed: the U.S. Dollar (USD) recently fell to record lows, and everyone, from car dealers to bartenders, is waking up to the impact of currencies.
Unlike the trading of stock, futures, or options, Forex trading does not take place on a centralized exchange, but instead through different forex brokers. At first glance, this ad hoc arrangement must seem bewildering to investors who are used to structured exchanges like the NYSE or CME. Forex Partners However, this arrangement works exceedingly well in practice: investors in forex must both compete and cooperate with each other, and self-regulation provides an effective amount of control over the market.
The currency market is one of the most sophisticated markets in the world, attracting trillions of dollars per day in volume from central banks, corporations, hedge funds, and individual speculators. It operates on a 24-hour basis, beginning with trading in Wellington, New Zealand, and continuing on to Sydney, Australia; Tokyo, Japan; London, England; and finally, ending with New York before the whole cycle begins all over again.
Although the currency market exists mainly for importing and exporting activities and for corporations to hedge their foreign exchange risk, like all markets, there are speculators. In the Forex market, it happens that 80% of all trading activity is speculative in nature. Here are five key factors that move currency markets:
Yield is the most important factor of exchange rates between currencies. Every currency’s country has a central bank that sets the interest rate on the currency. This means when the central bank of a country moves the interest rate either up or down, it affects the movement of the currency substantially. This is because, in general, speculators will buy currencies with high yields and finance those same purchases with low yielding currencies. One example is the USD/JPY pair, which is often used for carry trade. In the fall of 2006, the short-term rates in the U.S. were at 5.25%[1], while in Japan they were only 0.25 %[1]. In this case, traders would buy long on dollars in order to receive 525 basis points[1] of interest and sell yen to only pay 25 basis points on that end of the trade, making a total spread of 500 basis points[1], allowing to not only gain profit from interest income flows, but also from capital appreciation (Please note: You will pay interest when you sell a currency with a high interest yield and in exchange buy a currency with a low interest yield). Similarly, when the Bank of England surprisingly raised interest rates in August of 2006 from 4.5% to 4.75%[1], the spread on the popular GBP/JPY pair widened from 425 basis points to 450 basis points, driving the pair to have huge speculative flows in the currency as traders tried to take advantage of the new spreads, which brought the currency up a stunning 700 points within just three short weeks.
In finance, an electronic trading platform also known as an online trading platform, is a computer software program that can be used to place orders for financial products over a network with a financial intermediary. This includes products such as stocks, bonds, currencies, commodities and derivatives with a financial intermediary, such asbrokers, market makers, Investment banks or stock exchanges. Such platforms allow electronic trading to be carried out by users from any location and are in contrast to traditional floor trading usingopen outcry and telephone based trading.
Electronic trading platforms typically stream live market prices on which users can trade and may provide additional trading tools, such as charting packages, news feeds and account management functions. Some platforms have been specifically designed to allow individuals to gain access to financial markets that could formerly only be accessed by specialist trading firms such as those allowing margin trading on forex and derivatives such as contract for difference. They may also be designed to automatically trade specific strategies based on technical analysis or to do high-frequency trading.
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