Forex Market Overview
The Market
The foreign exchange market (Forex or FX) is the largest financial market in the
world with an estimated daily trading volume of $2 trillion dollars (NYSE¨s 2003
total dollar value of reported volume equaled $9.6 trillion and $10.2 trillion for
all of 2002). Unlike other financial markets, the Forex market has no physical location
and no central exchange. The Forex market operates 24 hours a day through an electronic
network of banks, corporations and individual traders. Forex trading begins every
day in
Sydney
, moves to
Tokyo
, followed by
London
and then
New York
. The participants in this market include central banks, commercial banks, investment
banks, securities dealers, pension funds, insurance companies, multinational corporations
and sophisticated individuals.
Forex Trading vs. Equities and Futures Trading
The buying and selling of foreign exchange provides significant advantages over
equities and futures. In addition to these advantages, the seamless 24 hour nature
of the trading market gives traders the unique advantages of reacting to news
and worldwide developments instantaneously, participating in real-time trading in
the largest market in the world.
|
|
Forex Trading |
Equities Trading |
Futures Trading |
|
Typical Margin |
100:1 |
2:1 |
15:1 |
|
Liquidity |
Daily Volume: USD$ 2 Trillion |
Limited Liquidity |
Limited Liquidity |
|
Commissions |
No Commissions |
Commissions and Exchange Fees |
Commissions and Exchange Fees |
|
Trading Activity |
24 Hour Active Market |
7 Hours with Limited After Hours |
7 Hours with Limited After Hours |
|
Ability to Profit in the Rising or Declining Markets
Unlike equity and fixed income managers, Forex traders
are able to profit under any market conditions by either buying or selling
a particular currency in relationship to another. In the Foreign Exchange market
there always be one currency strengthening against another, unlike stock shares
that move only up or down.
High Leverage Provides
Opportunity
to Substantial Return
High leverage
is the most attractive feature in Forex Trading. 100:1 Leverage allows the traders
to enhance their profit by 100 times. For example; US$1000 deposit guarantees a
position of US$100,000; for EURUSD, a change
0f
0.0100 (one cent) in the right direction will gain a profit of US$1000, a 100% return.
Certainly,
high leverage can cost high damage to your capital as well; if the position goes
in the wrong direction for a 0.0100(one cent), you also suffer lose of US$1000.
As a conclusion,
Forex Trading is a performance sport car; it requires skill and training to master
the driving. Skill drivers could enjoy the performance while the novices may crash
easily.
From experience
of working in the Foreign Exchange markets few individuals tend to have the training,
skill, patience or inclination to trade on their own successfully. The basic idea
behind this type of trading then is to open or join a Foreign Exchange Fund and
let an experienced manager trade funds in the foreign exchange market.
This allows
a broader spectrum of the public to participate and also gives them the advantage
of portfolio diversification.
There is
a compelling argument for the inclusion of currency funds in a traditional investment
portfolio. Currency funds can offer enhanced portfolio performance under all market
conditions. It is the manager¨s flexibility and skill-based strategies that make
this investment class inherently attractive. This said, a strong case may be made
for the investor to learn as much about the industry as they reasonably can in order
to more effectively monitor their situation.
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