ABOUT THE FOREX MARKET

The Forex market is the largest and most liquid market with a daily turnover of about US $ 4 trillion. The daily volume of transactions exceeds the total turnover of the global stock and futures markets. This high liquidity makes the foreign exchange market conducive to trading.

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The Forex market is over-the-counter, which means there is no central exchange for trading currencies. Market participants are banks, brokers, dealers, financial institutions and individual traders from all over the world. More than 90% of transactions are made for investment and speculative purposes, and only a small part is the conversion of real currencies.

Major trading sessions

Trades are held in major financial centers - Wellington, Sydney, Tokyo, Singapore, Hong Kong, Moscow, Frankfurt am Main, Zurich, London, New York. Together, these financial centers form an unbroken circle allowing currency trading throughout the day. Choosing the right session is an important point for a trader, because each session is different in its dynamics.

There are four main trading sessions:

  1. Sydney 22.00 - 7.00 GMT
    Tokyo 0.00 - 9.00 GMT
    London 8.00 - 17.00 GMT
    New York 13.00 - 22.00 GMT

The greatest liquidity of a currency occurs when trading occurs during its "home" sessions. This means that the Japanese yen is most liquid during the Pacific session and the British pound is most liquid during trading hours on the London stock exchanges.

Traders keep an eye on economic calendars and economic data releases as the impact of macroeconomic factors, political events and central bank reports on the Forex market is enormous.

Forex hedging

As in other markets, Forex market participants are divided into speculators and hedgers. If speculators are only interested in price movement, then for hedgers the price movement factor is not important, because they own physical assets.

Consider the following example of hedging foreign exchange risks. If an investor owns a manufacturing facility in France and sells manufactured goods in Canada, then he / she will have the advantage of a strong Canadian dollar and a weak euro. In this case, after the sale of goods in Canada and given that the contract is in Canadian dollars, the investor will receive a larger amount in euros than expected. If the EUR / CAD rate rises (the euro rises, the Canadian dollar falls), then the manufacturer will incur losses and, therefore, receive a smaller amount in euros than planned.

By opening a long position in the EUR / CAD pair, an investor will be able to hedge his currency risks using the Forex market. If the rate falls, the investor will lose money on Forex, but will earn more on his own product. With accurate hedging, foreign exchange risks will be significantly reduced.

Major currency pairs and cross rates

The most liquid currencies are the US dollar (USD), euro (EUR), British pound (GBP), Japanese yen (JPY), Swiss franc (CHF) and Canadian dollar (CAD). More than 80% of the total volume of transactions is made with these currencies.

In addition to the four main pairs, EUR / USD, GBP / USD, USD / CHF, USD / JPY, “commodity” pairs are distinguished separately: NZD / USD, AUD / USD and USD / CAD. The last three pairs may be of interest to the “metals and oil” trader, since currency pairs are highly dependent on changes in prices for these resources.

As you know, Australia and New Zealand are the largest producers of industrial metals, and Canada is the largest exporter of oil to the United States.

Unlike the stock market, the foreign exchange market does not provide a trader with ample opportunity to balance his portfolio. Having a long position in EUR / USD, GBP / USD and a short position in USD / JPY and USD / CHF, a trader has about the same exposure to risk because he profits from the weakening of the US dollar.

Cross rates give the trader the opportunity to diversify their strategy by including multiple currency pairs and thus reduce dependence on the US dollar, as central banks are known to keep their reserves in US dollars. In addition, cross rates allow you to make a more accurate bet on the effect of the output of certain macroeconomic data of the selected country.

Also available for trading are currencies such as DKK, SGD, PLN, RUB, SEK, ZAR, MXN, CZK, HUF, NOK, ILS, which are collectively called exotic due to their low liquidity. They are also interesting because of the difference in interest rates.

How to read quotes

Forex Currencies are quoted according to the ratio of one currency to another. There are base and counter currencies. Example: USD / JPY = 111.15. In this case, the US dollar is the base currency and the yen is the counter currency equivalent to the base currency in yen. This quote means that one dollar can buy 111.15 Japanese yen.

As in other markets, the currency market distinguishes between Bid prices, at which participants are willing to buy, and Ask prices, at which market participants are ready to sell. The difference between the Bid and Ask prices is the spread. The spread is the tightest under normal market conditions. A wider spread is possible during the release of economic data and at night European time.

  1. Example:
    EUR / GBP
    Bid / Ask
    0.8595 / 0.8600

If a trader wants to buy this currency pair, then the transaction will take place at Ask prices, if a trader wants to sell, then at Bid prices. When buying EUR / GBP at a rate of 0.8600, the trader buys 100,000 euros and simultaneously sells 86,000 pounds sterling.

An item (or item) is the smallest change in price. For example, one position for the EUR / USD pair is 0.0001, and for XAG / USD it is 0.01. As a rule, all currency pairs have four decimal places, with the exception of pairs with JPY, RUB and metals, which are quoted with two decimal places.

Overnight position transfer

The cost of foreign exchange borrowing depends on interest rates regulated by central banks. When opening a position for a currency pair, a trader has an exhibition of two currencies. Depending on the difference in the rates of these currencies, the trader either earns or pays for the transfer of the position to the next day.

For example, when buying NZD / USD, the trader has a long position in NZD and a short position in USD. In other words, the NZD is deposited and the US dollar is borrowed. With the New Zealand dollar, the investor receives income, and the US dollar is used to pay interest on the loan. The difference between the two rates after accounting for the USD commission is the Transfer of Position (SWAP) fee.

Most currency pairs have a delivery date (value date) t + 2, so the position moves two days ahead every day. If delivery falls on a weekend, then it is postponed to the next business day, and accordingly the swap is charged several days in advance.

ALWAYS REMEMBER THAT

Operations in the FOREX market involve risk and require appropriate knowledge and experience. Any investment decision you make must be entirely based on an assessment of your personal financial situation and investment goals.

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