Features of the international currency market Forex, its organization and margin trading in the USA
The international currency market Forex occupies a special place among the world’s financial markets. Due to its scale (up to 2-4 trillion dollars a day), high liquidity and profitability, this market is one of the most attractive markets for investors. Placing funds on the Forex market is one of the most promising and profitable areas of modern business and investments in this market can potentially bring great dividends.
The Forex market is not a market in the conventional sense. Work takes place not in a certain building and at certain hours. The market has a distributed nature. All its participants are connected with each other through different information systems and have an opportunity to trade day and night from Sunday night to Friday night. The market never stops operating, beginning in the Far East, New Zealand, successively passing through Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt, Zurich and London, ending the day in New York and Los Angeles.
Major currency market participants
- Commercial banks. Commercial banks conduct the bulk of foreign exchange transactions. Other market participants keep accounts in banks and conduct necessary conversion operations with them. Through operations with clients, banks accumulate the aggregate market demand for currency conversions, as well as for raising and placing funds, and then they go out to other banks. Besides meeting their clients’ demands, banks can also carry out operations on their own, using their own funds. Ultimately, the foreign exchange market is a market for interbank transactions. Banks trade with each other using information systems and serve as market makers for customers who do not have access to such systems.
- Central banks. Their functions include managing foreign exchange reserves, carrying out foreign exchange interventions that affect the level of the national currency exchange rate, and regulating interest rates on investments in the national currency.
- Companies engaged in foreign trade operations. The main consumers and suppliers of cash foreign currency, carrying out conversion operations through banks.
- Investment, pension and insurance funds. This type of market participants is represented by various kinds of international investment, pension and mutual funds, insurance companies and trusts. They carry out the policy of diversified management of their assets portfolios and having enormous funds are able to exert significant influence on correlation and movement of interchange rates.
- Brokerage companies. Brokers act as intermediaries, market-makers, providing their clients with access to the market and enabling deals between sellers and buyers of foreign currencies. For their services, dealers of brokerage companies receive a portion of the price difference between the buying and selling rates of currencies. The brokerage firm, which has information about the requested rates, is where the exchange rate is formed for the deals that have already been made. A commercial bank may also act as an intermediary directly.
- Individuals. A wide range of non-trading operations, as well as the largest group conducting currency operations with speculative aims.
Advantages of Forex
Advantages of Forex in comparison with other markets which helped the currency market to attract hundreds of thousands of investors all over the world are as follows.
- Market accessibility. In order to begin working in the Forex market, it is sufficient to open a trading account at any bank or brokerage company that provides services in the financial sector, and to deposit the funds on the account – a security deposit required to obtain the right to conduct transactions.
- An opportunity to buy and sell currencies in the absence of the full amount of the contract. All that is necessary for carrying out transactions is an initial margin (security deposit), after which it is possible to enter into contracts, the amount of which can be 20 to 100 times greater than the initially invested funds.
- High potential profitability. The volatility of exchange rates is such that within one trading day it can achieve several percent, allowing a trader to earn, taking into account the credit leverage at marginal trade, sometimes up to several dozens or more percent of the pledge (guarantee) deposit.
- Opening positions in any direction by any currency or cross-rate. It is enough to have U.S. dollars or other currency, deposited as a guarantee, on your trading account, to be able to open positions in any direction, i.e. to buy and sell any currencies and cross-rates of currencies, which are quoted by your broker.
- The markets are open 24 hours a day. This is the only market that operates 24 hours a day. Possibility of work in the financial markets of Asia, America and Europe became accessible thanks to their association in one global communication network. Round-the-clock access to the currency market allows to open and close positions at the most favorable time and at the best price.
- High liquidity. Commodity in the Forex market is money – a commodity with 100% liquidity. Because of this and the huge volumes of transactions made daily, the Forex market is the most liquid market in the world. At any time you can open and close positions at the prices prevailing in the world market at any given moment.
- Transparency. There is no insider information in Forex market. All data on changes in exchange rates, economic and political news is available in real time to all market participants. And you get the news at the same time as George Soros. Although it must be noted that there is still some difference between you and Soros – his actions in the market are already news that can lead to a certain influence on currency rates.
- Promptness of making deals. To make a deal simply ask your broker for the price of the currency you are interested in and give an order to buy or sell. After the bank’s dealer confirms the fact of buying or selling, the amount and the price of the contract currency, the deal is considered to be made. By means of Internet there is an opportunity to do something that was unthinkable before – to trade currency from any place of the world, at any time.
- No commissions. In the Forex market, as a rule, there are no commissions as opposed to other markets. In the commodities, stock or futures markets clients are charged in the form of a commission and clearing fees from the exchange, they pay a commission to a broker in the form of a fixed amount for each completed transaction or as a percentage of the transaction amount, etc. The basis for the broker’s (bank or brokerage company’s) profit on Forex is the spread – the difference between the quoted bid and ask prices of the currency. The spread can be seen as a payment for services.
The mechanism of margin trading in the U.S. Forex market
Many of the speculative operations at the international financial markets are carried out on the principles of margin trading. Margin trading began to develop in the process of deregulation of the currency market at the beginning of the 1980s, after cancellation of fixed exchange rates according to the Ministers of Finance of the leading industrial countries. Officially, margin trading was permitted in 1986.
The essence of margin trading consists in the fact that there is no necessity to possess the whole amount of a contract, it is enough to deposit a margin, which usually amounts to 1-10% (more often 2-5%) of the contract amount. That is, for carrying out a deal of buying or selling currencies your financial partner credits you with the lacking amount, or, as traders say, gives a “leverage”. For example, to buy $100,000 in German marks at 1% margin (1:100 leverage), you need only pay a $1,000 deposit. Naturally, it increases a player’s potential: with relatively small means he can operate on the market with amounts many times larger. In this case all profits and losses, arising from currency rates’ changes, are written on his account. The maximum leverage in the USA is 1:50.
How to start Forex trading
So how to start trading at the Forex exchange? You should pay attention to several factors:
- Theoretical training, as well as practice, which is desirable to do on a demo account, so you don’t risk your money. It is better not to delay with practical exercises, because it is necessary to understand the possibilities of the trading terminal, and to get acquainted with the toolkit (scripts, indicators, advisors, etc.);
- Selection of a brokerage company, through which trading will be carried out. In short, the personal account at the broker’s website is registered, the trading terminal is downloaded (for example, MetaTrader 4), and after its installation you can use the demo account.
- Selection of trading strategies that can be tested on a demo account. Without such systems trading will resemble a lottery, making deals at random. So, the strategies are needed here, and it is better to choose the trading system for yourself.