There has been significant bad press specifically on forex trading software, and there are certainly some scams online to be aware of, however there are most definitely bonafide options as well. Using forex trading software and systems eliminates the risk involved in currency trading, as Andreas Kirchberger of Forex Killer states "proven software which does the thinking for you and therefore eliminates the human error factor".
There are essentially 3 main factors of successful forex trading software and systems.
Firstly selecting your term of trading is crucial to your currency trading success. There are essentially 3 time frames: long term, medium term and short term. The long term trader will hold on to their currency for months. The short term trader, sometimes known as a scalper, is seeking quick fire trades and immediate profits. The medium term trade is the lowest risk option, and require the least amount of capital to realize profits. Justin Kuepper of Investopedia.com suggests favouring a medium term trade will "help you save money and ultimately become a profitable retail forex trader".
Secondly, analysis of technical statistics is required. The currency marketplace is essentially a continuous supply of data which needs to be interpreted and correctly exploited for profit. One needs to be able to understand market fluctuations and be aware of key indicators of a market swing. This is the attraction of forex trading software, as it will interpret this data and help you make educated decisions on future trades more frequently.
Finally, timing of your trades is crucial to your success. John Chen of Profitable Trend Forex System attributes timing in terms of joining a trend as a key ingredient in currency trading success. There are essentially two main orders or decisions one needs to incorporate in one's forex trading system, theses are 'stop loss' and 'take profit'. 'Stop loss' is an order to cease trading when the currency reaches a certain point. 'Take profit' is a more conservative approach to a market upswing, which will result in profit, but not risk a massive collapse.
Wednesday, December 26, 2007
Sunday, December 23, 2007
How To Spot A Bubble
from fxstreet.com
Whenever traders speak about bubbles, they usually cite some anecdotal evidence that demonstrates just how irrational investors have become. By the late stages of the Nasdaq bubble, it was impossible to go anywhere in the U.S. - to a party, to the grocery store, to your dentist - without hearing about the booming U.S. stock market. Well, here is the latest symptom of investors gone wild - according to the Daily Yomiuri Online, a hit song in China contains the following lyrics:
- Use intuition to buy stocks and make money
- I won't be excited unless my investment goes up multiple times
- I won't be excited unless my investment hits irrational highs
- As stock investors, we must persist
From: "I'll Never Sell the Shares Even After My Death,"by Kaijie Gong
According to the article, the song is popular in karaoke bars, along with Gong's other hits, "Stock Investment is Like a Song of Sadness," "Investors Have No Time to Sleep," and "Stocks are Playing with our Hearts." As bad as the Nasdaq bubble was in the year 2000, I can't ever recall hearing Shania Twain or Metallica singing about the markets back then.
Letting the Air Out
The People's Bank of China struck a sour note this weekend when they raised the proportion of funds banks must hold in reserve by 0.5%, to 13.5%, effective November 26. It was the ninth such move this year. By forcing banks to hold a larger percentage of funds, the PBOC is trying to reduce the amount of money that can be loaned out - some of which undoubtedly would be used to purchase stocks, or perhaps even Kaijie Gong CDs.
) I have a question regarding Fib Levels. What levels should you generally use? I can plot retracement levels based on yesterdays, high/low, this/last week's high/low this/last month's high/low, or even intra-day swing extremes, so I would really appreciate some insight into what levels are generally best to use.
Ed Ponsi) Thank you for your question. Instead of using daily, weekly, or monthly highs and lows, Forex traders use Fibonacci to measure a major move in the market. In other words, they measure from a major low point to a major high point, or from a major high point to a major low point, regardless of whether the high and low occur during the same day, week, or month. I prefer to use Fibonacci retracements on the daily or weekly chart, because I believe that Fibs are a self-fulfilling prophecy. If they are, then Fibs will work better if more people have time to locate them, and there is more time to locate the Fibs on the daily (or weekly) charts as opposed to intraday charts. Also, if Fibs are really self-fulfilling, then the most widely watched retracement levels - 38.2%, 50%, and 61.8% - will prove the most rewarding. Here's an example; the Australian Dollar/ U.S. Dollar currency pair recently bounced after a nearly perfect 38.2% pullback
Q) I am looking for information on arbitrage trading, but everything I have found only states that these opportunities last for just milliseconds. I have successfully completed three trades lasting no more than a day, but more than just seconds. I am just wondering if this is actually considered an arb, or is this just relative value over time?
Ed Ponsi) Arbitrage could be defined as buying in one market and selling in another, although the interpretation of the term has expanded over the years. It seems that you are trying to use one currency pair as an indicator to trade another currency pair. It's true that many of these opportunities have already been exploited to the point where they are no longer feasible for the individual trader. Here's what happens; someone identifies an arbitrage opportunity, meaning that when "A" happens, "B" usually occurs sometime afterward. Word eventually gets out. Every trader who takes advantage of that opportunity is in fact shortening the lead-time between the initial "signal" move and the "secondary" move. Eventually, traders begin to program computers to automatically exploit this relationship, and the lag time disappears entirely. At this point, "B" follows "A" so quickly that the individual trader can no longer gain an advantage. A trader would say that the advantage has been "arbed to death".
Does this mean that there are no arb opportunities left? No, old arbs die and new ones are born. If you find a real arb opportunity the best way to use it is to keep quiet about it, because once word gets out, the 'edge' will disappear. Let me put it this way, if you indeed have discovered something new, which is impossible to say from the sample given, then publishing it here will only speed its demise. Keep the nature of the arb hidden and it will last longer. Good luck!
Bernanke on the Grill
On Thursday morning, Fed Chief Ben Bernanke appeared before the Joint Economic Committee of Congress. After reading his prepared remarks, Big Ben took questions from the committee. One of the highlights was Bernanke's grilling by Texas Rep. Ron Paul, who put the Fed Chairman's feet to the fire on the topic of the ever-falling U.S. Dollar. As usual, Dr. Paul's comments about the U.S. Dollar and the money supply were right on target.
"It is that not only have we had a subprime market in housing; the whole economic system is subprime. The real deception is when we distort the value of money, when we create money out of thin air. We have no savings. Yet there's so-called capital. There's money available. But it comes from what you have to do and the pressures put on you."
What does Dr. Paul mean when he says, "what you have to do"? According to Paul, what Bernanke and the Fed have to do in order to keep the economic ball rolling is print money. Lots of money. The problem is, when the Fed adds money to the overall supply without adding value, they are diluting the outstanding money - your money - thereby making every dollar worth a little bit less. Paul continued:
"There's a dollar crisis out there and people's money is being stolen; people who have saved, they're being robbed. I mean, if you have a devaluation of the dollar at 10 percent, people have been robbed at 10 percent. But how can you pursue this policy without addressing the subject that somebody's losing their wealth because of a weaker dollar? And it's going to lead to higher interest rates and a weaker economy."
M2, the broadest measure of the money supply that the Fed is currently willing to reveal (it stopped publishing the broader M3 in 2006), shows that the supply of money has increased by over ten percent since October of 2005, and has nearly doubled since 1990The impact of a weaker dollar will change the economic landscape of the U.S. It is not something that "just happens", it is a direct result of our economic policy. The high cost of a barrel of oil is not just due to strong demand; it is a side effect of a weak U.S. currency. As such, we Americans should demand that our elected officials be held accountable. Every Presidential candidate should be asked, "What do you plan to do about the weak U.S. Dollar?" Let's make this a campaign issue for 2008.
Four suggestions on forex reserve management
From The Hindu
Chennai: Import power plants, facilitate corporate borrowings, reduce dollar liabilities, and don’t squander away foreign exchange (forex) reserves.
These are among the suggestions that Mr N. A. Mujumdar makes in a recent book titled ‘Inclusive Growth: Development Perspectives in Indian Economy’ (www.academicfoundation.com).
He extols the track record of the RBI (the Reserve Bank of India) in managing the exchange rate as being ‘excellent’, while at the same time bemoaning the ‘total ineptitude’ and ‘monumental inertia’ in forex reserve management.
Though there is no set formula to determine the optimum level of forex reserves for a country, there is a threshold level beyond which the reserves maintained could be characterised as unproductive, the author argues. He suggests $60 billion as a liberal estimate of such a level, ‘equivalent to one year’s imports’, and the use of excess to import power plants. On November 2, forex reserves were close to $270 billion.
“Availability of power is acting as a constraint in industrial growth and hence, utilisation of reserves for import of power plants would confer great benefits to the economy,” reasons Mr Mujumdar, who was formerly principal adviser to the RBI.
He is aghast that corporates have to pay at least 6 to 7 per cent interest on overseas borrowings, even as the central bank earns ‘only 2 or 3 per cent of interest’ on reserves. “Of course, it is conceded that the RBI cannot lend directly to private corporate sector; but it is not beyond the ingenuity of the RBI to devise a mechanism to facilitate such borrowings.”
There seem to be stirrings. At the Economic Editors Conference, the Finance Ministry is understood to have informed on November 12 about the in-principle nod from the RBI to annually invest $5 billion of forex reserves in infrastructure projects through SPVs (special purpose vehicles), and thus take forward the idea proposed in the Budget 2007.
On the ‘power’ front too, there is news. A story dated November 6 on www.chinaknowledge.com talks about the Essar Group importing $1 billion power plant from Harbin Power, China.
Towards reduction of dollar liabilities, Mr Mujumdar’s suggestion is the discontinuation of the convertible category of FCNR (foreign currency non-resident) deposits. “Those NRIs (non-resident Indians) keen to invest in India could do so in non-convertible rupee deposits.”
He is of the view that the RBI has been liberalising outward remittances ‘with reckless abandon’, by doubling the cap from $25,000 to $50,000 to $1,00,000 and, recently, to $2,00,000.
“Returns to private investment abroad are far from encouraging,” the author laments. Also, eerily, such dissipation of reserves by the RBI reminds him of ‘the frittering away of the huge sterling balances in the post-War period.’
Forex outflow curbs may be eased further
From The Economic Times
NEW DELHI: After taking steps to curb capital inflows into the country through participatory notes (PN), the government may consider further easing of outflows.
Though the central bank had recently allowed Indian companies to invest more funds overseas and individuals to remit upto $2,00,000 per annum without its permission, sources said some more measures could be on the way.
RBI, which has allowed Indian companies to invest up to 400% of their networth in joint ventures or wholly-owned subsidiaries under the automatic route, could look at raising it further. Even the remittance scheme for individuals, which saw a hike in the ceiling to $2,00,000, could see some relaxation.
However, this could be mainly on the procedural front or by way of a broadening of instruments in which these funds are allowed to be invested in. At present, the scheme allows individuals to remit it only for the specific purpose of investing in assets like real estate or shares or park it with banks. However, there is no clarity on the instruments in which an individual can park these funds.
While the proposed restrictions on inflows through PN may be able to address the issue of inflows, investments can always come in directly, again posing the same problem of inflows for the central bank. The notional value of PNs outstanding, which was at Rs 31,875 crore in March 2004, has grown to Rs 3,53,484 crore by August 2007.
This is about 51.6% of assets under custody of foreign institutional investors. Even if a smaller percentage of this comes directly as FII investment, it would still mean substantial flows. Sources said these measures may be considered to ease outflows if inflows continue to threaten the overall monetary situation. The central bank had mopped up $12 billion in the last week of September.
NEW DELHI: After taking steps to curb capital inflows into the country through participatory notes (PN), the government may consider further easing of outflows.
Though the central bank had recently allowed Indian companies to invest more funds overseas and individuals to remit upto $2,00,000 per annum without its permission, sources said some more measures could be on the way.
RBI, which has allowed Indian companies to invest up to 400% of their networth in joint ventures or wholly-owned subsidiaries under the automatic route, could look at raising it further. Even the remittance scheme for individuals, which saw a hike in the ceiling to $2,00,000, could see some relaxation.
However, this could be mainly on the procedural front or by way of a broadening of instruments in which these funds are allowed to be invested in. At present, the scheme allows individuals to remit it only for the specific purpose of investing in assets like real estate or shares or park it with banks. However, there is no clarity on the instruments in which an individual can park these funds.
While the proposed restrictions on inflows through PN may be able to address the issue of inflows, investments can always come in directly, again posing the same problem of inflows for the central bank. The notional value of PNs outstanding, which was at Rs 31,875 crore in March 2004, has grown to Rs 3,53,484 crore by August 2007.
This is about 51.6% of assets under custody of foreign institutional investors. Even if a smaller percentage of this comes directly as FII investment, it would still mean substantial flows. Sources said these measures may be considered to ease outflows if inflows continue to threaten the overall monetary situation. The central bank had mopped up $12 billion in the last week of September.
Forex gains to play smaller role in driving surprises
From The Economic Times
NEW DELHI: Forex gains, which were a key driver of positive surprises last quarter, will be less of a factor this quarter, as the rupee has appreciated by a modest 2% during the September 2007 quarter.
After a robust first quarter, Citigroup expects Sensex ex-oil earnings to rise by 21% in the second quarter. With base effect and slowing credit, trend of top line moderation is expected to continue and is expected at 13%. Margins should hold steady overall, despite challenges of wage inflation and currency appreciation for many sectors.
A liquidity surge after the Fed rate cut has driven a stunning 27% rise in the Sensex from lows just six weeks back. Positive earnings surprises will be key to hold up that momentum. The previous quarter’s earnings surprises, outside the capital goods sector, were mostly from forex gains and hence it did not drive any significant earnings revision. Earnings surprises are expected to remain on a slow track, though positive.
Leading sectors in terms of profit growth are likely to be telecom, media, brokerages, hotels, capital goods while sugar, textiles, metals, autos and pharma will likely be laggards this quarter.
The previous results season had seen well above expected profit growth, but much of the earnings surprise outside of capital goods came from forex gains and other one-offs. Not surprisingly, despite a strong June 2007 quarter, earnings upgrade momentum has been very muted and Sensex ex-oil earnings growth for fiscal 2008 and 2009 is still expected to be 16-17 %, says Citigroup.
With the rupee appreciating merely 2.1% versus the dollar in the September quarter (6.1% in the preceding quarter), forex gains will play a far smaller role in driving surprises this time around.
NEW DELHI: Forex gains, which were a key driver of positive surprises last quarter, will be less of a factor this quarter, as the rupee has appreciated by a modest 2% during the September 2007 quarter.
After a robust first quarter, Citigroup expects Sensex ex-oil earnings to rise by 21% in the second quarter. With base effect and slowing credit, trend of top line moderation is expected to continue and is expected at 13%. Margins should hold steady overall, despite challenges of wage inflation and currency appreciation for many sectors.
A liquidity surge after the Fed rate cut has driven a stunning 27% rise in the Sensex from lows just six weeks back. Positive earnings surprises will be key to hold up that momentum. The previous quarter’s earnings surprises, outside the capital goods sector, were mostly from forex gains and hence it did not drive any significant earnings revision. Earnings surprises are expected to remain on a slow track, though positive.
Leading sectors in terms of profit growth are likely to be telecom, media, brokerages, hotels, capital goods while sugar, textiles, metals, autos and pharma will likely be laggards this quarter.
The previous results season had seen well above expected profit growth, but much of the earnings surprise outside of capital goods came from forex gains and other one-offs. Not surprisingly, despite a strong June 2007 quarter, earnings upgrade momentum has been very muted and Sensex ex-oil earnings growth for fiscal 2008 and 2009 is still expected to be 16-17 %, says Citigroup.
With the rupee appreciating merely 2.1% versus the dollar in the September quarter (6.1% in the preceding quarter), forex gains will play a far smaller role in driving surprises this time around.
Strong FII inflows lift forex reserves by $12 bn
From The Economic Times
MUMBAI: India’s foreign exchange reserves rose by a record $11.9 billion during the week ended September 28 to top $248 billion as foreign portfolio investors poured money into stocks in the second-fastest growing economy in the world.
Last week’s inflows are reckoned to be one of the highest ever and had the effect of strengthening the rupee, which has gained over 10% against the dollar since April this year.
According to data released by the Reserve Bank of India (RBI) in its weekly statistical supplement (WSS), total foreign exchange reserves including gold and special drawing rights (SDR) rose $11.9 billion during the week ended September 28. While the forex assets rose $11,383 million, the value of gold in reserves was up by $486 million. Though the value of SDR in reserves remained unchanged, the reserves with the IMF rose by $2 million.
The Reserve Bank has mopped up $48.6 billion since April this year, releasing rupee funds worth Rs 1,16,382 crore. The central bank has been up against strong capital inflows since April this year. The inflows accelerated specially after the US Federal Reserve cut its benchmark interest rates by 50 basis points recently.
This led to the rupee breaching the psychological Rs 40 barrier against the dollar, inspite of a mopup of close to $12 billion by the central bank during the week. The strong inflows have also posed a liquidity management challenge to the central bank.
The central bank data shows that the Centre has refrained from resorting to ways and means advances (WMA) to meet its temporary revenue mismatches, indicating a comfortable revenue position. It has instead parked surplus funds to the tune of Rs 10,871crore as on September 28 with the central bank, down Rs 12,960 crore over the previous fortnight’s levels.
The states, however, continued to rely on the central bank to meet their temporary revenue shortfall. They borrowed an additional Rs 398 crore from the central bank to take their outstanding stock of WMA to Rs 893 crore as on September 28.
MUMBAI: India’s foreign exchange reserves rose by a record $11.9 billion during the week ended September 28 to top $248 billion as foreign portfolio investors poured money into stocks in the second-fastest growing economy in the world.
Last week’s inflows are reckoned to be one of the highest ever and had the effect of strengthening the rupee, which has gained over 10% against the dollar since April this year.
According to data released by the Reserve Bank of India (RBI) in its weekly statistical supplement (WSS), total foreign exchange reserves including gold and special drawing rights (SDR) rose $11.9 billion during the week ended September 28. While the forex assets rose $11,383 million, the value of gold in reserves was up by $486 million. Though the value of SDR in reserves remained unchanged, the reserves with the IMF rose by $2 million.
The Reserve Bank has mopped up $48.6 billion since April this year, releasing rupee funds worth Rs 1,16,382 crore. The central bank has been up against strong capital inflows since April this year. The inflows accelerated specially after the US Federal Reserve cut its benchmark interest rates by 50 basis points recently.
This led to the rupee breaching the psychological Rs 40 barrier against the dollar, inspite of a mopup of close to $12 billion by the central bank during the week. The strong inflows have also posed a liquidity management challenge to the central bank.
The central bank data shows that the Centre has refrained from resorting to ways and means advances (WMA) to meet its temporary revenue mismatches, indicating a comfortable revenue position. It has instead parked surplus funds to the tune of Rs 10,871crore as on September 28 with the central bank, down Rs 12,960 crore over the previous fortnight’s levels.
The states, however, continued to rely on the central bank to meet their temporary revenue shortfall. They borrowed an additional Rs 398 crore from the central bank to take their outstanding stock of WMA to Rs 893 crore as on September 28.
Forex
Foren Exchange Market (FOREX)
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The trade happening in the forex markets across the globe currently exceeds US$1.9 trillion/day (on average). Retail traders (individuals) are currently a very small part of this market and may only participate indirectly through brokers or banks and may be targets of forex scams.
The foreign exchange market is unique because of:
its trading volume,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours - 24 hours a day (except on weekends).
the variety of factors that affect exchange rates,
According to the BIS study Triennial Central Bank Survey 2004, average daily turnover in traditional foreign exchange markets was estimated at $1,880 billion. Daily averages in April for different years, in billions of US dollars, are presented on the chart below:
Global foreign exchange market turnover:
$621 billion spot
$1.26 trillion in derivatives, ie
$208 billion in outright forwards
$944 billion in forex swaps
$107 billion in FX options.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Average daily global turnover in traditional foreign exchange market transactions totalled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the world’s equity markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms has also made it easier for retail traders to trade in the foreign exchange market.[1]
Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006. Other large centres include the US (with a 18.2% global share), Japan (7.6%) and Singapore (5.7%) (Chart 2). Most of the remainder was accounted for by trading in Germany, Switzerland, Australia, Canada, France and Hong Kong.
The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 0-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $100,000.
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 5 pips wide (i.e. 0.0005). Competition has greatly increased with pip spreads shrinking on the major pairs to as little as 1 to 1.5 pips.
Market participants
Financial markets
Bond market
Fixed income
Corporate bond
Government bond
Municipal bond
Bond valuation
Junk Bond
Stock Market
Stock
Preferred stock
Common stock
Stock exchange
Foreign Exchange Market
Retail forex
Forex Scam
Derivative market
Credit Derivative
Hybrid security
Options
Futures
Forwards
Swaps
Other Markets
Commodities market
OTC market
Real estate market
Spot market
Valuation and Theories
Market Valuation
Financial market efficiency
Finance series
Financial market
Financial market participants
Corporate finance
Personal finance
Public finance
Banks and Banking
Financial regulation
v d e
Top 10 Currency Traders
% of overall volume, May 2006
Source: Euromoney FX survey[1]
Rank Name % of volume
1 Deutsche Bank 19.26
2 UBS 11.86
3 Citigroup 10.39
4 Barclays Capital 6.61
5 RBS 6.43
6 Goldman Sachs 5.25
7 HSBC 5.04
8 Bank of America 3.97
9 JPMorgan Chase 3.89
10 Merrill Lynch 3.68
Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001-2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.
[
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] Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems, such as EBS, Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Bloomberg and TradeBook(R). The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
[
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] Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
[
edit
] Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in Southeast Asia.
Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximization.
Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.
Hedge funds
Hedge funds, such as George Soros's Quantum fund have gained a reputation for aggressive currency speculation since 1990. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.
Retail forex brokers
Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $25-50 billion daily, which is about 2% of the whole market.
Trading characteristics
There is no single unified foreign exchange market. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is no such thing as a single dollar rate - but rather a number of different rates (prices), depending on what bank or market maker is trading. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs.
Top 6 Most Traded Currencies
Rank Currency ISO 4217 Code Symbol
1 United States dollar USD $
2 Eurozone euro EUR €
3 Japanese yen JPY ¥
4 British pound sterling GBP £
5-6 Swiss franc CHF -
5-6 Australian dollar AUD $
The main trading centers are in London, New York, Tokyo, and Singapore, but banks throughout the world participate. As the Asian trading session ends, the European session begins, then the US session, and then the Asian begin in their turns. Traders can react to news when it breaks, rather than waiting for the market to open.
There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.3045 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.
The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.
On the spot market, according to the BIS study, the most heavily traded products were:
EUR/USD - 28 %
USD/JPY - 18 %
GBP/USD (also called sterling or cable) - 14 %
and the US currency was involved in 89% of transactions, followed by the euro (37%), the yen (20%) and sterling (17%). (Note that volume percentages should add up to 200% - 100% for all the sellers, and 100% for all the buyers).
Although trading in the euro has grown considerably since the currency's creation in January 1999, the foreign exchange market is thus far still largely dollar-centered. For instance, trading the euro versus a non-European currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The only exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market.
Economic factors
These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
Economic conditions include:
Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency.
Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The trade happening in the forex markets across the globe currently exceeds US$1.9 trillion/day (on average). Retail traders (individuals) are currently a very small part of this market and may only participate indirectly through brokers or banks and may be targets of forex scams.
The foreign exchange market is unique because of:
its trading volume,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours - 24 hours a day (except on weekends).
the variety of factors that affect exchange rates,
According to the BIS study Triennial Central Bank Survey 2004, average daily turnover in traditional foreign exchange markets was estimated at $1,880 billion. Daily averages in April for different years, in billions of US dollars, are presented on the chart below:
Global foreign exchange market turnover:
$621 billion spot
$1.26 trillion in derivatives, ie
$208 billion in outright forwards
$944 billion in forex swaps
$107 billion in FX options.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Average daily global turnover in traditional foreign exchange market transactions totalled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the world’s equity markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms has also made it easier for retail traders to trade in the foreign exchange market.[1]
Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006. Other large centres include the US (with a 18.2% global share), Japan (7.6%) and Singapore (5.7%) (Chart 2). Most of the remainder was accounted for by trading in Germany, Switzerland, Australia, Canada, France and Hong Kong.
The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 0-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $100,000.
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 5 pips wide (i.e. 0.0005). Competition has greatly increased with pip spreads shrinking on the major pairs to as little as 1 to 1.5 pips.
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v d e
Top 10 Currency Traders
% of overall volume, May 2006
Source: Euromoney FX survey[1]
Rank Name % of volume
1 Deutsche Bank 19.26
2 UBS 11.86
3 Citigroup 10.39
4 Barclays Capital 6.61
5 RBS 6.43
6 Goldman Sachs 5.25
7 HSBC 5.04
8 Bank of America 3.97
9 JPMorgan Chase 3.89
10 Merrill Lynch 3.68
Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001-2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.
[
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] Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems, such as EBS, Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Bloomberg and TradeBook(R). The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
[
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] Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
[
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] Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in Southeast Asia.
Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximization.
Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.
Hedge funds
Hedge funds, such as George Soros's Quantum fund have gained a reputation for aggressive currency speculation since 1990. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.
Retail forex brokers
Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $25-50 billion daily, which is about 2% of the whole market.
Trading characteristics
There is no single unified foreign exchange market. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is no such thing as a single dollar rate - but rather a number of different rates (prices), depending on what bank or market maker is trading. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs.
Top 6 Most Traded Currencies
Rank Currency ISO 4217 Code Symbol
1 United States dollar USD $
2 Eurozone euro EUR €
3 Japanese yen JPY ¥
4 British pound sterling GBP £
5-6 Swiss franc CHF -
5-6 Australian dollar AUD $
The main trading centers are in London, New York, Tokyo, and Singapore, but banks throughout the world participate. As the Asian trading session ends, the European session begins, then the US session, and then the Asian begin in their turns. Traders can react to news when it breaks, rather than waiting for the market to open.
There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.3045 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.
The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.
On the spot market, according to the BIS study, the most heavily traded products were:
EUR/USD - 28 %
USD/JPY - 18 %
GBP/USD (also called sterling or cable) - 14 %
and the US currency was involved in 89% of transactions, followed by the euro (37%), the yen (20%) and sterling (17%). (Note that volume percentages should add up to 200% - 100% for all the sellers, and 100% for all the buyers).
Although trading in the euro has grown considerably since the currency's creation in January 1999, the foreign exchange market is thus far still largely dollar-centered. For instance, trading the euro versus a non-European currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The only exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market.
Economic factors
These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
Economic conditions include:
Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency.
Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
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