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Forex Introduction

Overview

FinproFX leverages the latest software, including MetaTrader4 for the most advanced Forex trading you can find anywhere.
The basics of Forex lay in the investment strategies based on differences in exchange rates between two currencies. Whether you are an individual, introducing broker, or financial institution, with FinproFX you can buy and sell currencies with the hope of making a profit. A profit is realized when the value of the currencies changes in your favor, whether from market news or events that take place in the world. And with the Forex market being the largest market in the world with a daily volume of over USD 5.3 trillion, it makes it one of the most exciting markets for trading.

Market Hours

As a tech-savvy trader, Forex offers you a true 24-hour market in which you can trade currencies. Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, then London, and then New York. Unlike any other financial market, you can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.
The FX market is considered an Over-the-Counter (OTC) or 'interbank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets.

Spot Rate

The spot rate is today’s market price of one currency measured in terms of another, for example, the price of one US dollar in Japanese Yen. The spot rates of all currencies against the US dollar (USD) are basic ones, the rest are considered cross rates.
Some of the existing currencies are said to be major; these include the US dollar (USD), the Euro (EUR), the British pound (GBP), the Swiss franc (CHF), the Canadian Dollar (CAD), the Australian Dollar (AUD) and the Japanese yen (JPY).
When you are looking at a quote, for example, EUR/USD, you will be given two different prices (i.e. 1.2043 EUR and 1.2048 USD) for the currency pair. The spread is the difference between the buy price (also known as the bid) and the sell price (also known as the ask). In addition, the spread illustrates the difference between what the broker gives to buy from a trader, and what the broker takes to sell to a trader. . If you want to buy one Euro, you have to pay, in this hypothetical case, 1.2048 USD for it, but if you want to sell one euro you are going to be paid by your dealer 1.2043 for it. In this case the difference between “buy” and “sell”, or the spread, is 0.0005 or 5 pips. Note that buying one currency is actually the action of selling the other; alternatively, selling one currency actually means that you are buying the other.

Advantages of Forex Trading

  • 24-hour Trading
  • The availability of buying and selling on a 24-hour cycle is one the biggest advantages for trading Forex.
  • Increase in Leverage
  • Leveraged trading, also referred to as margin trading, allow you to execute trades up to $100,000 with an initial margin of only $1,000. It is important to remember that higher gearing creates greater profits if you correctly anticipate movements in Forex prices and vice versa.
  • Liquidity
  • Forex liquidity, particularly for major currencies, helps to ensure price stability that enables you to always open or close a position, receive a fair market price, and more importantly be less vulnerable to liquidity risk.
  • Lower Transaction Costs
  • The Forex market is much more cost efficient for investment, in terms of both commissions and transaction fees. In general, the width of the spread in a FX transaction is less than 1/10 as wide as a stock transaction.

Participants of Forex

So, who are the players in the Forex market?

  • Individuals like you
  • Commercial banks
  • Currency stock exchanges
  • TFirms which are carrying out the foreign trade operations
  • Investment funds
  • Broker companies

Commercial banks carry out Forex trades and may affect the rate due to their high level of activity, as the volumes of daily operations at large banks can amount to billions of dollars. At some banks. the basic portion of the profit is derived exclusively from speculative currency operations.

Other than banks, broker houses are the most active participants in the market. They act as the intermediary between multiple different banks, funds, commission houses, dealing centers, etc.

Commercial banks and broker houses not only buy and sell currency under the prices which are established by the other active participants, but also offer their own prices. They therefore actively influence the pricing process and overall market trends, and are therefore known as market-makers. Unlike active participants, passive participants of the market cannot offer their own quotations and they buy or sell currency under the prices which are offered by active participants of the market.

Passive participants of the market usually pursue the following targets: payment of export-import contracts, foreign industrial investments, opening of branches abroad or creation of joint ventures, tourism, speculation on a difference of rates, hedging of currency risks, etc.

The central banks of many countries are involved in the Forex market for non-profit purposes, as a rule. Their role is normally to conduct stability checks or correct the existing rate of a national currency. The correction of an existing national currency rate has an influence on national economic conditions.

Commercial banks provide central banks access to the currency market. While profit is not a central bank’s primary purpose, they also avoid unprofitable operations. Central bank activities are therefore normally hidden and carried out through several commercial banks at once.

The central banks of different countries can also carry out joint coordinated interventions. While active participants conduct transactions involving large sums (a few million dollars), passive participants can use margin trade. They have an opportunity to temporarily operate the capital, in one hundred times exceeding this deposit. This approach to trading allows to take a part in work of the currency market to fine investors with the small capital and thus to receive significant profit.

The structure of the basic participants of the market is such that this market is actively used by "serious business" and for serious purposes. This means not all the participants of the market use Forex for investment purposes. As already explained, fluctuations in exchange rates can lead to huge losses in the export-import transactions. In order to protect themselves from currency risks, exporters and importers look to take out hedging instruments in the currency market, including forward transactions, options, futures, etc.

Moreover, businesses that have no involvement in export-import transactions can suffer huge losses as a result of exchange rate fluctuations. That is why studying Forex is an essential component of any successful business.