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Forex trading generates about $1.5 trillian a day
in volume, making it the largest and most liquid market in the world.
Compare that to futures ($437 billion) and stocks ($191 billion)
and you will see that forex liquidity towers over any other market.
Liquidity has its advantages, the primary one being no manipulation
of the market. Thin stock and futures markets can easily be pushed
up or down by specialists, market makers, commercials and locals.
It takes real buy/selling by banks and institutions to move the
forex market. Any attempted manipulation of the forex market usually
becomes and exercise of futility.
The Forex Market is a 24-hour international market where banks,
hedge funds, international corporations, and individuals from all
over the world are active participants. The sheer scope of market
participation and volume of activity insures around-the-clock activity
making this an ideal market for trading at all times.
Currencies have the tendency to trend heavily and rarely spend much
time in tight trading ranges. These two characteristics are central
for short to medium term trading. On a daily basis, traders can
easily identify new trends and breakouts providing multiple opportunities
to exit and enter positions.
The Foreign Exchange market allows positions to be leveraged up
to 200:1, providing tremendous upside potential. This means with
$1000 margin deposit you can place a $200,000 position in the market.
Foreign Exchange provides much better leverage then the futures
market, which requires a 2%-5% margin and the equities market, which
requires at least 50% initial margin. A 1% movement in the FX market
can triple the value of your entire investment. Leverage is a double-edged
sword, and without proper risk management, the market can move against
you and cause the lost of initial investment.
In the Foreign Exchange market there are no restrictions on short
selling, which means that a trader can take advantage of an upward
or downward market. Traders can buy or sell a currency with equal
ease.
There are two basic approaches to analyzing currency markets, fundamental
analysis and technical analysis. The fundamental analyst concentrates
on the underlying causes of price movements, while the technical
analyst studies the price movements themselves.
Technical analysis focuses on the study of price movements. Historical
currency data is used to forecast the direction of future prices.
The premise of technical analysis is that all current market information
is already reflected in the price of that currency; therefore, studying
price action is all that is required to make informed trading decisions.
The primary tools of the technical analyst are charts. Charts are
used to identify trends and patterns in order to find buying and
selling opportunities. The most basic concept of technical analysis
is that markets have a tendency to trend, or either increasing or
decreasing. Being able to identify trends in their earliest stage
of development is the key to technical analysis.
Fundamental analysis focuses on the economic, social and political
forces that drive supply and demand. Fundamental analysts look at
various macroeconomic indicators such as economic growth rates,
interest rates, inflation, and unemployment. However, there is no
single set of beliefs that guide fundamental analysis. There are
several theories as to how currencies should be valued.
Currency prices reflect the balance of supply and demand for currencies.
Two primary factors affecting the supply and demand are interest
rates and the overall strength of the economy. Economic indicators
such as GDP, foreign investment and the trade balance reflect the
general health of an economy and are therefore responsible for the
underlying shifts in supply and demand for that currency. There
is a tremendous amount of data released at regular intervals and
some of the data is more important than others. The ones that are
looked at more closely are those related to interest rates and international
trade.
If the market has uncertainty regarding interest rates, then any
bit of news regarding interest rates can directly affect the currency
markets. Traditionally, if a country raises its interest rates,
the currency of that country will strengthen in relation to other
countries as investors shift assets there to gain a higher return
on the interest rate. Hikes in interest rates, however, are generally
bad news for stock markets. Some investors will transfer money out
of a country's stock market when interest rates are hiked, causing
the country's currency to weaken. Which effect dominates can be
tricky, but generally there is a consensus beforehand as to what
the interest rate move will do. Indicators that have the biggest
impact on interest rates are PPI, CPI and GDP. Generally the timing
of interest rate moves is known in advance. They take place after
regularly scheduled meetings by the BOE, FED, ECB, BOJ, and other
central banks.
The trade balance shows the net difference over a period of time
between a nation’s exports and imports. When a country imports
more than it exports the trade balance will show a deficit, which
is generally considered unfavorable. For example, if U.S dollars
are sold for other domestic national currencies (to pay for imports),
the flow of dollars outside the country will depreciate the value
of the currency. Similarly if trade figures show an increase in
exports, dollars will flow into the United States and appreciate
the value of the currency. From the standpoint of a national economy,
a deficit in and of itself is not necessarily a bad thing; If the
deficit is greater than market expectations then it will trigger
a negative price movement.
Margined Currency Trading is one of the riskiest forms of investment
available in the financial markets and is only suitable for sophisticated
individuals and institutions. An account with RefcoFX permits you
to trade foreign currencies on a highly leveraged basis (up to approximately
200 times your account equity). An initial deposit of $1,000 will
enable the account holder to take a maximum position with $200,000
market value. The funds in an account trading at maximum leverage
can be completely lost, if the position(s) held in the account has
a 1/2 percent swing in value. Theoretically, an account could lose
more than the equity it contains, if the account is trading at maximum
leverage and positions held in the account swing more than 1/2 percent
in value. Given the possibility of losing one's entire investment,
speculation in the foreign exchange market should only be conducted
with risk capital funds that if lost will not significantly affect
one's personal or institution's financial well-being.
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