G e t t i n g S t a r t e d: FOREX

 

Forex (or FX) refers to the foreign exchange markets, where currencies are traded.
It is the biggest and fastest growing financial market in the world, with an average
daily turnover of almost $2 trillion – many times the total traded volume of the US
stock exchanges.
The forex market consists of a worldwide wired network of buyers and sellers of
currencies, with trading all done over-the-counter (OTC), which means that there
is no central exchange and clearinghouse where orders are matched. If you are
looking for 24-hour action, you can find it in this global trading system, where no
physical barriers exist and activity moves seamlessly from one major financial
centre to another.
A reason why there is a veil of mystery over forex is that the market was once the
exclusive playground of banks, hedge funds, corporations and financial institutions,
where money changed hands for commercial and speculative purposes. However,
forex has now expanded and is easily accessible to all traders with the rapid
emergence of online currency trading platforms. Many of these platforms are wellequipped
with free charting software, real-time news-feeds and easy-to-use order
placing systems.
The wide availability of sophisticated technology has spawned a whole new level
of foreign exchange, where self-directed (so-called “retail”) traders can easily buy
and sell currencies through an internet connection with a click of the mouse,
dealing with invisible counter-parties on the other side of the transaction. This
group of people (also known as speculative traders) engage in trading forex for the
sole purpose of making profits.
Welcome to the new world of online forex trading.
The rapid fluctuations of currency exchange rates are what attract speculators to the
forex market as currencies are highly sensitive, and thus react very fast to changing
economic conditions of countries or regions, changing interest rates and political
happenings around the world. Sometimes central banks of countries attempt to
intervene in the forex market if the policy-makers feel that their country’s currency
is too strong or too weak for their own good. All these factors lead to high volatility
of currency prices, which can be taken advantage of by traders who speculate on
the direction and magnitude of the current and future price move.
I would like to point out that while movements in certain currency pairs can be
quite volatile in nature, most major currencies generally move less than 1% daily,
which is much lower than that of active stocks, which can easily move between 5-
10% per day. For a rough guide of currency pairs and their relative volatility, refer
to Figure 1.1 under “Warming Up” in the later part of this chapter.
Forex has increasingly become an extremely attractive alternative asset group for
speculators to trade, in addition to the usual staple of stocks and futures.

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