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Author Topic: Forex Trading  (Read 3325 times)

March 09, 2016, 10:41:52 AM
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EvilSpiriT

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Forex Trading
« on: March 09, 2016, 10:41:52 AM »
The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. This includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of volume of trading, it is by far the largest market in the world.[1] The main participants in this market are the larger international banks. Financial centres around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market does not determine the relative values of different currencies, but sets the current market price of the value of one currency as demanded against another.

The foreign exchange market works through financial institutions, and it operates on several levels. Behind the scenes banks turn to a smaller number of financial firms known as “dealers,” who are actively involved in large quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the “interbank market”, although a few insurance companies and other kinds of financial firms are involved. Trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars. Because of the sovereignty issue when involving two currencies, forex has little (if any) supervisory entity regulating its actions.

The foreign exchange market assists international trade and investments by enabling currency conversion. For example, it permits a business in the United States to import goods from European Union member states, especially Eurozone members, and pay Euros, even though its income is in United States dollars. It also supports direct speculation and evaluation relative to the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.[2]

In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying with some quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

The foreign exchange market is unique because of the following characteristics:

    its huge trading volume representing the largest asset class in the world leading to high liquidity;
    its geographical dispersion;
    its continuous operation: 24 hours a day except weekends, i.e., trading from 22:00 GMT on Sunday (Sydney) until 22:00 GMT Friday (New York);
    the variety of factors that affect exchange rates;
    the low margins of relative profit compared with other markets of fixed income; and
    the use of leverage to enhance profit and loss margins and with respect to account size.

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks.

According to the Bank for International Settlements,[3] the preliminary global results from the 2013 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity show that trading in foreign exchange markets averaged $5.3 trillion per day in April 2013. This is up from $4.0 trillion in April 2010 and $3.3 trillion in April 2007. Foreign exchange swaps were the most actively traded instruments in April 2013, at $2.2 trillion per day, followed by spot trading at $2.0 trillion. According to the Bank for International Settlements,[4] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.[5] The $3.98 trillion break-down is as follows:

    $1.490 trillion in spot transactions
    $475 billion in outright forwards
    $1.765 trillion in foreign exchange swaps
    $43 billion currency swaps
    $207 billion in options and other products

March 09, 2016, 10:42:09 AM
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EvilSpiriT

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Re: Forex Trading
« Reply #1 on: March 09, 2016, 10:42:09 AM »
History
Ancient

Currency trading and exchange first occurred in ancient times.[6] Money-changing people, people helping others to change money and also taking a commission or charging a fee were living in the times of the Talmudic writings (Biblical times). These people (sometimes called "kollybistẻs") used city-stalls, at feast times the temples Court of the Gentiles instead.[7] Money-changers were also in more recent ancient times silver-smiths and/or gold-smiths.[8]

During the 4th century, the Byzantine government kept a monopoly on the exchange of currency.[9]

Papyri PCZ I 59021 (c.259/8 BC), shows the occurrences of exchange of coinage within Ancient Egypt.[10]

Currency and exchange was also a vital and crucial element of trade during the ancient world so that people could buy and sell items like food, pottery and raw materials.[11] If a Greek coin held more gold than an Egyptian coin due to its size or content, then a merchant could barter fewer Greek gold coins for more Egyptian ones, or for more material goods. This is why, at some point in their history, most world currencies in circulation today had a value fixed to a specific quantity of a recognized standard like silver and gold.

March 09, 2016, 10:42:22 AM
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EvilSpiriT

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Re: Forex Trading
« Reply #2 on: March 09, 2016, 10:42:22 AM »
Medieval and later

During the 15th century, the Medici family were required to open banks at foreign locations in order to exchange currencies to act on behalf of textile merchants.[12][13] To facilitate trade the bank created the nostro (from Italian translated – "ours") account book which contained two columned entries showing amounts of foreign and local currencies, information pertaining to the keeping of an account with a foreign bank.[14][15][16][17] During the 17th (or 18th ) century, Amsterdam maintained an active forex market.[18] In 1704, foreign exchange took place between agents acting in the interests of the Kingdom of England and the County of Holland.[19]

March 09, 2016, 10:42:37 AM
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EvilSpiriT

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Re: Forex Trading
« Reply #3 on: March 09, 2016, 10:42:37 AM »
Early modern

Alex. Brown & Sons traded foreign currencies exchange sometime about 1850 and was a leading participant in this within U.S.A.[20] During 1880, J.M. do Espírito Santo de Silva (Banco Espírito Santo) applied for and was given permission to begin to engage in a foreign exchange trading business.[21][22]

The year 1880 is considered by at least one source to be the beginning of modern foreign exchange, significant for the fact of the beginning of the gold standard during the year.[23]

Prior to the first world war, there was a much more limited control of international trade. Motivated by the outset of war, countries abandoned the gold standard monetary system.[24]

March 09, 2016, 10:42:51 AM
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EvilSpiriT

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Re: Forex Trading
« Reply #4 on: March 09, 2016, 10:42:51 AM »
Modern to post-modern

From 1899 to 1913, holdings of countries' foreign exchange increased at an annual rate of 10.8%, while holdings of gold increased at an annual rate of 6.3% between 1903 and 1913.[25]

At the time of the closing of the year 1913, nearly half of the world's foreign exchange was conducted using the Pound sterling.[26] The number of foreign banks operating within the boundaries of London increased from 3 in 1860 to 71 in 1913. In 1902, there were altogether two London foreign exchange brokers.[27] During the earliest years of the 20th century, trade was most active in Paris, New York and Berlin, while Britain remained largely uninvolved in trade until 1914. Between 1919 and 1922, the employment of foreign exchange brokers within London increased to 17, in 1924 there were 40 firms operating for the purposes of exchange.[28] During the 1920s, the occurrence of trade in London resembled more the modern manifestation, by 1928 forex trade was integral to the financial functioning of the city. Continental exchange controls, plus other factors, in Europe and Latin America, hampered any attempt at wholesale prosperity from trade for those of 1930's London.[29]

During the 1920s, the Kleinwort family were known to be the leaders of the foreign exchange market; while Japheth, Montagu & Co., and Seligman still warrant recognition as significant FX traders.[30]

March 09, 2016, 10:43:14 AM
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EvilSpiriT

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Re: Forex Trading
« Reply #5 on: March 09, 2016, 10:43:14 AM »
fter WWII

After WWII, the Bretton Woods Accord was signed allowing currencies to fluctuate within a range of 1% to the currencies par.[31] In Japan, the law was changed during 1954 by the Foreign Exchange Bank Law. So, the Bank of Tokyo was to become, because of this, the centre of foreign exchange by September of that year. Between 1954 and 1959 Japanese law was made to allow the inclusion of many more Occidental currencies in Japanese forex.[32]

U.S. President Richard Nixon is credited with ending the Bretton Woods Accord and fixed rates of exchange, eventually bringing about a free-floating currency system. After the ceasing of the enactment of the "Bretton Woods Accord" during 1971,[33] the Smithsonian Agreement allowed trading to range to 2%. During 1961–62, the amount of foreign operations by the U.S. Federal Reserve was relatively low.[34][35] Those involved in controlling exchange rates found the boundaries of the Agreement were not realistic and so ceased this in March 1973, when sometime afterward none of the major currencies were maintained with a capacity for conversion to gold, organizations relied instead on reserves of currency.[36][37] During 1970 to 1973 the amount of trades occurring in the market increased three-fold.[38][39][40] At some time (according to Gandolfo during February–March 1973) some of the markets' were "split", so a two tier currency market was subsequently introduced, with dual currency rates. This was abolished during March 1974.[41][42][43]

Reuters introduced computer monitors during June 1973, replacing the telephones and telex used previously for trading quotes.

March 09, 2016, 10:43:37 AM
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EvilSpiriT

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Re: Forex Trading
« Reply #6 on: March 09, 2016, 10:43:37 AM »
Markets close

Due to the ultimate ineffectiveness of the Bretton Woods Accord and the European Joint Float the forex markets were forced to close sometime during 1972 and March 1973.[45][46] The very largest of all purchases of dollars in the history of 1976 was when the West German government achieved an almost 3 billion dollar acquisition (a figure given as 2.75 billion in total by The Statesman: Volume 18 1974), this event indicated the impossibility of the balancing of exchange stabilities by the measures of control used at the time and the monetary system and the foreign exchange markets in "West" Germany and other countries within Europe closed for two weeks (during February and, or, March 1973. Giersch, Paqué, & Schmieding state closed after purchase of "7.5 million Dmarks" Brawley states "... Exchange markets had to be closed. When they re-opened ... March 1 " that is a large purchase occurred after the close)

March 09, 2016, 10:43:53 AM
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EvilSpiriT

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Re: Forex Trading
« Reply #7 on: March 09, 2016, 10:43:53 AM »
After 1973

The year 1973 marks the point to which nation-state, banking trade and controlled foreign exchange ended and complete floating, relatively free conditions of a market characteristic of the situation in contemporary times began (according to one source),[51] although another states the first time a currency pair were given as an option for U.S.A. traders to purchase was during 1982, with additional currencies available by the next year.[52][53]

On 1 January 1981, as part of changes beginning during 1978, the People's Bank of China allowed certain domestic "enterprises" to participate in foreign exchange trading.[54][55] Sometime during 1981, the South Korean government ended forex controls and allowed free trade to occur for the first time. During 1988 the countries government accepted the IMF quota for international trade.[56]

Intervention by European banks especially the Bundesbank influenced the forex market, on 27 February 1985 particularly.[57] The greatest proportion of all trades world-wide during 1987 were within the United Kingdom, slightly over one quarter, with the United States being the nation with the second most places involved in trading.[58]

During 1991, Iran changed international agreements with some countries from oil-barter to foreign exchange.

March 09, 2016, 10:44:12 AM
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EvilSpiriT

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Re: Forex Trading
« Reply #8 on: March 09, 2016, 10:44:12 AM »
Market size and liquidity
Main foreign exchange market turnover, 1988–2007, measured in billions of USD.

The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998).[4] Of this $3.98 trillion, $1.5 trillion was spot transactions and $2.5 trillion was traded in outright forwards, swaps and other derivatives.

In April 2010, trading in the United Kingdom accounted for 36.7% of the total, making it by far the most important centre for foreign exchange trading. Trading in the United States accounted for 17.9% and Japan accounted for 6.2%.[60]

In April 2013, for the first time, Singapore surpassed Japan in average daily foreign-exchange trading volume with $383 billion per day. So the rank became: the United Kingdom (41%), the United States (19%), Singapore (5.7)%, Japan (5.6%) and Hong Kong (4.1%).[61]

Turnover of exchange-traded foreign exchange futures and options have grown rapidly in recent years, reaching $166 billion in April 2010 (double the turnover recorded in April 2007). Exchange-traded currency derivatives represent 4% of OTC foreign exchange turnover. Foreign exchange futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.

Most developed countries permit the trading of derivative products (like futures and options on futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Some governments of emerging markets do not allow foreign exchange derivative products on their exchanges because they have capital controls. The use of derivatives is growing in many emerging economies.[62] Countries such as South Korea, South Africa, and India have established currency futures exchanges, despite having some capital controls.

Foreign exchange trading increased by 20% between April 2007 and April 2010 and has more than doubled since 2004.[63] The increase in turnover is due to a number of factors: the growing importance of foreign exchange as an asset class, the increased trading activity of high-frequency traders, and the emergence of retail investors as an important market segment. The growth of electronic execution and the diverse selection of execution venues has lowered transaction costs, increased market liquidity, and attracted greater participation from many customer types. In particular, electronic trading via online portals has made it easier for retail traders to trade in the foreign exchange market. By 2010, retail trading is estimated to account for up to 10% of spot turnover, or $150 billion per day (see below: Retail foreign exchange traders).

Foreign exchange is an over-the-counter market where brokers/dealers negotiate directly with one another, so there is no central exchange or clearing house. The biggest geographic trading center is the United Kingdom, primarily London, which according to TheCityUK estimates has increased its share of global turnover in traditional transactions from 34.6% in April 2007 to 36.7% in April 2010. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. For instance, when the International Monetary Fund calculates the value of its special drawing rights every day, they use the London market prices at noon that day.

March 09, 2016, 10:44:30 AM
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EvilSpiriT

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Re: Forex Trading
« Reply #9 on: March 09, 2016, 10:44:30 AM »
Market participants
See also: Forex scandal
Top 10 currency traders [64]
% of overall volume, May 2015 Rank    Name    Market share
1    United States Citi    16.11%
2    Germany Deutsche Bank    14.54%
3    United Kingdom Barclays Investment Bank    8.11%
4    United States JPMorgan    7.65%
5    Switzerland UBS AG    7.30%
6    United States Bank of America Merrill Lynch    6.22%
7    United Kingdom HSBC    5.40%
8    France BNP Paribas    3.65%
9    United States Goldman Sachs    3.40%
10    United Kingdom Royal Bank of Scotland    3.38%

Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is the interbank market, which is made up of the largest commercial banks and securities dealers. Within the interbank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0 to 1 pip to 1–2 pips for currencies such as the EUR) as you go down the levels of access. 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 foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier interbank market accounts for 39% of all transactions.[60] From there, smaller 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 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”.[65] Central banks also participate in the foreign exchange market to align currencies to their economic needs.

March 09, 2016, 10:44:45 AM
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EvilSpiriT

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Re: Forex Trading
« Reply #10 on: March 09, 2016, 10:44:45 AM »
Commercial companies

An important part of the foreign exchange 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 corporations (MNCs) can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

March 09, 2016, 10:45:01 AM
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EvilSpiriT

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Re: Forex Trading
« Reply #11 on: March 09, 2016, 10:45:01 AM »
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. 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.

March 09, 2016, 10:45:15 AM
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EvilSpiriT

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Re: Forex Trading
« Reply #12 on: March 09, 2016, 10:45:15 AM »
Foreign exchange fixing

Foreign exchange fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the market. Banks, dealers and traders use fixing rates as a market trend indicator.

The mere expectation or rumor of a central bank foreign exchange 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. The combined resources of the market can easily overwhelm any central bank.[66] Several scenarios of this nature were seen in the 1992–93 European Exchange Rate Mechanism collapse, and in more recent times in Asia.

March 09, 2016, 10:45:28 AM
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EvilSpiriT

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Re: Forex Trading
« Reply #13 on: March 09, 2016, 10:45:28 AM »
Hedge funds as speculators

About 70% to 90%[citation needed] of the foreign exchange transactions conducted are speculative. This means the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Since 1996, hedge funds have gained a reputation for aggressive currency speculation. 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.

March 09, 2016, 10:45:44 AM
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Re: Forex Trading
« Reply #14 on: March 09, 2016, 10:45:44 AM »
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 bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.

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. While the number of this type of specialist firms is quite small, many have a large value of assets under management and, hence, can generate large trades.

 

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