Forex Newbies Rejoice!
We've put together a collection of free information, tools, and resources to help new traders get a head start on trading one of the most exciting, fast-paced markets in the world.
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Secrets of MetaTrader 4
These videos teach you how to perform various tricks and techniques in the fantastic MetaTrader 4 trading platform.
Assistant Secretary, U.S. Treasury, Harry Dexter White (left) and John Maynard Keynes, honorary advisor to the U.K. Treasury at the inaugural meeting of the International Monetary Fund's Board of Governors in Savannah, Georgia, U.S., March 8, 1946.
The Bretton Woods Agreement was initiated in 1944 in an effort to keep cash from draining out of war-ravaged Europe. Currency values were pegged to the U.S. Dollar, which was then pegged to the price of gold.
The modern era of foreign exchange first emerged in 1971 with the collapse of the Bretton Woods Agreement. The U.S. Dollar was no longer convertible into gold, signaling an increase in currency market volatility and trading opportunities.
The collapse in 1973 of the subsequent Smithsonian and European Joint Float agreements signaled the true beginning of the free-floating currency exchange system that drives the markets today. Starting in the 1980's, computer technology extended the reach of the exchange marketplace.
Today, the values of the major world currencies are independent of each other, with intervention available to the states only through the central banking system.
Today forex is one of the most exciting, fast-paced markets around. Until recently, trading in the forex market had been the domain of large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. The emergence of the internet has changed all of this, and now it is possible for average investors to buy and sell currencies easily with the click of a mouse.
Daily currency fluctuations are usually very small. Most currency pairs move less than one cent per day, representing a less than 1% change in the value of the currency. This makes foreign exchange one of the least volatile financial markets around. Therefore, many speculators rely on the availability of enormous leverage to increase the value of potential movements.
In the forex market, leverage can be as much as 500:1. Higher leverage can be extremely risky, but because of round-the-clock trading and deep liquidity, foreign exchange brokers have been able to make high leverage an industry standard in order to make the movements meaningful for FX traders.
Extreme liquidity and the availability of high leverage have helped to spur the market's rapid growth and made it the ideal place for many traders. Positions can be opened and closed within minutes or can be held for months.
Currency prices are based on objective considerations of supply and demand and cannot be manipulated easily by individual retail traders. It is moved primarily by large banks, investment firms, and multinational companies who buy and sell currencies for the purpose of hedging their day to day business needs.
The forex market provides plenty of opportunity for investors. However, in order to be successful, a currency trader has to understand the basics behind currency movements.
Investment in various stock exchanges and the forex market has seen a dramatic increase in recent years. Let us look at some of the advantages of trading in forex instead of the the stock market.
- Bullish or Bearish? Doesn't matter for Forex Traders.
A forex trader can make a profit whether the market is bearish or bullish, unlike the capital market. Forex has no strict regulation in speculation, so a profit can be made through a long-term or short-term transaction. Because the forex market is a double-transaction market, forex traders can make profit in both upward and downward trends.
- Forex Traders control a larger leveraged position.
Forex traders can obtain a much larger transaction compared to the stock market, sometimes more than 100 times larger. According to the present US situation, a $1,000 investment in the stock market allows the investor to obtain $2,000 of stock domination property (a proportion of 2:1). It is not unusual for forex traders to execute transactions with a proportion of 100:1, 200:1, or even as high as 500:1.
- Forex Traders can take advantage of fundamentals.
Forex traders can profit from the ordinary news, such as changes in interest rates. The forex market is highly-sensitive to the political, financial and cultural developments of various countries, and this volatility creates numerous opportunities for investors.
- Forex is open 24 hours a day, Sunday to Friday.
The stock market can only be traded on during daytime at a specific time, generally from 9:30am to 4:00pm. With a full-time job, it becomes difficult to take advantage of numerous trading opportunities. The forex market can be traded on 24 hours a day for 5 days of the week, so forex traders are free to trade during their free time after working hours.
- Forex Traders enjoy greater liquidity.
Technical analysis plays a very important role in the forex market, due to the enormous daily trading volume (in excess of US$ 190 billion) - such a large market easily digests any forex trader's transaction cash. Under this situation, the accuracy of technical analysis is better than in any other financial market.
- Forex Traders work with just several instruments.
In the stock market, there are hundreds of different kinds of stocks, which makes choosing a stock itself a very difficult decision. The forex market has a limited number of currency combinations; this enables forex traders to better concentrate on their investment, and calculate the return on alternate invesments (other currency combinations).
- Accrual - The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals , over the period of each deal.
- Appreciation - A currency is said to 'appreciate' when it strengthens in price in response to market demand.
- Arbitrage - The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets.
- Ask (Offer) Price - The price at which the market is prepared to sell a specific Currency in a Foreign Exchange Contract or Cross Currency Contract. At this price, the trader can buy the base currency. In the quotation, it is shown on the right side of the quotation. For example, in the quote USD/CHF 1.4527/32, the ask price is 1.4532; meaning you can buy one US dollar for 1.4532 Swiss francs.
- Bear Market - Someone who believes the prices/market will decline.
- Bid - The price that a buyer is prepared to purchase at; the price offered for a currency.
- Bretton Woods Accord of 1944 - An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and set the price of gold at US $35 per ounce. The agreement lasted until 1971. See More on Bretton Woods.
- Bull Market - A market characterised by rising prices.
- Broker - An agent who handles investors' orders to buy and sell currency. For this service, a commission is charged which, depending upon the broker and the amount of the transaction, may or may not be negotiated.
- Cable - Dealers slang for the Sterling/US Dollar exchange rate.
- Call Rate - The overnight interbank interest rate.
- Cash Market - The market for the purchase and sale of physical currencies.
- Convertible Currency - Currency which can be freely exchanged for other currencies or gold without special authorisation from the appropriate central bank.
- Counter Party - The customer or bank with whom a foreign deal is made. The term is also used in interest and currency swaps markets to refer to a participant in a swap exchange.
- Cross Rate - An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, measured against the United States dollar.
- Currency Risk - The risk of incurring losses resulting from an adverse change in exchange rates.
- Currency Swap - Contract which commits two counter-parties to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity.
- Currency Option - Option contract which gives the right to buy or sell a currency with another currency at a specified exchange rate during a specified period.
- Currency Swaption - OTC Option to enter into a currency swap contract.
- Currency Warrant - OTC Option; long-dated (more than one year) currency option.
- Day Trading - Refers to opening and closing the same position or positions within one day's trading.
- Dollar Rate - When a variable amount of a foreign currency is quoted against one US Dollar, regardless of where the dealer is located or in what currency he is requesting a quote. The exception is the Sterling/US Dollar rate (cable) which is quoted as variable amount of US Dollars to one Sterling.
- EMS - Abbreviation for European Monetary System, an agreement between member nations of the European Union to maintain an alignment between the exchange rates of their respective currencies.
- European Monetary Unit - The principal goal of the EMU is to establish a single European currency called the Euro, which will officially replace the national currencies of the member EU countries in 2002. Currently, the Euro exists only as a banking currency and for paper financial transactions and foreign exchange. The current members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal.
- Federal Reserve (Fed) - The Central Bank of the United States.
- Fixed Exchange Rate - Official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower bands, leading to intervention.
- Flat / Square - To be neither long nor short is the same as to be flat or square. One would have a flat book if he has no positions or if all the positions cancel each other out.
- Floating Rate Interest - As opposed to a fixed rate, the interest rate on this type of deal will fluctuate with market rates or benchmark rates. One example of a floating rate interest is a standard mortgage.
- Foreign Exchange Swap - Transaction which involves the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract (short leg), at a date further in the future at a rate agreed at the time of the contract (the long leg).
- Forward - A deal that will commence at an agreed date in the future. Forward trades in FX are usually expressed as a margin above (premium) or below (discount) the spot rate. To obtain the actual forward FX price, one adds the margin to the spot rate. The rate will reflect what the FX rate has to be at the forward date so that if funds were re-exchanged at that rate there would be no profit or loss (i.e. a neutral trade). The rate is calculated from the relevant deposit rates in the 2 underlying currencies and the spot FX rate. Unlike in the futures market, forward trading can be customized according to the needs of the two parties and involves more flexibility. Also, there is no centralized exchange.
- Fundamental Analysis - Thorough analysis of economic and political data with the goal of determining future movements in a financial market.
- GTC - "Good Till Cancelled". An order left with a Dealer to buy or sell at a fixed price. The order remains in place until it is cancelled by the client.
- Hedging - The practice of undertaking one investment activity in order to protect against loss in another, e.g. selling short to nullify a previous purchase, or buying long to offset a previous short sale. While hedges reduce potential losses, they also tend to reduce potential profits.
- High/Low - Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.
- Initial Margin - The required initial deposit of collateral to enter into a position as a guarantee on future performance.
- Interbank Rates - The Foreign Exchange rates at which large international banks quote other large international banks.
- Limit Order - An order to buy at or below a specified price or to sell at or above a specified price.
- Long Position - A market position where the Client has bought a currency he previously did not hold own. Normally expressed in base currency terms.
- Margin - Customers must deposit funds as collateral to cover any potential losses from adverse movements in prices.
- Margin Call - A demand for additional funds. A requirement by a clearing house that a clearing member (or by a brokerage firm that a client) brings margin deposits up to a required minimu m level to cover an adverse movement in price in the market.
- Market Maker - A dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices. A market maker runs a trading book.
- Offer - The price, or rate, that a willing seller is prepared to sell at.
- One Cancels Other Order (O.C.O. Order) - A contingent order where the execution of one part of the order automatically cancels the other part.
- Open Position - Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date.
- Over The Counter (OTC) - Used to describe any transaction that is not conducted over an exchange.
- Overnight Trading - Refers to a purchase or sale between the hours of 9.00 pm and 8.00 am. on the following day.
- Pip (or Points) - The term used in currency market to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY).
- Political Risk - The uncertainty in return on an investment due to the possibility that a government might take actions which are detrimental to the investor's interests.
- Quote - An indicative market price, normally used for information purposes only.
- Resistance - A price level at which you would expect selling to take place.
- Risk Capital - The amount of money that an individual can afford to invest, which, if lost would not affect their lifestyle.
- Rollover - Where the settlement of a deal is rolled forward to another value date based on the interest rate differential of the two currencies.
- Settlement - Actual physical exchange of one currency for another.
- Short - To go 'short' is to have sold an instrument without actually owning it, and to hold a short position with expectations that the price will decline so it can be bought back in the future at a profit.
- Spot - A transaction that occurs immediately, but the funds will usually change hands within two days after deal is struck.
- Spread - The difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads usually signify high liquidity.
- Stop Loss Order - An order to buy or sell at the market when a particular price is reached, either above or below the price that prevailed when the order was given.
- Support Levels - A price level at which you would expect buying to take place.
- Technical Analysis - An effort to forecast future market activity by analyzing market data such as charts, price trends, and volume.
- Tomorrow to Next - Simultaneous buying and selling of a currency for delivery the following day and selling for the next day or vice versa.
- Two-Way Price - Rates for which both a bid and offer are quoted.
- US Prime Rate - The interest rate at which US banks will lend to their prime corporate customers.
- Value Date - Settlement date of a spot or forward deal.
- Variation Margin - An additional margin requirement that a broker will need from a client due to market fluctuation.
- Volatility - A statistical measure of a market or a security's price movements over time and is calculated by using standard deviation. Associated with high volatility is a high degree of risk.
- Whipsaw - slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.
- Yard - Slang for a billion.
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