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What Is Forex?

What Is Forex?

A New Era

Although it might seem easy to invest in Forex nowadays, by just logging into an account with a broker, deposit some money and start actively trading; it has not always been like this, as forex industry has rapidly changed in the past three decades.
Before technology and free-floating currencies took over the industry, world currency exchanges were operating under the Bretton Woods System of Money Management. This agreement established rules for commercial and financial relations among top economies, tying their currencies to gold. Hence, a currency note issued by any world government represented a real amount of gold held in a vault by that nation. When in July 1944 delegates from all over the world sign off the pact, the main goal was to reduce lack of cooperation between countries and therefore avoiding currency wars. This process of regulating the foreign exchange brought to the foundation of the international money fund (IMF) and the International Bank of Reconstruction and Development (IBRD), today part of World bank Group.
However, in the early 70s the real-world economics outpaced the system, dollar suffered from severe inflation cutting its value by half. At that time unemployment rate was 6.1% and inflation 5.84%. Finally, in August 1971, U.S. government led by Richard Nixon took away gold standard, creating the first fiat currency and replacing Bretton Woods System with De Facto. Together with this there were other important measures taken by the USA president to combat that high inflation regime:
  1. This decision was driven by many European nations asking to redeem their dollars for gold, till leaving Bretton Woods System. This had an enormous impact on USD which plunged against European currencies. Consequently, USA congress release a report suggesting USD devaluation to protect the currency from foreign gougers. However, dollar dropped again, and Treasury Secretary was directed to suspend the USD convertibility with gold; hence foreign governments could no longer exchange their USD with gold.
  2. The inflation level was skyrocketing and one more action taken by Nixon was to freeze all wages and prices for 90 days, this was the first time since WWII.
  3. Import surcharge of 10% was set up to safeguard American products ensuring no disadvantage in trades.
Today, USD dominates financial markets, accounting together with the EURO, for approximately 50% of all currency exchange transactions in the world.
1971 represents the beginning of a new forex trading era, bringing this market to be the largest and most liquid in the world, with an average of daily trading volume exceeding $5trn. All the world’s combined stock markets don t even come close to this, what does this mean to you?
In an environment which is controlled by free-floating currencies moving constantly, following principles of supply and demand, there are constant and exciting trading opportunities, unavailable when investing in different markets.
In this article are shared main features of what is forex trading today and how can be an incredible new source of income for everyone who is into financial markets.

What Is Forex?

Forex is the acronym for foreign exchange which intends to be a decentralized or over the counter (OTC) marketplace, where currencies from all over the world are traded 24 hours, five days a week. Main financial centres include New York, Chicago, London, Tokyo and Frankfurt for Eurozone. It is by far the largest market in the world in terms of volume, followed by the credit market. Being highly liquid is an important feature that allows traders to be able to enter and exit their positions very quickly. Nevertheless, while trading forex, an investor should be aware of several components:
Dynamicity – forex is an extremely fast environment, this means that currency rates can move very fast, influenced by price action signals and fundamental factors. Therefore, going into forex trading, one needs to be aware of adopting serious risk and money management strategies in order to be effective, limiting losses.
Zero Sum Game – trading forex is not like investing in the stock market but is known to be a zero-sum game. For example, going into the equity market buying some tech shares, they could both rise or decrease in value. In forex is different because currencies work in pairs; for instance, an investor decides Euro will go up he or she is doing it against another currency. Thus, in this specific marketplace one currency will rise while the other will fall, meaning an investor is buying the currency hoping it will appreciate to the other, or selling the one that will depreciate.
See image below:
Figure 1: Main traded currency pairs
https://preview.redd.it/vu77ziuoyle31.png?width=574&format=png&auto=webp&s=9b1693bf27508fcb142705c309de1fc5b3e8fa19
Currency pairs are composed by a base and a price currency. Main forex trading principle is how much price currency an investor can buy using 1 unit of the base, thus, the base currency, which is the first one in line within the quotation, is always equal to 1.
Because like every financial instrument currency pairs are driven by fundamentals of supply and demand, forex is intensively influenced by geopolitical and macroeconomic factors.
Capital Markets – these are the most visible indicators of a country economic health, where usually the healthier the economy the stronger the currency. For example, a rapid sell-off from a country will show that nation is not economically stable, subsequently investors will think negatively of it depreciating its currency.
Moreover, many countries are sector driven, this means that their currencies are strictly correlated with certain resources. For instance, Canada which is a commodity-based market, CAD is strictly linked to price of Brent and metals, a swing in those will affect the Canadian currency.
Finally, credit market is also connected to forex since also relies heavily on interest rate so, a change in bond yield will have major impact on currency prices. like increase in yield will favour bullish market for USD
International Trade – Trade levels serve as a proxy for relative demand of goods from a nation, a country which goods and services that are in high demand internationally, will experience an appreciation to its currency. This is an effect driven by all other countries converting their currencies into the one of that state to purchase its goods and services. Let’s say a product from USA is in high demand globally, all the other countries must sell their currencies to buy dollars to then see their goods shipped, thus USD will appreciate.
Trade surplus and deficit also indicate a nation competitive standing in international trade. Countries with a large trade deficit are usually importers resulting in more of their currencies being sold to buy goods worldwide, thus they will see their currencies devaluate.
Geopolitics – The political landscape of a nation places a major role in the economic outlook for that country and consequently, the perceived value of its own currency. Beside building up price action strategies, based purely on price levels, forex traders constantly look at economic calendars and news to gauge what could move currencies. A geopolitical event which is having a great impact on GBP, is the election of Boris Johnson as UK prime minister, driving the local currency to 2 years low, yesterday 29th of July 2019. Therefore, when investors observe instability from a nation political environment, there are high chances that the currency of that country will depreciate.

Why Trading Forex

Beside swapping from a gold standard to free-floating, which change the whole forex trading game, technology is another crucial factor that helped this financial sector to spread globally. With the introduction of internet in the 90s forex opened to retail investors giving access to various trading platforms. The introduction of online platforms and retail investments have increased forex market volume by 5%, up to $250bn of its daily turnover. Different traders may have different reasons for selecting forex, however, mostly is because this is a fertile market plenty of daily opportunities to gauge price action and profit from it.

Volatility

How traders profit from trading forex? Basics of trading are rather simple to understand. An investor buys an asset at a certain price hoping to get rid of it for a higher price. The more volatile is the market for that specific financial instrument, the more revenue is possible to make. Therefore, a trader is looking for long up and down moves rather than market fluctuating sideways.
Volatility is great in forex and a trader can expect to regularly see prices oscillating 50-100 pips on major currency pairs almost any day of the week. Yet again, due to this enormous constant fluctuation, potential losses or gains can be very high thus, rigours money management must be applied to avoid major damages and become a profitable trader. To conclude, volatility is the main characteristic investors are looking at and that is why it is one of the main feature traders can take advantage.
See image below:

Figure 2: FDAX Volatility, H4 (30th May 2019, 16:00, 30th July 2019, 16:00)

Accessibility & Technology

While volatility is the most important element out in the market that tell us why forex is the best market to trade, accessibility comes straight after. This market is more accessible than all the others, trading forex requires an online desk position and as little as $100 to start off an account.
In comparison with the other financial markets, forex requires a rather low trading capital. Moreover, trading forex can be easily accessible from your PC, tablet or mobile since most of retail broker firms operate online. Although, accessibility cannot tell the quality of the market by itself, it definitely shows a reason why many investors try their first trading experience on forex.
Also, the rapid introduction of technology since the 90s, made trading much easier. There are every year more advanced online platforms to trade on with many possible updates and that is why trading forex is edging for many global investors.

Forex Players

Before the introduction of free-floating currency and more importantly cutting hedge technology, forex was a market that could have been traded only by institutional investors. Nowadays however, even retail and individual investor can take advantage of the huge volume forex offers every day.
Banks
Interbank market is the major responsible for the high volume registered daily in forex. This is the place where banks exchange currency among each other, facilitating forex transactions for customers and speculate for their trading desks.
  • Clients transactions: in this case banks of all size act as dealer for clients, where the bid-ask spread represents the profit for the institutions.
  • Speculation: currencies are traded to profit from their price fluctuations as well as to increase diversification on their portfolio
Because banking institutions are the biggest players in foreign exchange market, they are able to push up and down the price of currencies giving an extreme advantage and higher volatility to individual traders who are trying to gauge price moves.
Central Banks
Central banks representing their nation’s government, are crucial in forex. They oversee monetary and fiscal policies having massive influence on currency rates. A central bank is responsible for fixing the price level of its native currency on the market, in other words they take care of the regime currencies will float in the open market.
  • Floating: these are the currencies which price floats on the open market based on principles of supply and demand relative to other currencies
  • Pegged (fixed exchange rate): opposite to floating currencies pegged ones are not free-floating in the open market however, their government rather tie them to the value of a stronger foreign currency. Pegged currencies are more seen in developing countries (CYN to USD).
Because central banks manage interest rates in order to increase the competitiveness of their native nation to another.
  • Dovish: these policies will be lowering down interest rates. A central bank which applies dovish conditions aims to give economic stimulus and guard against deflation. Usually a policy intended to give economy stimulus will weakening the currency value.
  • Hawkish: on the other hand, hawkish policies lead to an increase in interest rate. A central bank that uses hawkish measures aims to reduce inflation. Typically, this kind of policies will reinforce the country currency value.
Investment Managers & Hedge Funds
Portfolio managers and hedge funds are the second investors in forex after central and investment banks. They are hired by huge institutions such as pension to manage their assets. However while portfolio managers of pool funds will buy currency to speculate on foreign securities, hedge funds execute speculative trades as part of their strategies.
Corporations
Also international corporation play a big role in forex. Those firms operating globally, buying and selling goods and services are involved in forex transactions daily. Imagine an American company producing pipes that imports Japanese components and sell the finished product to China. After the sale is closed the CYN must be converted back to USD, while the American company must exchange USD into JPY to repay for the components supply.
Moreover, company involved in international trade have an interest in forex in order to hedge the risk associated with currencies fluctuations making several foreign exchange transactions. For instance, the same American company might buy JPY at spot rate, or enter a swap agreement to obtain JPY in advance, overtaking the risk of the Japanese currency to rise in the future. Therefore, forex become crucial to run companies with many subsidiaries and suppliers all over the word.
Individual & Retail Investors
Even though this investor cluster brings to forex a very limited volume compared to financial institutions and corporations, it is rapidly growing in numbers and popularity. These base their trades on a mixture of fundamentals and technical analysis.
Bottom line, main reason why forex is the most traded market in the world is because gives everyone, from top financial institutions to retail and individual trades, opportunities to make returns on capital invested from currencies price fluctuations related to global economy.
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Asian shares bounce after losses, dollar sags on weak U.S. CPI

Asian shares bounce after losses, dollar sags on weak U.S. CPI
Shinichi Saoshiro
5 Min Read
Men walk past an electronic board showing market indices outside a brokerage in Tokyo, Japan, March 2, 2016.Thomas Peter
TOKYO (Reuters) - Asian stocks bounced on Monday after three losing sessions, tracking a firmer Wall Street, while the dollar was weighed down by tensions on the Korean peninsula and weak U.S. inflation data which dampened prospects of another Federal Reserve interest rate hike later this year.
Overall reaction was subdued to Monday's Chinese data which were generally weaker than forecast, and reinforced views that the world's second-largest economy is starting to lose a bit of steam as lending costs rise and the property market cools.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.7 percent. The index had fallen for three straight days previously, losing a combined 3 percent, on escalating tensions between the United States and North Korea.
Australian stocks rose 0.5 percent and South Korea's KOSPI .KS11 climbed 0.4 percent.
Hong Kong's Hang Seng .HSI was up 0.8 percent and Shanghai .SSEC added 0.2 percent.
China's factory output in July grew 6.4 percent from a year earlier, short of the 7.2 percent forecast, while fixed-asset investment expanded 8.3 percent in the first seven months against expectations for growth of 8.6 percent.
Geopolitical risks were expected to remain a key theme for the global markets in the near term, as North Korea celebrates Liberation Day on Tuesday to mark the end of Japanese rule.
Investors also braced for tensions ahead of Aug. 21, when an annual joint U.S.-South Korean military exercise is due to begin.
"Due to caution towards a further escalation in tensions over North Korea, U.S. yields and equities are expected to decline and the yen is likely keep appreciating this week," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.
Japan's Nikkei .N225 bucked the trend and fell 1 percent as a stronger yen overshadowed much better-than-expected second quarter economic growth.
The three major U.S. stocks indexes snapped three days of losses and ended higher on Friday, as investors bet on slower U.S. rate hikes following weaker-than-expected consumer price data. But gains were muted by increasingly aggressive exchanges between Washington and Pyongyang. [.N]
U.S. Treasury yields, which already declined on the North Korean concerns, fell further on Friday on the soft U.S. consumer prices data. The benchmark 10-year Treasury yield US10YT=RR touched 2.182 percent on Friday, its lowest since late June, before pulling back a little to 2.204 percent on Monday.
Friday's data showed the U.S. consumer price index edged up just 0.1 percent last month after it was unchanged in June. Economists polled by Reuters had forecast the CPI rising 0.2 percent in July.
The dollar index against a basket of six major currencies was flat at 93.076 .DXY after it slipped about 0.4 percent on Friday.
The greenback traded slightly higher at 109.370 yen JPY= after slipping to 108.720 on Friday, its weakest since April 20.
The yen tends to gain in times of geopolitical tension on expectations that Japanese investors will repatriate assets.
It also showed little reaction to second-quarter gross domestic product data which revealed that the economy expanded for a sixth straight quarter led by private consumption and capital expenditure.
While growth was faster than expected, it is not expected to nudge the Bank of Japan into dismantling its massive stimulus program any time soon, as inflation remains stubbornly weak.
The euro was 0.1 percent higher at $1.1824 EUR=.
Crude oil prices edged down after rising slightly on Friday on lower U.S. crude stocks, instability in major producer Nigeria and strong global demand growth. [O/R]
U.S. crude CLc1 was down 2 cents at $48.80 a barrel and Brent LCOc1 was 7 cents lower at $52.03 a barrel.
Gold hovered near a two-month high, benefiting from the U.S.-North Korean tensions and Friday's weak U.S. inflation data. The dollar's recent weakness was also seen to be helping gold.
Spot gold XAU= was a shade lower at $1,287.51 an ounce after reaching $1,291.86 on Friday, its highest level since June 7.
Other precious metals such as silver XAG= and platinum XPT= were also buoyant.
Reporting by Shinichi Saoshiro; Editing by Lisa Twaronite and Kim Coghill
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Forex Trading Online

Basically, the Forex market is where banks, businesses, governments, investors and traders come to exchange and speculate on currencies. The Forex market is also referred to as the ‘Fx market’, ‘Currency market’, ‘Foreign exchange currency market’ or ‘Foreign currency market’, and it is the largest and most liquid market in the world with an average daily turnover of $3.98 trillion. The Fx market is open 24 hours a day, 5 days a week with the most important world trading centers being located in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney. It should be noted that there is no central marketplace for the Forex market; trading is instead said to be conducted ‘over the counter’; it’s not like stocks where there is a central marketplace with all orders processed like the NYSE. Forex is a product quoted by all the major banks, and not all banks will have the exact same price. Now, the broker platforms take all theses feeds from the different banks and the quotes we see from our broker are an approximate average of them. It’s the broker who is effectively transacting the trade and taking the other side of it…they ‘make the market’ for you. When you buy a currency pair…your broker is selling it to you, not ‘another trader’. • A brief history of the Forex market Ok, I admit, this part is going to be a little bit boring, but it’s important to have some basic background knowledge of the history of the Forex market so that you know a little bit about why it exists and how it got here. So here is the history of the Forex market in a nutshell: In 1876, something called the gold exchange standard was implemented. Basically it said that all paper currency had to be backed by solid gold; the idea here was to stabilize world currencies by pegging them to the price of gold. It was a good idea in theory, but in reality it created boom-bust patterns which ultimately led to the demise of the gold standard. The gold standard was dropped around the beginning of World War 2 as major European countries did not have enough gold to support all the currency they were printing to pay for large military projects. Although the gold standard was ultimately dropped, the precious metal never lost its spot as the ultimate form of monetary value. The world then decided to have fixed exchange rates that resulted in the U.S. dollar being the primary reserve currency and that it would be the only currency backed by gold, this is known as the ‘Bretton Woods System’ and it happened in 1944 (I know you super excited to know that). In 1971 the U.S. declared that it would no longer exchange gold for U.S. dollars that were held in foreign reserves, this marked the end of the Bretton Woods System. It was this break down of the Bretton Woods System that ultimately led to the mostly global acceptance of floating foreign exchange rates in 1976. This was effectively the “birth” of the current foreign currency exchange market, although it did not become widely electronically traded until about the mid 1990s. (OK! Now let’s move on to some more entertaining topics!)… What is Forex Trading? Forex trading as it relates to retail traders (like you and I) is the speculation on the price of one currency against another. For example, if you think the euro is going to rise against the U.S. dollar, you can buy the EURUSD currency pair low and then (hopefully) sell it at a higher price to make a profit. Of course, if you buy the euro against the dollar (EURUSD), and the U.S. dollar strengthens, you will then be in a losing position. So, it’s important to be aware of the risk involved in trading Forex, and not only the reward. • Why is the Forex market so popular? Being a Forex trader offers the most amazing potential lifestyle of any profession in the world. It’s not easy to get there, but if you are determined and disciplined, you can make it happen. Here’s a quick list of skills you will need to reach your goals in the Forex market: Ability – to take a loss without becoming emotional Confidence – to believe in yourself and your trading strategy, and to have no fear Dedication – to becoming the best Forex trader you can be Discipline – to remain calm and unemotional in a realm of constant temptation (the market) Flexibility – to trade changing market conditions successfully Focus – to stay concentrated on your trading plan and to not stray off course Logic – to look at the market from an objective and straight forward perspective Organization – to forge and reinforce positive trading habits Patience – to wait for only the highest-probability trading strategies according to your plan Realism – to not think you are going to get rich quick and understand the reality of the market and trading Savvy – to take advantage of your trading edge when it arises and be aware of what is happening in the market at all times Self-control – to not over-trade and over-leverage your trading account As traders, we can take advantage of the high leverage and volatility of the Forex market by learning and mastering and effective Forex trading strategy, building an effective trading plan around that strategy, and following it with ice-cold discipline. Money management is key here; leverage is a double-edged sword and can make you a lot of money fast or lose you a lot of money fast. The key to money management in Forex trading is to always know the exact dollar amount you have at risk before entering a trade and be TOTALLY OK with losing that amount of money, because any one trade could be a loser. More on money management later in the course.
http://tradingoutofthebox.com/
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