Archives for October 2007

?Defining Exotic Currencies and Their Impact on Forex Markets

The exotic currency is defines as a currency with little liquidity and limited dealing. The exotic currency is neither a minor nor a major currency. Some of the currencies that are considered minor are the Australian dollar, the Canadian dollar and the New Zealand dollar. Some of the currencies that are considered major are the Japanese yen, the Euro, the British pound, the Swiss francs and the German mark. All exotic currencies play a very important role in the forex market and are just as important as all the major currencies.

The foreign exchange market has played a very important role as the sole domain for financial institutions, most major banks and for the central banks like the United States Federal Reserve. The foreign exchange market has made some substantial profits that are made annually by these banks and financial institutions and these are now offered to you.

All countries are now becoming more dependent on one another due to the increase in worldwide trade and foreign investments. The state of a country’s economic activity can cause the country’s currency to fluctuate, considering how the economic factors can alter the structure of a currency’s interest rate. The monetary health of a particular country depends on whether the currency either appreciates or devalues.

Some banks make between 40-60% of their profits from trading currencies when they allocate around 20-30% of their funds into the foreign exchange market. Until recently, the American public has been unaware of the forex market because the foreign currency market had not been financially accessible to the general population of traders and investors; also, because of the minimum account requirement, which was beyond the means of the average trader or investor. Now that the situation has changed, instead of needing a minimum of $200K to open an account, a mere $10K can be used to open an account.

The foreign exchange market is dominated by these five major currencies: the U.S. dollar (USD), the British pound (GBP), the Japanese yen (JPY), the European euro (EUR) and the Swiss franc (CHF). All five of these currencies rank highly in their activity and popularity thus accounting for more than 70% of trading in North America alone. Other currency’s that are traded, though not as easily, are the more exotic currencies including the New Zealand dollar (NZD), Australian dollar (AUD), Canadian dollar (CAD) and the French franc(XPF). The minor currencies, which can also be considered as exotic currencies, account for between 3-7% of the total market volume. Together, all the major and minor currencies represent all the hard currencies that are currently being traded in the forex market.

Top three most traded currency in the world:

The U.S. dollar Index is the currency that gives relative strength to the Dollar. The Index reflects the statistical weaknesses or strengths of the trend of the U.S. dollar (USD). If the index figure is fairly large, then the U.S. Dollar is stronger, likewise if the index figure is smaller, then the U.S. dollar has become weaker. The Dollar has become weaker over the past two decades, mostly because of the world’s low opinion of financial policies that result in prominent budget deficits.

The European euro and Europe has taken its first steps toward what many economists call “Euroland” with its single currency, the Euro. Europe’s eleven nations that use the euro are: France, Spain, Belgium, Italy, Portugal, Austria, Finland, Luxembourg, Ireland, the Netherlands and Germany. These eleven nations consist of about 300 million people and also account for almost 20% of the worldwide economy. The European Union in addition represents America’s largest foreign market, which is twice the size of Japan and Canada combined. Trade flows between Europe and the United States has been roughly in balance for over nearly a quarter of a century, whereas in Asia, the U.S. runs large trade deficits.

Japan, along with its Japanese yen, continues to be one of the most undisputed global economic powers of today’s market place. Since WWII, the Japanese government has been applying all of its energy and resources into developing its economy into one of the biggest economic powers in the world. The Japanese yen has become the third most traded currency in the world.

How to Get Started In FOREX Trading

You may have been hearing about the foreign exchange market (FOREX) and the investment advantages it offers. You would like to try it out, but don’t know where to start. This short guide will give you the basics in FOREX and tell you what you need to participate in this fast growing field.

Foreign exchange used to be limited to large players such as national banks and multi-national corporations. In the 1980’s the rules were revised to allow smaller investors to participate using margin accounts. Margin accounts are the reason why FOREX trading has become so popular. With a 100:1 margin account, you can control $100,000 with a $1,000 investment.

FOREX is not simple, however, and education is needed to make wise investment decisions. Although it is relatively easy to start trading on the FOREX, there are risks involved, so finding out as much as possible about the market is a good move for any beginner.

FOREX traders usually require a broker to handle transactions. Most brokers are reputable and are associated with large financial institutions such as banks. A reputable broker will be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) as protection against fraud and abusive trade practices.

Opening a FOREX account is as simple as filling out a form and providing the necessary ID. The form will include a margin agreement that states that the broker can interfere with any trade it deems to be too risky. This is to protect the interests of the broker – most trades, after all, are done using the broker’s money. Once your account has been established, you can fund it and begin trading.

Many brokers have different types of accounts to suit the needs of individual investors. Mini accounts allow you to get involved in FOREX trading for as little as $250, while standard accounts may have a minimum deposit of $1000 to $2500 depending on the broker. The amount of leverage – using borrowed money – varies with accounts. High leverage gives you more money to trade for a given investment.

HOWEVER – beginner traders are advised get accustomed to FOREX by doing paper trades for a period of time. Paper trades are practice transactions that don’t involve real capital. They allow you to see how the system works while learning how to use the various software tools that are at provided by most FOREX brokers.

Most online brokers have demo accounts that allow you to make free paper trades for up to 30 days. Every new FOREX investor is strongly advised to use these demo accounts at least until they are showing consistently steady profits.

Each broker has their own set of software tools to aid in making transactions, but there are a few tools that are common to all FOREX brokers. Real time quotes, news feeds, technical analyses and charts, and profit and loss analyses are some of the features you should expect to see on most online brokers’ web sites.

Almost every broker operates on the Internet. To access their online services you should have a reasonably modern computer, a fast Internet connection, and an up-to-date operating system such as Windows XP. Once your account is set up, you can access it from any computer – just enter your account name and password. If for some reason you are not able get access to a computer, most brokers will allow you to make trades over the phone.

Trades are commission free, meaning that you can make many trades in one day without worrying about incurring high brokerage fees. Brokers make their money on the ‘spread’ – the difference between bid and ask prices.

?Interpreting How Interest Rates Drive the Foreign Exchange Markets

The foreign exchange market, sometimes known as the Forex market, is one that is affected by several things. The market itself is becoming one of the most popular forms of trading today. It once was reserved for the richest of the rich, however today with lower minimums; this is a market that draws people from all financial levels. The attractive thing about this market is both its leverage and it liquidity. Many people with a grand background in the Forex system can take very little money and turn it into a lot using the foreign exchange market. However, when you have expertise in the foreign exchange market, you must also be aware of things that affect it. Being aware of these things is part of making logical and rational decisions of trading.

Interest rates are something that drives the foreign exchange market. While currency prices are what the market is all about, interest rates have a direct affect on those prices. Therefore, to be able to understand the current foreign exchange market, one must understand the current conditions of each individual interest rate. While economic and political conditions are also among the things that greatly affect the Forex, there is nothing that affects it more than interest rates. Something to remember is that money often follows interest rates. When the interest rates raise, investors will want to capitalize high returns and you will see money flowing into the country. When one country’s interest rates rise, their currency is seen as being stronger than other currencies. This happens because investors seek more of that currency to profit more. Otherwise, it is seen as a good thing when interest rates rise and a bad thing when they fall.

Government participation in the Forex is not an uncommon action. Sometimes governments will flood the foreign exchange market with their own domestic currency. This action may seem foolish to someone who knows nothing about the foreign exchange market, however to those who know it well, it makes perfect sense. When governments flood the Forex with their own domestic currency, they are attempting to lower the price. When they buy their own domestic currency, they are attempting to raise the price. One might know this strategy as Central Bank intervention. Governments do this to help their overall economy. This is a type of action that keeps the foreign exchange market strong and steady. When you have extremely large players making appearances to keep everything as fair as possible, you create an attractive market.

While interest rates can drive the market for a short time, the nature of the foreign exchange market makes it difficult for them to drive it for a long period of time. The design of the market, with it being large in size and volume, restricts interest rates from having complete control over the system. Many times however, experts try to figure out when interest rates will rise or fall. The most common thing they do in order to keep up with rates is to pay attention to economic inflation indicators. Sometimes investors and experts will also listen to speeches from politicians and other influential people. They can pick apart clues in order to make a guess before the announcements are made. Most of the time, there is a little advance notice before interest rates move.

As you can see, the influences of interest rates on the foreign exchange market are strong. They can help determine which countries’ currencies are the strongest. This of course is relative to all other currencies in the market at the time. When you think about the rise and fall of interest rates, you can remember that when interest rates fall, it is typically a good thing for investors and for domestic currency. When rates fall, it is not such a great thing. When rates stay low for an extended period of time, the market may seem a little dull, however the great thing about the foreign exchange market is that when government gets involved, which it usually does at these down times, there is hope for improvement. So, if you are beginning to learn about the foreign exchange market, don’t forget to pay attention to the rise and fall of interest rates around you in order to make the best investment decisions possible.

?The Ins and Outs of Trying Out a Forex Demo Account

Trying out a forex demo account is a method used by literally thousands of potential forex traders and investors to determine if forex trading is truly for them. With a demo account, an interested person can go online and see exactly how an account would work. They are able to do the forex equivalent of the war games generals play in the Pentagon. Without investing and risking any real money the investor can pretend to have money in an account and make buys and sells the same way it would be done in reality. The software used for these demo accounts is very realistic, and generally a person is able to see at the end of the day if they would have lost or gained money if the transactions had been real.

It would work very simply. Let’s say an investor pretends to have a margin account with ten thousand dollars in it. He looks closely at the currency markets and believes that the dollar will go up in value against the yen. The demo account allows him to buy at a ten to one margin, so he buys (in the program) one hundred thousand dollars of dollars and sells one hundred thousand dollars of yen. There will be a spread, or difference, which amounts to the pretend profit.

Why would a person want to use one of these pretend demo accounts? The reason is found to be because it is always much safer to learn how to do this sort of thing without having actual money at risk. The same principle applies when kids in driver’s education classes sit in demonstrator modules that resemble real autos. They are able to practice driving without taking risk. They maintain heir safety while they build their skills, knowledge and confidence. Pilots follow this idea also by using flight simulators. You would never think of flying an airplane unless sufficient time had been spent in a flight simulator first. The same holds true for forex trading. Spending time with a demo account allows the potential trader to gain skills and learn the ins and outs of the game and the market place. A person is then able to see if they truly have the instincts necessary for the market and have sufficient knowledge to “play with the big boys.”

Most brokerage companies involved in forex trading have such demo accounts available, sometimes free and sometimes for a small fee. Even if a fee is paid, it is usually worth it because a forex trader can parlay his skills and knowledge into vast profits after spending some time practicing with the forex demo account. Generally checking with a broker can get a demo account set up quickly. A trader with an interest in setting up a forex demo account can also go online and find a vast array of companies ready, willing and able to help the student trader set up an account and enhance skills. Learning what you are doing is always smart, no matter what game you are playing, and forex trading can certainly be seen as an advanced financial game.

John Jackson is an example of a person who benefited from a forex demo account. After months of study of the forex market, Jackson was convinced that he could make a go of it as a day trader in the forex market. His wife however wasn’t convinced and was a little less risk inclined. Jackson went to a brokerage company online that he felt good about and trusted. He set up a demo forex account and began to make trades as though he were using real money. After several days, on paper, Jackson had made a consistent profit. As he learned and as his confidence increased he became even more anxious to open a real forex account and invest his money. His wife also saw how on paper he had made a nice profit and relaxed, taking away her objections. Today Jackson and his family do very well financially through forex trading, and his wife is confident that he will continue to do so. By using a demo account he was able to learn enough to go foreword and open a true account and is an active trader today.