‘Foreign exchange,’ ‘Forex’ or ‘FX’
is the home of the inter-bank and wholesale market for exchanging one currency for another and thrives in what is an enormous sea of money. It trades across the globe in over 100 currency pairs in the largest of the world’s financial markets!

Institutional FX

Basically, Institutional Forex is the big end of town when it comes to foreign exchange. Here, we are talking about a market with daily transactions in excess of 3 trillion dollars. To be ‘big’ in this business is to talk about huge amounts of funds being traded in an instant. While it is standard to trade in 5 to10 million dollar parcels, quite often 100 to 500 million dollar parcels get quoted. But what is important (and comforting) to note, is that even financial institutions are vulnerable to market moves and they are also subject to market volatility. In a practical sense, what this means is that because the market is simply too big, no one player can hope to control this largest of the world’s financial markets.

No one is bigger than the market – not even the major global brand name banks can lay claim to being able to swing the markets. Thus, so-called ‘insider’ information is not only very hard to come by, it is quite doubtful that even if someone had it would it be anything but a ‘blip on the screen’ with minimal value.

The Participants

Banks

Whether big or small scale, banks participate in the currency markets from the point of view of managing their own foreign exchange risks and that of their clients. They also speculate in the currency markets should their dealer/traders have a particularly strong view of the market. What probably distinguishes them from the other players is their unique access to the buying and selling interests of their clients. This knowledge can provide them with insight to the likely buying and selling pressures on the exchange rates on a particular day or other small timeframe.

Deals are transacted by telephone with brokers (we will talk about these people later) or via an electronic dealing terminal connection to their counter party. The usual transaction time is somewhere be-tween 5 and 10 seconds. The skills of the foreign exchange dealer demands agility of reflexes and decisiveness, particularly when we are talking about transaction sizes of multi-million dollar amounts.

The ostensible role of the foreign ex-change dealing desk in a bank or other financial company is to make profits trading currency directly and in the managing of in-house and clients’ trading positions. However, their roles will also include periodic hedging or arbitrage opportunities.

(See the insert below)

Brokers

The foreign exchange broker acts as an agent in the same way that a stockbroker acts in the equities market. The slight difference being that they usually confine their activities to acting between inter-bank market participants and they do not accept orders from corporate clients.

Through their extensive and direct electronic contacts with the banks, brokers take and match currency buying and selling orders of their bank clients. Of course, this is done for a fee. The value to the banks using this service is that it is usually done quickly because orders can be placed and dealt in a matter of seconds, and it avoids the bank having to deal on a competitor’s price and pay the ‘spread’ on the transaction.

Many of these brokering functions have been significantly computerized, cutting out the need for human handling of the orders.

Central Banks

The majority of developed market economies have a central bank. The role of a central bank tends to be diverse and can differ from country to country. In Singapore for instance, it is the Monetary Policy of Singapore (or MAS for short) and is charged with the responsibility of maintaining an orderly market for the national currency, which is known as the Singapore dollar.

In a practical sense this involves monitoring and checking the prices dealt in the inter-bank market. Sometimes, they even ‘test’ market price by actually dealing to check the integrity of the quoted prices. In extreme circumstances where the central bank feels prices are out of alignment with broad fundamental economic values, the central bank may ‘intervene’ in the market to influence its level directly. The intervention can take the form of direct buying to push prices higher or selling to push prices down. Another tactic that is adopted is stepping into the market and ‘jawboning,’ or commenting in the media about its ‘preferred’ level for the currency.

Bankers, fund managers and companies all tend to respect the opinions of the central banks (if not always agreeing) as their sheer financial power to borrow or print money gives it a huge say in the value of a currency. The opinions and comments of a central bank should never be ignored and it is always good practice to follow their comments, whether it in the media or on their website.

Corporations

As the name implies, this represents com-panies and businesses of any size from a small importer/exporter to a multi-billion dollar cash flow enterprise that are com-pelled by the nature of their business to engage in commercial or capital transactions that require them to either purchase or sell foreign currency.

Fund Managers

These participants in the currency markets are basically international and domestic money managers. They tend to deal in the hundreds of millions, as their pools of investment funds tend to be very large. Because of their investment charters and obligations to their investors, they are constantly seeking the best investment opportunities for those funds.

In short, they invest money across a range of countries and class of investments on behalf of a range of clients including pension funds, individual investors, gov-ernments and even central banks. This segment of the foreign exchange market has come to exert a greater influence on currency trends and values as time moves forward.

Hedge Funds

This is a special class of fund manager and has come to be referred to by their more appropriate name of ‘absolute return funds.’ These high-end funds are general-ly more concerned with managing the to-tal risk of a pooled investment, than just relative performance, which preoccupies traditional fund managers. They tend to be more aggressive in their investment approaches, and will be found adopting investment strategies such as borrowing to realize leverage potential and will ex-ploit the use of derivatives. But they are relatively small (though high in profile) in comparison to traditional funds.

Major Dealing Centers

This list of participants does not necessarily reside in the one geographic center. Indeed, as the global Forex clientele is quite dispersed and, as a consequence, so is the market as a whole. When it comes to Forex it is simply not possible, as is the case for the equities markets, to be located on particular formal exchanges or national center points. In practice, the foreign exchange market is made up of a network of dealers and traders clustered in various hubs around the globe. They are linked via computer terminals, telex, telephone and even the Internet or Internet-based dealing platforms to form a diverse global market where prices and information are freely exchanged. Simply put, there is no single ‘center’ in this market.

Despite this, the foreign exchange market has prominent and major dealing centers located in London, New York and Tokyo. We generally call these the ‘major centers,’ not just because of the sheer size of the volumes and number market participants in their vicinity, but also because the hap-penings in these places tend to influence other dealing centers around the world.

These other smaller centers include such cities as Sydney, Singapore, Hong Kong, Switzerland and Frankfurt and they tend to take up the remaining balance of traded global currency flow. Thus, these three main and five minor trading centers are the major regions that set the pace of currency transaction across the globe.

Now, it is also worth mentioning that this list has practical implications for Forex dealing regardless of ones level of sophistication. It forces everyone, including the small retail trader to be aware of the most recent leading center’s trading activity. In the case of a Forex trader in Asia, it means at the start of the trading day, looking to the U.S. market action will give some clue as to the likely direction of the local morning session. A few hours into the
session, it is normal to keep an eye on the course of action emanating from the To-kyo market, which is to our north as it takes its part in influencing the course of Asian currency trading trends.

Do not forget, the above applies not just to market activity, but also inactivity. So if these centers are together or separately on holiday, do not be surprised when trading tends to go quiet. Holidays, like economic statistics have a bearing on the general flow or lack of business and price activity. Hence it is a good idea to keep a calendar of major international holidays near when doing your market research and within easy reach to help you recall them in planning particular trades.

The Inter-Bank World and Direct

Dealing

To be considered a foreign exchange market marker, a bank must be prepared to quote a two-way price (i.e. a bid and offer). Of course, the bid is the market makers ‘buying’ price and their offer price is their ‘selling’ prices to all enquiring market principals, whether or not they are themselves market makers in a particular currency. The price rates are quoted over the telephone, electronically via digital dealing platforms or, less frequently nowadays, by telex to dealers in other countries.

Market markers ‘earn’ their money by the difference between their buying price and their selling price, which is called their ‘spread’ and these spreads are extremely fine for large inter-bank parcels. For instance, in the $Australian dollar on a parcel of say 10 million $US dollars, the spread is only ‘5’ in the fourth decimal place. In such a case, it is quoted as 0.8005 / 10, the difference between the two prices adds up to $5,000 (US) dollars profit to the market maker.

clipped the conversations sometimes are between inter-bank dealers. It may also look a little like jargon. However it not really that hard to follow once you under-stand the basic intention of either side.

Briefly, Bank A in this conversation is the price taker, that is, he/she is asking for Bank B’s price in the Australian dollar versus the US dollar, simply by saying ‘oz.’ The amount that they wish to trans-act is 10 million Australian dollars as the base currency in the quote.

The answer that Bank B provides is simply the two-way price quote as the last two decimal places. In this case, it is ‘5 –10.’ However to avoid ambiguity, Bank A has requested confirmation of the big figure of the price. Bank B responds with 8005-10, which is the long form of the price.

At this point Bank A states what ‘side’ it would like to deal; ‘at 5’ meaning the bid side. Now, we know that Bank A wants to sell 10 million Australian dollars at 0.8005 US per Australian dollar. Bank B confirms the deal as ‘done’ and politely thanks him. Bank A simply replies with ‘bye bye for now’ short formed to ‘bibifn.’

The New Generation of FX Brokering and Trading

One of the great challenges to the institutional foreign exchange market ha s been the emergence of the Internet and Inter-net based trading platforms. Not just in terms of enabling access to Forex markets for the retail trader and investor, these changes have challenged the very domain of the institutional investor and how they handle their foreign exchange business.

On the electronic brokering side, systems like EBS, which is short for ‘electronic brokering system’ and price information vendors like Reuters are providing computer platforms where bank dealers and
traders can input their prices directly into the computer without the need for a human broker to take their prices down. This is the process of collecting prices from all contributing banks automatically. And because of the instantaneous method of these platforms, prices are not just indicative, but they are the actual dealing prices. This has, in turn, significantly increased the speed of the process of price discovery and also contributed to the market’s over-all transparency, while at the same time reducing the costs to participating banks.

Online Portals and the Rise of

Electronic Brokers

As if the changes in the Forex brokering industry were not enough, increasingly and with the unstoppable advances in technology, as evidenced by the emergence of electronic brokering platforms such as EBS and Reuter’s dealing systems, the task of customer/order matching is being systematized. This has led to the entire human element of the brokering process being virtually dispensed with altogether. This does not mean that humans do not decide to put on an order or take them off – that still stays – but the people involved between when an order is put to the trading system up until when it is dealt and matched by a counter party is being reduced by technology. This is called ‘straight through processing’ or, in other words, the automatic processing of an order as soon as it becomes ‘live.’

Forex Internet portals do this automated processing and, in doing so, they have made Forex trading available to a much wider audience of traders and not just bank traders either. Because of the competitive pressures of the market place, Forex participants of all types are being given a choice of available trading and processing systems for all scales of transactions. Some these new trading platforms include

FXall, FXconnect, Atriax, hotspotfx.com, and all of them are easily available on the web for your further research.

These portals provide a crucial step for the retail trader. They allow foreign exchange market participants (importantly the corporations and fund managers) to by-pass bank dealers in being able to access the market for foreign exchange directly. This cuts out the middleman and reduces costs substantially.

These platforms are undeniably in their market infancy and for this reason, they exhibit a large diversity of available structures. For example, a bank usually man-ages a bi-lateral Forex platform, but the prices that displayed are those of its customers. Conversely, a multi-lateral system has no managing bank or agent and is purely an unofficial foreign exchange trading system. Naturally, there are regulatory and privacy issues in dealing with these innovative platforms and their offerings, but certainly in the absence of a worldwide ban, they have emerged as a market fact of life that is probably here to stay. One thing is certain though; the marketplace for foreign exchange has changed allowing the retail Forex trader to participate and to actively trade Forex.

Conclusion

The global currency markets are inhabited, but not necessarily controlled by banks. Other players include brokers, corporations, fund managers, hedge funds and central banks as well as retail investors. Though their scale is huge compared to the average retail Forex trader, their concerns are not dissimilar to those of the retail speculators. Whether a price maker or price taker, both seek to make a profit out of being involved in the Forex market.

We saw how market makers in the financial markets are forced to provide competitive two-way prices to their clients and are not immune to the technological changes afoot in the industry. These changes pave the way for a lot of inter-bank dealing now being brokered electronically using various platforms. A phenomenon that merely mirrors what is already seen at the retail level of Forex trading as the benefits of the new technologies spread democratically.

Trader House Network

Summary

1. Introduction
2. Currency pairs and the rate of exchange
3. Buying equals selling
4. Practical spot trading
5. Worked examples
6. Controlling risk
7. Screen-based spot trading
8. Fundamental and technical analysis
9. Tips for aspiring spot traders

Appendix A

1. Introduction
The spot market accounts for nearly a third of global foreign exchange turnover. It can be broadly divided into two tiers:

* The interbank market where currency is bought and sold for delivery and settlement within two days, with the banks acting as “wholesalers” or “market makers”.
* The retail market made up of private traders, who deal over the telephone or the internet through intermediaries (brokers).

The forex market has no centralised exchanges. All trades are over-the-counter deals, agreed and settled by individual counterparties known to one another. The forex market is truly global and operates 24 hours a day, Monday to Friday. Daily trading commences in Wellington, New Zealand and follows the sun to (inter alia) Sydney, Tokyo, Hong Kong, Singapore, Bahrain, Frankfurt, Geneva, Zurich, Paris, London, New York, Chicago and Los Angeles before starting again.

2. Currency pairs and the rate of exchange
Every foreign exchange transaction is an exchange between a pair of currencies. Each currency is denoted by a unique three-character International Standardisation Organisation (ISO) code (e.g. GBP represents sterling and USD the US dollar). Currency pairings are expressed as two ISO codes separated by a division symbol (e.g. GBP/USD), the first representing the “base currency” and the other the “secondary currency”.

The rate of exchange is simply the price of one currency in terms of another. For example GBP/USD = 1.5545 denotes that one unit of sterling (the base currency) can be exchanged for 1.5545 US dollars (the secondary currency). The base currency is the one that you are buying or selling. This elementary point is often lost on beginners.

Exchange rates are usually written to four decimal places, with the exception of Japanese yen which is written to two decimal places. The rate to two (out of four) decimal places is known as the “big figure” while the third and fourth decimal places together measure the “points” or “pips”. For instance, in GBP/USD = 1.5545 the “big figure” is 1.55 while the 45 (i.e. the third and fourth decimal places) represents the points.

2.1. Bid offer spread
As with other financial commodities, there is a buying price (“offer” or “ask” price) and a selling price (“bid” price). The difference is known as the “bid-offer spread” or “the spread”.

The spread is written in a particular format, best demonstrated by way of an example. GBP/USD = 1.5545/50 means that the bid price of GBP is 1.5545 USD and the offer price is 1.5550 USD. The spread in this case is 5 points.

2.2. The major pairings
All pairings with the US dollar are known as the “majors”. The “big four” majors are: -

EUR/USD denoting euro/US dollar
GBP/USD denoting sterling/US dollar (known as “cable”)
USD/JPY denoting US dollar /Japanese yen
USD/CHF denoting US dollar/Swiss franc

2.3. Cross rates
Pairings of non-US dollar currencies are known as “crosses”. We can derive cross exchange rates for GPB, EUR, JPY and CHF from the aforementioned major pairs. Exchange rates must be consistent across all currencies, or else it will be possible to “round trip” and make riskless profits.

The following “major” exchange rates (red) imply the “cross rates” (blue). An illustration of how cross rates are computed is given in Appendix A.

3. Buying equals selling
Every purchase of the base currency implies a reciprocal sale of the secondary currency. Likewise, sale of the base currency implies the simultaneous purchase of the secondary currency.

For example, when I sell 1 GBP, I am simultaneously buying 1.5545 USD. Likewise, when I buy 1 GBP, I am simultaneously selling 1.5550 USD.

We can express this equivalence by inverting the GBP/USD exchange rate and rotating the bid and offer reciprocals, to derive the USD/GBP rate i.e.

USD/GBP = (1/1.5550) bid; (1/1.5545) offer = 0.6431/33

This means that the bid price of one USD is 0.6431 GBP (or 64.31p) and the offer price of one USD is 0.6433 GBP (or 64.33p). Note that USD has now become the base currency and that the spread is 2 points.

4. Practical spot trading
4.1 Units of trading – lots
As we have already seen, every forex transaction is an exchange of one currency for another. The basic unit of trading for private investors is known as a “lot” which consists of 100,000 units of the base currency (although some brokers may arrange trading in mini-lots).

* Using the data in Table A, the purchase of a single lot of GBP/USD will involve the purchase of 100,000 GBP at a price of 1.5852 USD = 158,520 USD.
* Similarly, the sale of a single lot of GBP/USD entails the sale of 100,000 GBP at 1.5847 USD = 158,470 USD.

4.2 Margin
A private investor who purchases a GBP/USD lot does not have to put down the full value of the trade (158,520 USD). Instead, the buyer is required to put down a deposit known as “margin” which enables the investor to gear up the trade size to institutional level.

Since the sale of one currency involves the simultaneous purchase of another, the seller of a GBP/USD lot will have bought a volume of USD, and will also have to put down margin for the value of the deal (158,470 USD).

The normal margin requirement is between 1% and 5% of the underlying value of the trade. The currency denomination depends on the brokerage through which you execute your trade. If you are dealing through an American broker (say online), then it is likely that you will have to deposit margin in USD even if you are resident in the UK.

With 5,000 USD in your margin account and with margin requirement of 2.5%, you can open positions worth 200,000 USD. Your positions will be valued continuously. If the funds in your margin account drop below the minimum required to support your open positions, then you may be asked to provide additional funds. This is known as a “margin call”.

If your trade is denominated in a currency other than that accepted by the broker, you will have to convert your gains and losses back into an acceptable currency. For example, if you trade a USD/JPY pair, then your gains and losses will be denominated in JPY. If your broker’s home currency is USD, then your profits and losses will be converted back to USD at the relevant USD/JPY offer rate.

4.3 Going short – going long
When you buy a currency, you are said to be “long” in that currency. Long positions are entered into at the offer price. Thus if you are buying one GBP/USD lot quoted at 1.5847/52, then you will buy 100,000 GBP at 1.5852 USD.

When you sell a currency, you are said to be “short” in that currency. Short positions are entered into at the bid price, which is 1.5847 USD in our example.

Because of the symmetry of currency transactions, you are always simultaneously long in one currency and short in another. For example if you exchange 100,000 GBP for USD you are short in sterling and long in US dollars.

4.4 Closing out
An open position is one that is live and ongoing. As long as the position is open, its value will fluctuate in accordance with the exchange rate in the market. Any profits and losses will exist on paper only and will be reflected in your margin account.

To close out your position, you conduct an equal and opposite trade in the same currency pair. For example, if you have gone long in one lot of GBP/USD (at the prevailing offer price) you can close out that position by subsequently going short in one GBP/USD lot (at the prevailing bid price).

Your opening and closing trades must the conducted through the same intermediary. You cannot open a GBP/USD position with Broker A and close it out through Broker B.

5. Worked examples
5.1 Betting on a rise
Assume that you start with a clean slate and that the current GPB/USD rate is 1.5847/52.

• You expect the pound to appreciate against the US dollar, so you buy a single lot of 100,000 GBP at the offer price of 1.5852 USD.

• The value of the contract is 100,000 X $1.5852 = $158, 520. The broker wants margin of 2.5% in USD, so you must ensure that you deposit at least 2.5% of 158,520 USD = 3,963 USD in your margin account

• GBP/USD duly appreciates to 1.6000/05 and you decide to close out your position by selling your sterling for US dollars at the bid rate. Your gain is:

100,000 X (1.6000 – 1.5852) USD = 1,480 USD, the equivalent of 10 USD per point

• Your rate of return is 1,480/3,963 = 37.35%, on an exchange rate movement of less than 1%. This illustrates the positive effect of buying on margin.

• Had GBP/USD fallen to 1.5700/75, your loss would have been:

100,000 X (1.5852 – 1.5700) USD = 1,520 USD, a return of –38.35%

The lesson is that margin trading magnifies your rate of profit or loss.

5.2 Betting on a fall
You expect sterling to fall from GBP/USD = 1.5847/52 so you decide to sell 1 lot of GBP/USD.

• The value of the contract is 100,000 X 1.5847 USD = 158,470 USD. You have effectively sold 100,000 GBP and bought 158,470 USD.

• Your broker requires 2.5% of 158,470 USD as margin in US dollars, namely 3,961.75 USD in cash

• GBP/USD falls to 1.5555/60 and you are sitting on a paper gain of:

100,000 X (1.5847 – 1.5560 USD) = 2,870 USD

• Your 2,870 USD paper gain is credited to your margin account where you now have 6,831.75 USD. This enables you to maintain open positions worth 273,270 USD

• However, GBP/USD starts to rise. When it reaches 1.6000/05, you are sitting on a paper loss of:

100,000 X (1.6005 – 1.5847) USD = 1,580 USD.

• Your margin account is debited by 1,580 USD, taking it down to 2,381.75 USD which is sufficient to support 2.381.75 USD/0.025 = 95,270 USD worth of open positions. Your current exposure, however, is:-

100,000 X 1.6005 USD = 160,050 USD

Your “shortage in equity” is therefore 160,050 USD – 95,270 USD= 64,780. USD

The broker makes a margin call for 2.5% of 64,780 USD = 1,619.50 USD. If you do not come up with the money tout de suite, the broker will liquidate your position.

• You eventually close out your position at GBP/USD = 1.5720/25. Your gain is:

100,000 X (1.5847 – 1.5725) USD = 1,220 USD.

Now that you have no more open positions, you can withdraw the full 5,181.75 USD from your trading account in cash. Alternatively you have enough margin to support 207,270 USD worth of positions.

6. Controlling risk
Trading currencies entails risk and, as we have seen, margin trading can greatly magnify both positive and negative returns. Forex trading demands constant vigilance and does not fit in easily with the human condition that requires time out for food, rest, “comfort breaks” and leisure.

Orders that are executed immediately at current rates are known as Market Orders. However, there are a number of automated orders that can be triggered at pre-set price levels and that can be deployed to control the downside and consolidate the upside:

Stop loss:
An order to close out a position automatically when the bid or offer price touches a given level.

If you have a long position, you may issue a stop loss order below the current exchange rate. If the market price falls through the stop loss trigger price, then the order will be activated and your long position will be closed out automatically.

If you have a short position, then you would set your stop loss above the current price to be activated when the offer price touches the trigger level.

A “trailing stop loss” is one that is adjusted behind a position as it moves into profit. This is a good strategy for locking in gains. By raising the stop loss trigger price as the position becomes increasingly profitable, the trader can ensure that most of the paper gain is realised if the market turns downwards.

The problem with stop orders is that exchange rates may move through the stop loss trigger prices in volatile markets, making stops impossible to execute at the precise limits.

Take profits order (TPO):
The opposite of a stop loss (i.e. a stop gain). The TPO order specifies that a position should be closed out when the current exchange rate crosses a given threshold.

For a short position, the TPO order will be set below the current exchange rate, and vice versa for a long position.

Limit order:
A buy or sell order that is activated when the current exchange rate passes beyond some pre-set threshold price.

A trader may set a “buy” limit order when the exchange rate falls below a pre-set threshold. Alternatively, a “sell” limit order may be given for an exchange rate above a given threshold

Limit orders can be good for a specified period (e.g. a day, a month) or “good till cancelled” (GTC). A good-for-the-day limit order is held open for the balance of the trading day unless it is filled before then. A GTC limit order is held open indefinitely (unless filled) and is only terminated on instructions by the account holder.

One cancels the other (OCO):
A combination of a stop loss and a limit order (or two limit orders) at opposite ends of the spread. When one is triggered, the other is terminated.

For a long position, the stop loss will be set below the market spread and the limit sell order above the market spread. If the base currency rate breaches the limit order threshold then the position will automatically be sold and there is no longer the need for the stop loss which will be cancelled. Alternatively, if the rate falls to the stop loss trigger price, then the position will be closed out and there will be no need for the limit order.

For a short position, the stop loss is set above the market spread and the limit order below. If the exchange rate rises to the stop loss trigger price then the position will be closed out and the limit order will be cancelled. If the exchange rate falls to the limit order trigger price, then the limit order will be activated, the position will be bought back and the stop loss will be cancelled.

7. Screen-based spot trading
The technology for trading forex has evolved from the telephone and telex (not forgetting voice dealing) through to the modern Electronic Broking System (EBS) that enables “straight through processing” (STP) with integrated quotation, transactional and administrative functionality.

EBS-type technology is now available to individual, private investors who can receive live, streaming data from and transact directly through their chosen brokers. The private dealer, however, does not deal on the highly competitive inter-bank market with its tight spreads. In practice, brokers add points to the price spread in lieu of dealing commission.

A private trader requires:

* A margin account broker with internet access and a fast connection
* A computer terminal capable of running several programmes simultaneously
* Proprietary software to open and manage positions and to display technical analysis tools.
* Sufficient monitors to handle market data, submit dealing instructions, display technical analysis; and for keeping tabs on open positions, managing orders (e.g. stop loss, TPO, limit etc.) and viewing the state of the margin account. For demonstrations of the kind of proprietary software available, visit Pronet Analytics (www.pronetanalytics.com) and Nostradamus (www.nostradamus.co.uk)

Pronet Analytics provides the only chart-based software package approved by Association of Cambistes Internationale, the governing body of professional forex trading.

From early 2003, a new spot trading software package from US provider Gain Capital will be available through the UK online margin broker Easy2Trade (www.easy2trade.com), better known for its futures online global trading platform. “We will build our required margin into the bid-offer spread,” says Easy2Trade chief executive David Wenman. “It will be free to use after that.”

Before you splash out on the full kit, why not do a test drive by renting a dealing desk at an organisation like TraderHouse (www.traderhouse.net).

7.1 The screens
The trading screen is where you monitor bid and offer prices in multiple currency pairs. A typical EBS-style screen format will highlight the “pips” (i.e. the second and third decimal places) where most of the movement takes place. All you have to do is pick your moment and click on the buy and sell key.

Forex traders rely heavily on technical analysis, which uses historical activity and price data to forecast future prices and trends. The serious trader needs a separate monitor (and possibly more than one) to display a range of analytical tools simultaneously.

We will return to the tools of technical analysis in the next section.

8. Fundamental and technical analysis
Without the apparatus for making sense of the currency market, any trade represents a pure gamble. There are two broad schools of analysis, which are not mutually exclusive.

8.1 Fundamental analysis
Fundamental analysis is the application of micro and macroeconomic theory to markets, with the aim of predicting future trends. So what fundamental forces drive currency markets?

The balance of trade:
Currencies that are associated with long term trade surpluses will tend to strengthen against those associated with persistent deficits – simply because there is net buying of surplus currencies corresponding to the excess of exports over imports.
Trends are important too. An improving balance of trade should cause the relevant currency to appreciate relative to those associated with a deteriorating or stable balance of trade.

Relative inflation rates:
If country A is suffering a higher rate of price inflation than country B, then A’s currency ought to weaken relative to B’s in order to restore “purchasing power parity”.

Interest rates:
International capital flows seek the highest inflation-adjusted returns, creating additional demand for high real interest-rate currencies and pushing up their rates of exchange.

Expectations and speculation:
Markets anticipate events. Speculation on, say, the future rate of inflation may be enough to move the exchange rate – long before the actual trend becomes apparent.

It should be understood that these economic forces act in concert. It is a supremely difficult task, however, to establish where the sum of interacting economic forces will take the market. The solution, some argue, lies in technical analysis.

8.2 Technical analysis
Technical analysis is concerned with predicting future price trends from historical price and volume data. The underlying axiom of technical analysis is that all fundamentals (including expectations) are factored into the market and are reflected in exchange rates.

The tools of technical analysis are now freely available to private investors in support of their trading decisions. It cannot be stressed too heavily, however, that such tools are only estimators and are not infallible.

The following is the briefest of introductions to the technical analytical tools used to identify trends and recurring patterns in a volatile marketplace. Aspiring forex dealers are advised to undergo proper training in technical analysis, although true proficiency comes with practice, endurance and experience.

8.2.1 Charts

Line Chart:
A graphical depiction of the exchange rate history of any currency pair over time. The line is constructed by connecting up daily closing prices.

Bar chart:
A depiction of the price performance of the currency pair, made up of vertical bars at set intra-day time intervals (e.g. every 30 minutes). Each bar has 4 “hooks”, representing the opening, closing, high and low (OCHL) exchange rates for that time interval.

Candlestick chart:
A variant of the bar chart except that it depicts OCHL prices as “candlesticks” with a wick at each end. Where the opening rate is higher than the closing rate the candlestick is “solid”. Where the closing rate exceeds the opening rate, the candlestick is “hollow”.

8.2.2 Support, resistance, channels and triangles
Support and resistance thresholds are common features of all tradeable financial commodities including currencies. Breaches of such thresholds are taken as evidence of a fundamental change in market sentiment towards a currency.

Support and resistance often form coherent patterns over time in the shape of channels.

8.2.2.1 Support
A support level is detected if you can connect up several under-points of the exchange rate cycle on a straight line. This is taken to indicate market reluctance to sell below certain rates of exchange. The more under-points that can be connected, the more evidence there is of a support level.

The support level may change with the passage of time. If the straight line inclines upwards then we speak of “upward support”. Where the line is horizontal we identify “sideways support”. Where the line slopes downwards we diagnose “downward support”.

8.2.2.2 Resistance
Resistance levels indicate a reluctance to buy a currency above given exchange rates. A resistance level is detected if it is possible to connect a succession of upper points in the exchange rate cycle with a single straight line.

As you would expect, one encounters upward, sideways and downward resistance.

8.2.2.3 Channels are identified by superimposing support and resistance levels on a single line chart. Channels can slope upward, sideways or downward.

8.2.2.3 Triangles
Where resistance and support lines converge towards to one another over time, “triangles” are formed which can be upward, sideways or downward sloping.

Triangles indicate declining profitability over time. Resistance and support levels superimposed on a chart will help predict the time of convergence. What we are seeking are “breakouts” that could go in either direction and which are likely to be “explosive”, presenting opportunities for profitable trading.

The slope of the triangle and the behaviour of the pricing cycle in the approach to the predicted intersection of resistance and support may indicate the likely direction of the breakout. For example, if the exchange rate cycle is in a clear upward phase, the breakout is likely to be upwards also. There are some real opportunities here, but also much risk.

8.2.3 Indicators

8.2.3.1 Moving averages
Moving averages smooth out the peaks and troughs of the exchange rate cycle over a rolling period and indicate the presence of a trend.

There are two main types of moving averages:

Simple:
Where past and present data are assumed to be of equal importance and are weighted equally.

Weighted:
Where current data is considered more important than past data and is weighted more heavily. The weighting factor takes the form of a “smoothing constant” that increases exponentially over time.

If prices lie below two or more moving averages, this is taken as a bearish signal, and vice versa.

8.2.3.2 Stochastic oscillators
Stochastic oscillators are momentum indicators that purport to tell you when to buy or sell. They are composed of two elements:

* A “%K” line that measures the difference between most recent closing price and the deepest low as a percentage of the difference between the highest peak and the deepest low, measured over a given period (e.g. 14 days)
* A “%D” line that tracks the 3-period (e.g. day) moving average of %K. A rise in %K rises over %D is interpreted as a buy signal, and vice versa.

When the oscillator touches 80, the currency is considered overbought. An oscillator below 20 is considered to indicate an oversold currency.

9. Tips for aspiring spot traders
Andy Shearman, a director of forex day-trading service Trader House Network (UK) has “Seven Pillars of Wisdom” for aspiring forex traders:

1. Don’t be under-capitalised or you will lose trading opportunities.
2. Don’t suspend your daily (successful) economic activity while you are learning to trade currencies.
3. Get an education. Make time to practise and to check markets every day.
4. Decide what your monetary goals are and devise a trading plan to realise them. Remember that you have overheads and that risk is involved. Your target remuneration must not only be realistic but must include a risk premium.
5. Choose a good broker – preferably one that feeds live, streaming prices to your screen.
6. Be decisive. Over-caution will cost you money. You can’t make any profits if you don’t trade. Don’t agonise too long over a deal and trust your instincts.
7. Watch your back. Never leave your trading screen even momentarily without putting stop losses in place. A pee is a long time in the forex market.

“Trading forex is a bit like life in a combat zone,” says Shearman. “There are bouts of frenetic, exhilarating and even panic-stricken activity interspersed with periods of uneventfulness. No one can physically trade 24 hours a day. You need your rest and recreation.”

Trader House has come up with a novel solution. It has set up a tutorial centre (with a night school for those with a day job) and a dealing room at the Cottesmore Country Club in West Sussex. You can play hard in the forex markets and chill out later in the bar, the gym, the pool or on the golf course – all for the rental of a dealing desk. Who needs the Lottery!

Appendix A
Computing cross rates – an example

Assume that the following major exchange rates are known:

EUR/USD = 1.0060/65
GBP/USD = 1.5847/52
USD/JPY = 120.25/30
USD/CHF = 1.4554/59

To calculate GPB/CHF

GBP/USD: Bid: 1.5847 Offer: 1.5852
USD/CHF: 1.4554 1.4559

GBP/USD X USD/CHF = 1.5847 X1.4554 1.5852 X 1.4559

GBP/CHF 2.3063 2.3079

Trading Educators Inc.

“Hey Joe! I need help finding a broker. I notice that discount commission rates are pretty much the same. So how do I choose?”

Commission is definitely not the most important factor in choosing a broker. Most important in choosing a brokerage firm is the per trade slippage, the difference between the stop order price and execution price.

Based o a study I saw some years back, ten orders were placed with five commission houses. All orders were priced in the same market at the same price, before the market opened. The difference in slippage from worst to best was over $800. Slippage one year for Rosenthal-Collins trading one and two contracts of the S&P, was over $20,000 per account. The floor broker for the majority of those trades was Mario De Bartolo. All the fills were supposedly legal. One order for 15 contracts was to sell at 45. The market took over two minutes to fall in one-tick increments to even money, at 00, before an up tick. All 15 contracts were unbelievably filled at 00. Slippage on the order was $3,375. A week later another order was slipped over $2,000, then all accounts were closed. Coffee once had the daily high and low in the opening range. I was filled on my buy stop and sell stop at the high and low of the day, 360 points times three. Legalized theft. The broker could have taken both sides of the orders. New York markets are notorious for their slippage, as is the Chicago pork belly market.

Any broker who allows this kind of slippage to occur on his customer’s orders is not worth having as a broker. There are brokerage firms that carefully monitor the kinds of fills their customers are getting from the floor. If the fills are bad, they will dump the bad floor broker and use another. Bad floor brokers can be penalized that way. They lose the business. A good broker will do battle for his/her customers. That’s why we use the broker we are currently using. If you want a referral, let me know. I’ll be happy to give it.

Forex: Benefits of Trading the Forex Market

Trading the Forex market has become very popular in the last years. Why is it that traders around the world see the Forex market as an investment opportunity? We will try to answer this question in this article. Also we will discuss some differences between the Forex market, the stocks market and the futures market.

Some of the benefits of trading the Forex market are:

Superior liquidity.

Liquidity is what really makes the Forex market different from other markets. The Forex market is by far the most liquid financial market in the world with nearly 2 trillion dollars traded everyday. This ensures price stability and better trade execution. Allowing traders to open and close transactions with ease. Also such a tremendous volume makes it hard to manipulate the market in an extended manner.

24hr Market.

This one is also one of the greatest advantages of trading Forex. It is an around the click market, the market opens on Sunday at 3:00 pm EST when New Zealand begins operations, and closes on Friday at 5:00 pm EST when San Francisco terminates operations. There are transactions in practically every time zone, allowing active traders to choose at what time to trade.

Leverage trading.

Trading the Forex Market offers a greater buying power than many other markets. Some Forex brokers offer leverage up to 400:1, allowing traders to have only 0.25% in margin of the total investment. For instance, a trader using 100:1 means that to have a US$100,000 position, only US$1,000 are needed on margin to be able to open that position.

Low Transaction costs.

Almost all brokers offer commission free trading. The only cost traders incur in any transaction is the spread (difference between the buy and sell price of each currency pair). This spread could be as low as 1 pip (the minimum increment in any currency pair) in some pairs.

Low minimum investment.

The Forex market requires less capital to start trading than any other markets. The initial investment could go as low as $300 USD, depending on leverage offered by the broker. This is a great advantage since Forex traders are able to keep their risk investment to the lowest level.

Specialized trading.

The liquidity of the market allows us to focus on just a few instruments (or currency pairs) as our main investments (85% of all trading transactions are made on the seven major currencies). Allowing us to monitor, and at the end get to know each instrument better.

Trading from anywhere.

If you do a lot of traveling, you can trade from anywhere in the world just having an internet connection.

Some of the most important differences between the Forex market and other markets are explained below.
Forex market vs. Equity markets Liquidity
FX market: Near two trillion dollars of daily volume.
Equity market: Around 200 billion on a daily basis.

Trading hours

FX market: 24hr market, 5.5 days a week.
Equity market: Monday through Friday from 8:30 EST to 5:00 EST.

Profit potential

FX market: In both, rising and falling markets.
Equity market: Most traders/investor profit only from rising markets.

Transaction costs

FX market: Commission free and tight spreads.
Equity market: High Commissions and transaction fees.

Buying power

FX market: Leverage up to 400:1.
Equity market: Leverage from 2:1 to 4:1.

Specialization

FX market: most volume (85%) is made on major currencies (USD, EUR, JPY, GBP, CHF, CAD and AUD.)
Equity market: More than 40,000 stocks to choose from

Forex market vs. Futures market Liquidity

FX Market: Near two trillion dollars of daily volume.
Futures market: Around 400 billion dollars on a daily basis.

Transaction costs

FX market: Commission free and tight spreads.
Futures market: High commissions fees.

Margin

FX market: Fixed rate of margin on every position.
Futures market: Different levels of margin on overnight positions than day time positions.

Trade execution

FX market: Instantaneous execution.
Futures market: Inconsistent execution.

All this makes the Forex market very attractive to investors and traders. But I need to make something clear, although the benefits of trading the Forex market are notorious; it is still difficult to make a successful career trading the Forex market. It requires a lot of education, discipline, commitment and patience, as any other market.

by Raul Lopez

Forex Trading Education: Things You Should Know About Forex Trading

How difficult is it to make money trading the Forex market? How much time does it take to actually be able to make a living trading the Forex market? These and other important aspects of trading are to be discussed in this article.

Trading the Forex market has many benefits over other financial markets, among the most important are: superior liquidity, 24hrs market, better execution, and others. Traders and investor see the Forex market as a new speculation or diversifying opportunity because of these benefits. Does this mean that it is easy to make money trading the Forex Market? Not at all.

Forex brokers agree that 90% of traders end up losing money, 5% of traders end up at break even and only 5% of them achieve consistent profitable results. With these statistics shown, I don’t consider trading to be an easy task. But, is it harder to master any other endeavor? I don’t think so, consider musicians, writers, or even other businesses, the success rates are about the same, there are a whole bunch of them who never got to the top.

Now that we know it is not easy to achieve consistent profitable results, a must question would be, Why is it that some traders succeed while others fail to trade successfully in the Forex market? There is no hard answer to this question, or a recipe to follow to achieve consistent profitable results. What we do know is that traders that reach the top think different. That’s right, they don’t follow the crowd, they are an independent part of the crowd.

A few things that separate the top traders from the rest are:

Education: They are very well educated in the matter; they have chosen to learn every single and important aspect of trading. The best traders know that every trade is a learning experience. They approach the Forex market with humility, otherwise the market will prove them wrong.

Forex trading system: Top traders have a Forex trading system. They have the discipline to follow it rigorously, because they know that only the trades that are signaled by their system have a greater rate of success.

Price behavior: They have incorporated price behavior into their trading systems. They know price action has the last word.

Money management: Avoiding the risk of ruin is a primary subject to the best traders. After all, you cannot succeed without funds in your trading account.

Trading psychology: They are aware of every psychological issue that affects the decisions made by traders. They have accepted the fact that every individual trade has two probable outcomes, not just the winning side.

These are, among others, the most important factors that influence the success rate of Forex traders.

We know now that it is not easy to make money trading the Forex market, but it is possible. We also discussed the most important factors that influence the rate of success of Forex traders. But, how much time does it take to have consistent profitable results? It is different from trader to trader. For some, it could take a life time, and still don’t get the desired results, for some others, a few years are enough to get consistent profitable results. The answer to this question may vary, but what I want to make clear here is that trading successfully is a process, it’s not something you can do in a short period of time.

Trading successfully is no easy task; it is a process and could take years to achieve the desired results. There are a few things though every trader should take in consideration that could accelerate the process: having a trading system, using money management, education, being aware of psychological issues, discipline to follow your trading system and your trading plan, and others.

by Raul Lopez

Currency Trading: Understanding the Basics of Currency Trading

Investors and traders around the world are looking to the Forex market as a new speculation opportunity. But, how are transactions conducted in the Forex market? Or, what are the basics of Forex Trading? Before adventuring in the Forex market we need to make sure we understand the basics, otherwise we will find ourselves lost where we less expected. This is what this article is aimed to, to understand the basics of currency trading.

What is traded in the Forex market?

The instrument traded by Forex traders and investors are currency pairs. A currency pair is the exchange rate of one currency over another. The most traded currency pairs are:

EUR/USD: Euro

GBP/USD: Pound

USD/CAD: Canadian dollar

USD/JPY: Yen

USD/CHF: Swiss franc

AUD/USD: Aussie

These currency pairs generate up to 85% of the overall volume generated in the Forex market.

So, for instance, if a trader goes long or buys the Euro, she or he is simultaneously buying the EUR and selling the USD. If the same trader goes short or sells the Aussie, she or he is simultaneously selling the AUD and buying the USD.

The first currency of each currency pair is referred as the base currency, while second currency is referred as the counter or quote currency.
Each currency pair is expressed in units of the counter currency needed to get one unit of the base currency.
If the price or quote of the EUR/USD is 1.2545, it means that 1.2545 US dollars are needed to get one EUR

Bid/Ask Spread

All currency pairs are commonly quoted with a bid and ask price. The bid (always lower than the ask) is the price your broker is willing to buy at, thus the trader should sell at this price. The ask is the price your broker is willing to sell at, thus the trader should buy at this price.

EUR/USD 1.2545/48 or 1.2545/8

The bid price is 1.2545

The ask price is 1.2548

A Pip

A pip is the minimum incremental move a currency pair can make. Pip stands for price interest point. A move in the EUR/USD from 1.2545 to 1.2560 equals 15 pips. And a move in the USD/JPY from 112.05 to 113.10 equals 105 pips.

Margin Trading (leverage)

In contrast with other financial markets where you require the full deposit of the amount traded, in the Forex market you require only a margin deposit. The rest will be granted by your broker.

The leverage provided by some brokers goes up to 400:1. This means that you require only 1/400 or .25% in balance to open a position (plus the floating gains/losses.) Most brokers offer 100:1, where every trader requires 1% in balance to open a position.

The standard lot size in the Forex market is $100,000 USD.

For instance, a trader wants to get long one lot in EUR/USD and he or she is using 100:1 leverage.

To open such position, he or she requires 1% in balance or $1,000 USD.

Of course it is not advisable to open a position with such limited funds in our trading balance. If the trade goes against our trader, the position is to be closed by the broker. This takes us to our next important term.

Margin Call

A margin call occurs when the balance of the trading account falls below the maintenance margin (capital required to open one position, 1% when the leverage used is 100:1, 2% when leverage used is 50:1, and so on.) At this moment, the broker sells off (or buys back in the case of short positions) all your trades, leaving the trader “theoretically” with the maintenance margin.

Most of the time margin calls occur when money management is not properly applied.

How are the mechanics of a Forex trade?

The trader, after an extensive analysis, decides there is a higher probability of the British pound to go up. He or she decides to go long risking 30 pips and having a target (reward) of 60 pips. If the market goes against our trader he/she will lose 30 pips, on the other hand, if the market goes in the intended way, he or she will gain 60 pips. The actual quote for the pound is 1.8524/27, 4 pips spread. Our trader gets long at 1.8530 (ask). By the time the market gets to either our target (called take profit order) or our risk point (called stop loss level) we will have to sell it at the bid price (the price our broker is willing to buy our position back.) In order to make 60 pips, our take profit level should be placed at 1.8590 (bid price.) If our target gets hit, the market ran 64 pips (60 pips plus the 4 pip spread.) If our stop loss level is hit, the market ran 26 (26 pips plus the 4 pip spread equals 30 pips) pips against us.

It’s very important to understand every aspect of trading. Start first from the very basic concepts, then move on to more complex issues such as Forex trading systems, trading psychology, trade and risk management, and so on. And make sure you master every single aspect before adventuring in a live trading account.

1-You should check that a broker is registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) as protection against fraud or abusive trade practices.

2-A FOREX broker also needs to be associated with a financial institution, such as a bank in order to provide funds for margin trading.

3-Picking the right FOREX broker for you will take some work on your part. There are brokers who charge a flat fee and some that charge commission. It may be a good idea to talk with friends and business associates about their brokers. You may get some good leads, and you’re certain to hear who to stay away from. There is nothing like word of mouth advertising.

4-If you are thinking of investing online, you could choose several online brokers and contact their help desks. Seeing how quickly they respond to your questions could be key in how they will respond to their customers needs. If you don’t get a speedy reply and a satisfactory answer to your question you certainly wouldn’t want to trust them with your business. Just be aware that as in other types of businesses, pre sales service might be better than after sales service.

5-Before you choose an online broker get a copy of their online demo account. What features are included? Is the software reliable? Does it offer automatic trading? Are there extra software features that cost more?

6- How quickly will these brokers execute your buy/sell orders? What is their policy on slippage? What are the transaction fees? What is the spread, fixed or variable? What are the margin requirements and how are they calculated? Does the margin change with currency traded? Is it the same for mini accounts and standard accounts?

Don’t forget to ask about minimum account balances and interest payments on account balances. Make sure that your funds will be insured.

Beware Of The Typical Forex Trading Scam

It’s very easy for new Forex trading investors to get taken in by some sort of Forex scam or another. This can include just about any idea under the sun that scammers can come up with. Usually the realm of Forex scams can include, software and e-books that ‘guarantee’ a profit in the Forex market, general false advertising, and even those with fake sites that just take your money and disappear.

The nature of the currency market tends to leave new investors vulnerable to such scams, simply because it fluctuates a lot and little is known about the market by the general population. It’s up to investors to educate themselves on Forex trading, just as they would before making any other investment if they expect to do well. This includes being aware of common scams. In 2001 the US Commodity Futures Trading Commission (CFTC) released nine tips investors in the Forex market should keep in mind when looking for a broker:

• Stay Away From Opportunities That are Too Good To Be True
• Avoid Any Company that Predicts or Guarantees Large Profits
• Stay Away From Companies That Promise Little or No Financial Risk
• Be Wary of Trading on Margin Unless You Know What That Means
• Be Wary of Those Claiming To Trade in the “Interbank Market” because Its ‘Safer’
• Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise
• Scams Often Target Members of Ethnic Minorities
• Get the Company’s Performance Track Record
• Anyone Who Won’t Give You Their Background Isn’t Worth the Risk

Many Forex scams, as is common with other types of scams, rely on getting dollar signs to appear in their victims eyes in order to pull off the scam. If at any point in the decision making process you start to feel yourself getting overly excited by the prospect of making what seems like easy money, then set your plans aside for the time being and come back to them later. You’ll be much calmer and in a better position to decide if the broker or deal you are interested in is really worth it.

One of the most common scams simply involves selling a product or system online that will ‘guaranteed’ make you profits in Forex trading. Be careful of online advertisements for these products, after all most of them contain information about the Forex market that you can obtain by reading any other book on Forex trading. It will give you information on the Forex market if you are doing research, but it probably won’t give you the guaranteed secret to success.

The Forex Market operates 24 hours through a global electronic network where trading occurs over the telephone and computer networks.

The Top Forex Currencies

Each world currency is given a three letter code which is used in FOREX quotes, the instrument traded by Forex traders and investors are currency pairs. A currency pair is the exchange rate of one currency over another. The most traded currency pairs are:

EUR/USD, GBP/USD, USD/CAD, USD/JPY, USD/CHF, AUD/USD.

The Trade

Trade happens when you accept the offered price and when the dealer confirms.

A currency can never be traded by itself. So you can not ever trade a EUR by itself. You always need to compare one currency with another currency to make a trade possible.

Lets have the EUR/USD and AUD/USD for example.

So, for instance, if a trader goes long or buys the Euro, she or he is simultaneously buying the EUR and selling the USD. If the same trader goes short or sells the Aussie, she or he is simultaneously selling the AUD and buying the USD.

The first currency of each currency pair is referred as the base currency, while second currency is referred as the counter or quote currency. Each currency pair is expressed in units of the counter currency needed to get one unit of the base currency. If the price or quote of the EUR/USD is 1.2545, it means that 1.2545 US dollars are needed to get one EUR.

There are no further costs in the trade. There are no commissions and other fees as well.

Bid/Ask Spread

All currency pairs are commonly quoted with a bid and ask price. The bid is the price your broker is willing to buy at, thus the trader should sell at this price. The ask is the price your broker is willing to sell at, thus the trader should buy at this price.

Margin Trading

In contrast with other financial markets where you require the full deposit of the amount traded, in the Forex market you require only a margin deposit. The rest will be granted by your broker.

The leverage provided by some brokers goes up to 400:1. This means that you require only 1/400 or .25% in balance to open a position (plus the floating gains/losses.) Most brokers offer 100:1, where every trader requires 1% in balance to open a position.

The standard lot size in the Forex market is $100,000 USD.

For instance, a trader wants to get long one lot in USD/YEN and he or she is using 100:1 leverage.

To open such position, he or she requires 1% in balance or $1,000 USD.

Of course it is not advisable to open a position with such limited funds in our trading balance. If the trade goes against our trader, the position is to be closed by the broker.

It’s very important to understand every aspect of trading. Start first from the very basic concepts, then move on to more complex issues such as Forex trading systems, trading psychology, trade and risk manage

During the first half of the twentieth century the British pound was the world’s principal trading currency and was the currency held by many as their main ‘reserve’ currency. As a result, London was also seen as the leading center for foreign exchange. However, the Second World War severely damaged the British economy and so the United States dollar took over as the world’s principle trading and reserve currency and retains that position today. This said, there are now a number of other currencies, principally the Yen and the Euro, which are also seen as reserve currencies.

Since the Second World War there have been a number of events which have proved instrumental in shaping today’s Forex market.

Until the start of the Second World War, as we said the British Pound Sterling was the World’s most prominent currency.

At the end of the Second World War the World’s economy, with the exception of the United States of America, was in disarray. Representatives from the United States of America, Britain and France met at Bretton Woods, New Hampshire with the objective of creating an infrastructure that would allow the rebuilding of the World’s economy. The result was the Bretton Woods Accord.

The Accord decided that the US Dollar would become the World’s benchmark and all other countries would measure the value of their currencies against it. Part of this agreement was the Gold Standard which fixed the price of Gold at $35 an ounce. All other currencies were pegged to the dollar at a certain rate. This rate was not allowed to fluctuate more than 1% in either direction (higher or lower). If a fluctuation greater than 1% did occur then the relevant central bank had to enter the market and restore the exchange rate to within the accepted band.

The Bretton Woods Accord also set in motion the establishment of the International Monetary Fund (IMF) which was designed to provide a stable system for buying and selling currencies and to ensure that currency transactions could take place smoothly and in a timely fashion.

In addition, the aim of the IMF was to create a consultative forum to promote international co-operation and to facilitate the growth of world trade, while at the same time breaking down exchange restrictions which hindered international trade

It was also part of the established role of the IMF to make financial resources available to member states on a temporary basis where this was considered necessary to further the aims of the IMF. Such loans were normally only made on the understanding that the country concerned would make substantial changes to rectify the situation which gave rise to the need for the loan in the first place.

There are mixed opinions as to whether the Bretton Woods Accord was successful in restoring economic stability to Europe and Japan. Despite this, the agreement eventually failed in 1971. It was superseded by the Smithsonian Agreement.

The Smithsonian Agreement tried to succeed where Bretton Woods had failed. Rather than give a 1% margin, greater room for manoeuvre was introduced. Not long into this agreement, Europe made its first attempt at breaking free from the Dollar dominated system. In 1972 Europe formed the European Joint Float. Member nations included West Germany, France, Italy, the Netherlands, Belgium and Luxembourg. This agreement was very similar to Bretton Woods but with a larger band for rate fluctuation.

Just as their predecessors had failed, these agreements were flawed and subsequently fell apart. However, this time there was no new agreement to take its place. For the first time since WWII there was a ‘free float’ system in place. The value of each currency is now governed completely by the laws of supply and demand. Large banks, private companies and individual speculators are all active participants in the Forex market.

The next major milestone was the establishment of European Monetary System which effectively came into force in 1979. The European Monetary System got off to something of a shaky start when Britain (one of the principle members of the European Community) decided not to join the system and Italy joined only under special arrangements. Britain did however later agree to participate to a limited degree by joining the exchange mechanism of the European Monetary System in 1990.

The final major development to affect the Forex market was the establishment of the Euro as a single currency for European Union member states in 1998 with eleven of the participating states replacing their national currency with the Euro.

Of all these developments it was the free-floating of currencies in 1978 which did more than anything else to boost the growth of the foreign exchange market. In 1978 Forex trading showed a daily turnover of about 5 billion US dollars and this figure rose in the following ten years to reach 600 billion US dollars by 1988. By 1992 this figure had reached 1 trillion US dollars, Today The Forex market has is the largest Trading market with daily turnover of around 2 trillion US dollars.