A necessary premise: one does not go anywhere without a careful analysis of the theory. That is why we will try to make a summary of the history of currencies. The date that you will have to print in your mind is 1875, the year in which the modern currency market was born, at the behest of the major world states. What happened? It was simply that the main Western countries decided that it was necessary to create a system of trade based on gold and silver. At that point, it was the gold that secured the national currencies.
The gold standard thus created the basis for the Forex market, solving common liquidity problems. The first problems arose after the First World War, when some states wanted to exercise their right to convert their foreign currencies into gold. In the end, a new international standard was chosen: the Bretton Woods Agreement (which provided for the replacement of gold with the US dollar as a reference value).
It is therefore currencies that we must use to generate profit in the context of the trend. In principle, when we operate in this financial sector, we are buying one currency against another. These are some of the main crosses you will need to get to grips with if you want to:
Look at the Yahoo Currency Converter to keep you up to date.
When we buy or sell our currencies, we should, of course, refer to their international benchmark. The spread cost therefore represents the difference in price between the value quoted on purchase and the value quoted on sale (a commission that is usually paid to the broker to manage your exchange order). This value will weigh as a percentage depending on the size of your investment (using appropriate terms, you will notice that the spread is measured in pips).
In the next articles we will analyze gradually the whole world of Forex, continuing to go into depth (with simulations), but gradually and especially trying to use terms that are easy to understand and use (we will try to analyze concrete elements such as trends and current taxation). Let us know you think about it, commenting on the article and/or sharing it with your contacts.
The financial market of Forex is characterized by huge amounts of liquidity, which prevent the manipulation of prices that occur in markets with low volume of liquidity. To understand the size, consider that, to move 10 Pips (Percentage In Point) is the smallest price movement that a change can have) the euro / dollar (USD / Eur), you have to intervene with about a billion euro.
Forex trading is a global market for buying and selling foreign currencies (such as the dollar), it is active 24 hours a day, five days a week, because of the time zones that allow world volatility and liquidity to always be high.
Trading in Forex means, predicting the trend of an exchange rate, buying a pair of currencies, such as U.S. dollars and euros, when you expect the exchange rate to go up and selling when you think it will go down, the exchange takes place through a broker. The two currencies are quoted with two prices, the selling price (Bid), always lower and the buying price (Ask) always higher. The difference between the two prices is called "Spread", from which brokers earn money.
The Forex market determines the exchange rate, i.e. the ratio between two currencies, one is placed on the numerator and is defined as "certain", while the other is placed on the denominator and is defined as "uncertain". The purchase or sale order, according to international usage, refers to the currency placed on the numerator.
Hence a long position in the euro/dollar is opened, the euro is expected to appreciate and the dollar to depreciate. Conversely, if a short position is opened, the euro is expected to depreciate and the dollar to appreciate. It is therefore to be considered that we do not deal directly with one currency but with the exchange of one against the other.
The U.S. dollar (USD) with 86.3% of all trades is the most traded currency, the second is the euro (Eur), with 37%, in third place with 17% trades we find the yen (JPY). The most traded currency pairs are the euro/US dollar, with a percentage of 28%, in second place with 14% we find the US dollar/yen, in third place the British pound/US dollar with 11%.
The currency market follows the fundamental principle of the economic theory it establishes: the price of certain products is determined by the match between supply and demand. The exchange rate between different currencies is influenced by some fundamental factors, in particular the demand for a currency is linked to its supply, the consistency of which will push the price up or down.
Importers and investors who buy goods and services from a country with a certain currency are those who demand the most money. The demand for money also comes from the central banks, both for reasons of financial investment and for objectives linked to monetary policy choices.
Some macroeconomic variables influence the performance of the currency market. The economic, financial and commercial conditions of a state determine the strength and solidity of a currency. To understand the behaviour of different exchange rates, Forex traders absolutely need to be updated on international macroeconomic variables.
The behavior of the exchange rates are influenced by the trend of:
One must be very careful, when working on Forex, about the monthly figures for the balance of payments because there are very close relations between the evolution of exchange rates and transactions in goods, services and financial instruments that a State has with foreign countries.
A countryâs public accounts also have a great deal of influence on its exchange rate behavior. If public finance developments deteriorate (an increase in the annual deficit), they lead to upward maneuvers on official short-term rates, which also lead to an increase in long-term rates on the bond markets, because of institutional investors losing confidence in their ability to repay their debt.
The increase in the differential between two currency areas usually produces an appreciation, both in the short and medium term, of the currency which guarantees a higher remuneration. The interest rate differential can affect a country's growth expectations, as it is rewarded by higher yields. The persistence of high interest rates over an extended period can slow down economic development (also influencing policy) and create the conditions for a subsequent depreciation of the currency.
The higher the inflation rate, the less competitive the goods are for export. If exports are fundamental to a country's economic growth, a possible rebalancing can come from a depreciation of the currency.
A state with a strong industrial, technological and financial structure attracts investors with its capital. The currency of this State will have a virtuous appreciation and the system will be able to keep the production costs of the goods low, containing the internal inflationary pressures.
Another factor influencing the financial market is unemployment in every country. Low unemployment signals a steadily expanding economy, with satisfactory annual GDP growth (gross domestic product). This situation may create inflationary tensions with a possible increase in the exchange rate of the central bank.
High unemployment is a sign of an economic condition with problems, low growth and a difficult financial situation. In this case, the central bank can intervene by reducing short-term interest rates in order to stimulate the recovery.
The macroeconomic data that influence the behaviour of the currency market and of the different currencies are divided into four categories:
By adopting an expansive rather than a restrictive strategy, the central banks are directly influencing the currency markets and influencing the development of the various currencies through their monetary policy choices.
By buying or selling their own currency, depending on whether they aim to strengthen it or weaken it, they intervene directly in the reference exchange rates.
Publishing reference records: the state of health of the economy through a comprehensive analysis of consumption, investment and the labor market.
The behavior of individual currencies is also influenced by developments in commodity prices. As a result, the economic results of countries that are major importers/exporters are also affected (currencies tend to revalue or devalue in line with commodity trends).
It should be noted that all the correlations between commodities and currencies have a variable oscillation over time; one of the most followed indicators to know the macro economic trend of these correlations is the Baltic Dry index, daily diffused by the Baltic Stock Exchange of London.
It is a condition of the Canadian dollar and the Norwegian krone. Canada has the world's second largest reserves of crude oil.
Also in this case, the Canadian dollar is the currency most closely linked to natural gas (even though it exports 50% of the quantity of oil). It should be noted that the price of natural gas is notoriously volatile.
It is positively correlated with the euro (and the Australian dollar) and negatively correlated with the US dollar.
They are so important that they can anticipate the trend of the world economy: a fall in them undoubtedly signals a clear economic contraction.
This financial market includes exchanges between large banks, central banks, currency speculators, multinational companies, governments and other financial institutions. While the stock, commodity and futures markets have a specific location within a given stock exchange, the Forex market has no physical location and is not subject to specific rules. Transactions are only carried out electronically through authorized international intermediaries.
To see practically how Forex works, you need to enter into a contract with a Forex broker that provides you with a constant data flow through its platform.
Thanks to the online trading platforms, provided to clients by almost all banks and brokers, anyone with little experience can trade with the same tools as traders via their own PC and an ADSL connection. You can see real-time prices of all world exchanges and all currency crossings (euro-dollar), with a very low cost of transactions.
All it takes is a few hundred euros to buy currencies, equities and futures with very narrow trading spreads. The execution is immediate. There are multi-level books, news relate, charts, generic analysis services and automatic trading systems. Everyone can now try to make money on the financial markets.
With 86.3% of all trades, in absolute terms, the currency most traded is the US dollar (USD), coupled in different combinations, the second currency with the highest number of trades is the euro (Eur), with 37%, and the third currency is the yen (Jpx), with 17%.
Investors who want to trade Forex first need to know all the different types of orders that can be placed within the different trading platforms. The orders can be divided into four different categories.
The price the market is currently beating is called the Market Order. Practically the investor is willing to buy at the offer price (Ask) or sell at the current asking price, in English Bid price, displayed by his broker.
The distance between the first value on the demand side and the first one on the supply side is called Bid/Ask to spread which, normally on the Eur/Usd exchange rate, is 2 Pips (the spread is expressed in Pips: for the most liquid currency pairs there are usually 1-2 Pips of spread, while for the less treated pairs there are 5 to 7 Pips).
When placing an order on the market, the investor should be very careful. To have the security of an instant run, you have to be willing to pay something extra. If, for example, we find fast market situations (when financial markets live high levels of volatility, in combination with unusually heavy trading), caused by the spread of important macro-economic data, the Bid/Ask spread can widen abnormally (6-10 Pips), with the consequence of having a very high purchase price or a very low selling price.
In this sense, our in-depth study of contracts by difference may be useful.
The Limit Order sets an absolute condition for its completion. In the case of a purchase, the value executed cannot be higher and in the case of a sale below the price level that you set as the limit at the time of placing the order. Practically the Limit Order sets the maximum/minimum price at which you are willing to buy/sell according to market quotations.
The stop order is used to cut losses (stop loss), but also to enter the market at a predetermined price. To execute the Stop Order, you must touch the price level that you have set. Only then will the order be activated to become a Market Order and executed at the best possible price.
There are some orders to trade forex that can be used under specific market conditions.
These orders are like limit orders: Mit purchase orders are placed below the current price, and Mit sales orders are placed above the current value. Once the limit value is touched the orders become orders to the market whose execution may be above or below the price indicated for the usual problems of slip-page.
This type of order involves the placing of two separate orders, one for purchase and one for sale. As soon as one of the two is executed the other one is automatically deleted. It can be used during the congestion phases (Trading range) to take advantage of the start of a directional movement.
To deepen what is said in the article we recommend the text "The currency market of De Vincentiis".
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