Forex market is the biggest security market in the world, with $6.6 trillion daily total volume. It opens around the clock and provides the highest leverage which is up to 500:1. As the Bitcoin joined the FX product list, FX market drives most investors' attentions.
The most popular main pairs of forex trading:
And the List of products available in the forex Market:
- Spot Contract: a contract where two parties agree to exchange an amount in one currency for another amount in another currency, based on the market price of those two currencies. Generally, this exchange of amounts takes place two working days (D+2) after the trade date (although some pairs have a D+1 exchange date, such as is the case of the dollar and the Turkish lira USDTRY).
- Forward Exchange Contract: A forward exchange contract is an agreement under which a business agrees to buy a certain amount of foreign currency on a specific future date. The purchase is made at a predetermined exchange rate. By entering into this contract, the buyer can protect itself from subsequent fluctuations in a foreign currency's exchange rate. The intent of this contract is to hedge a foreign exchange position in order to avoid a loss, or to speculate on future changes in an exchange rate in order to generate a gain.
- Currency swap: this instrument accounts for the highest volume of operations in the currency market (approximately 47%). Currency swaps are bilateral contracts, where two parties agree to exchange two amounts in different currencies within a limited period of time (eg, six months). In reality, these instruments are the sum of a cash amount and an exchange risk insurance; there is an initial exchange on the Spot date (D+2) and a final exchange on the settlement date. The difference between the spot exchange rate and the forward exchange rate is what is known as swap points, which basically reflect the interest rate differential between the two considered currencies.
- Foreign Exchange Options: agreements between two parties where one buys, subject to the payment of a premium, the right to buy (call) or sell (put) a currency in exchange for another one, while the other party acquires an obligation to sell or buy said currency in exchange for the premium. These are, together with the foreign exchange futures, the only products of the foreign exchange market that are traded in organized markets.
- Foreign Exchange Future: A currency future, also known as an FX future or a foreign exchange future, is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date.
Determinants of Exchange Rates:
- Economic Factors:
- Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and “cost” of money, which is reflected by the level of interest rates).
- Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
- Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
- Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However , a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.
- Economic growth and health: Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the healthier and more robust a country's economy, the better its currency will perform, and the more demand for it there will be.
- Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency. Its effects are more prominent if the increase is in the traded sector
- Political Conditions: Internal, regional, and international political conditions and events can have a profound effect on currency markets. All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy.
- Market Psychology:
- Flights to quality: Unsettling international events can lead to a “flight-to-quality”, a type of capital flight whereby investors move their assets to a perceived “safe haven”. There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The US dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty.
- Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.
- Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. “What to watch” can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.
Best Forex Brokers in North America:
- IG: https://www.ig.com/en/forex
- TD Ameritrade: https://www.tdameritrade.com/investment-products/forex-trading.page
- Forex.com: https://www.forex.com/en-ca/
- IB: https://www.interactivebrokers.ca/en/index.php?f=759
Top Forex Traders in the History:
- George Soros:
Mr. Soros is well known as one of the greatest investors in all of history. He sealed his reputation as an incredible money handler by reportedly profiting more than £1 billion from a short position in pound sterling. He successfully pulled this off before Black Wednesday , 16 September 1992.
At the time, Britain was a participant of the Exchange Rate Mechanism (ERM). This system required the government to interfere if the value of the pound fell below a specific level against the Deutsche Mark. Soros was successful in predicting that a certain set of circumstances—which included a then higher than average interest rates in Great Britain, and the less than desirable rate which Britain had become a part of the ERM—had resulted in the Bank of England (BoE) being in a vulnerable situation.
Britain was committed to sustaining the value of the pound against the Deutsche Mark. They intervened in the form of either buying sterling or increasing interest rates when the value of the pound fell, or sometimes both. Because of the recession, higher interest rates damaged the rest of the economy. This negatively impacted investment at a time when encouragement was extremely valuable. Economists at the BoE saw that the appropriate level of interest rates was a level much lower than those needed to support the pound as part of the ERM.
However, the value of sterling was sustained due to the UK's commitment to purchasing sterling.
In the weeks ahead of Black Wednesday, Soros used his Quantum Fund to establish a large short position on sterling. Then, on the day before Black Wednesday, President of the German Bundesbank spoke, suggesting specific currencies could come under pressure.
And this led Soros to raise his position considerably. On Wednesday morning, when the BoE started to buy billions of pounds, they discovered that the value of the currency had barely shifted. This occurred because there was a wave of selling in the market as other participants decided to copy Soros.
A final effort to increase UK rates, which had briefly reached 15% was not successful. When the UK announced that it would leave the ERM, and that it would resume the free-floating pound, the currency dropped 15% against the Deutsche Mark. It also fell 25% against the US dollar. Because of this, the Quantum Fund earned billions of dollars, which led to Soros becoming known as the person who broke the Bank of England. This event can easily be included in the list of the greatest Forex trades and the traders responsible for them.
- Stanley DruckenMiller:
Stanley Druckenmiller considers George Soros his mentor. Mr. Druckenmiller was a coworker of George Soros at the Quantum Fund for over ten years. Since then, Druckenmiller has developed an esteemed reputation for himself, successfully handling billions of dollars for Duquesne Capital, a fund which he started. Without a doubt, many of the best Forex traders see him as one of the best day traders on Earth.
In addition to participating in Soros' well-known trade on Black Wednesday, Mr. Druckenmiller established an impressive history of year after year profits in the double-digits with Duquesne, leading up to his retirement. Druckenmiller has a net worth estimated at more than $2 billion.
Druckenmiller has said that his trading strategy for developing long-term profits is founded on the idea of preserving capital. He aggressively pursues profits during times when his trades are working well. With this strategy, it is less important to be right or wrong. In this case, timing has a focus.
Instead, it focuses on the value of maximizing opportunities in which you are right and minimizing your damage in situations where you are wrong. As Druckenmiller stated when interviewed for the celebrated book'The New Market Wizards', “there are a lot of shoes on the shelf; wear only the ones that fit".
- Bill Lipschutz:
Oddly enough, Bill Lipschutz earned hundreds of millions of dollars in profits at the FX department of Salomon Brothers in the 1980s – despite having no previous experience in currency markets. Often called the Sultan of Currencies, Mr. Lipschutz describes FX as a highly psychological market. And, like our other successful Forex traders, the Sultan believes market perceptions influence price action as much as pure fundamentals do.
Lipschutz also agrees with Stanley Druckenmiller's view that when you are considering how to be a successful trader in Forex, your success is not dependent on being right, and, in fact, more often than not you are wrong. Instead, he stresses that you need to work out how to make money when being right only 20 to 30 percent of the time.
Here are some of Lipschutz other key tenets.
- Any trading idea needs to be well thought out before you place the trade
- Build a position as the market goes your way and exit the same way
- Start easing up once there are signs that the fundamentals and the price action are beginning to change
- There is a need to be aware of the market's focus
- FX is a 24-hour market, and doesn't stop moving when you go to bed
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