FOREX is a somewhat unique market for a number of reasons. Firstly,
it is one of the few markets in which it can be said with very
few qualifications that it is free of external controls and that
it cannot be manipulated. It is also the largest liquid financial
market, with trade reaching between 1 and 1.5 trillion US dollars
a day. With this much money moving this fast, it is clear why
a single investor would find it near impossible to significantly
affect the price of a major currency. Forex Option Defined - A
forex option is a financial currency contract giving the forex
option buyer the right, but not the obligation, to purchase or
sell a specific forex spot contract (the underlying) at a specific
price (the strike price) on or before a specific date (the expiration
date). The amount the forex option buyer pays to the forex option
seller for the forex option contract rights is called the forex
option "premium."
Furthermore, the liquidity of the market means that unlike some
rarely traded stock, traders are able to open and close positions
within a few seconds as there are always willing buyers and sellers.
Another somewhat unique characteristic of the FOREX money market
is the variance of its participants. Investors find a number of
reasons for entering the market, some as longer term hedge investors,
while others utilize massive credit lines to seek large short
term gains. Interestingly, unlike blue-chip stocks, which are
usually most attractive only to the long term investor, the combination
of rather constant but small daily fluctuations in currency prices,
create an environment which attracts investors with a broad range
of strategies.
The two fundamental strategies in investing in FOREX are Technical
Analysis or Fundamental Analysis. Most small and medium sized
investors in financial markets use Technical Analysis. This technique
stems from the assumption that all information about the market
and a particular currency's future fluctuations is found in the
price chain. That is to say, that all factors which have an effect
on the price have already been considered by the market and are
thus reflected in the price. Essentially then, what this type
of investor does is base his/her investments upon three fundamental
suppositions. These are: that the movement of the market considers
all factors, that the movement of prices is purposeful and directly
tied to these events, and that history repeats itself. Someone
utilizing technical analysis looks at the highest and lowest prices
of a currency, the prices of opening and closing, and the volume
of transactions.
This investor does not try to outsmart the market, or even predict
major long term trends, but simply looks at what has happened
to that currency in the recent past, and predicts that the small
fluctuations will generally continue just as they have before.
A Fundamental Analysis is one which analyzes the current situations
in the country of the currency, including such things as its economy,
its political situation, and other related rumors. By the numbers,
a country's economy depends on a number of quantifiable measurements
such as its Central Bank's interest rate, the national unemployment
level, tax policy and the rate of inflation. An investor can also
anticipate that less quantifiable occurrences, such as political
unrest or transition will also have an effect on the market. Before
basing all predictions on the factors alone, however, it is important
to remember that investors must also keep in mind the expectations
and anticipations of market participants. For just as in any stock
market, the value of a currency is also based in large part on
perceptions of and anticipations about that currency, not solely
on its reality.
Marginal trading is simply the term used for trading with borrowed
capital. It is appealing because of the fact that in FOREX investments
can be made without a real money supply. This allows investors
to invest much more money with fewer money transfer costs, and
open bigger positions with a much smaller amount of actual capital.
Thus, one can conduct relatively large transactions, very quickly
and cheaply, with a small amount of initial capital. Marginal
trading in an exchange market is quantified in lots. The term
"lot" refers to approximately $100,000, an amount which can be
obtained by putting up as little as 0.5% or $500. EXAMPLE: You
believe that signals in the market are indicating that the British
Pound will go up against the US Dollar. You open 1 lot for buying
the Pound with a 1% margin at the price of 1.49889 and wait for
the exchange rate to climb. At some point in the future, your
predictions come true and you decide to sell. You close the position
at 1.5050 and earn 61 pips or about $405. Thus, on an initial
capital investment of $1,000, you have made over 40% in profits.
(Just as an example of how exchange rates change in the course
of a day, an average daily change of the Euro (in Dollars) is
about 70 to 100 pips.)
