The history of the forex market
Posted on April 13, 2008
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Before anyone considered to call it “Foriegn Exchange,” currency trading existed. In fact, it dates back to the Middle East and Middle Ages, when international merchants came up with international bills of exchange for use in speeding up trades between nations. These bills, coins or notes were used to make third-party payments, and gave the merchants the flexibility they needed in order to grow their foriegn dealings.
The modern forex market is a product of the twentieth century. That century saw wild swings, from wild volatility in currency values, to long periods of stability, to a combination where some currencies were moving by huge amounts daily, and some were saying in a very tight ranges. London became the center for forex in the time between World War I and World War II, and the market was based on the Great British Pound (GBP.) Also at that time, the Bank for International Settlements was founded in Switzerland.
This bank was created to oversee the economies and finances of the newly established countries created by the treaties of World War I in Europe. It also helped provide cash and financing to countries who were having trouble recovering from the war. After World War II, the British economy was in tatters, and the United States picked up the mantle. Since the late 1940s, the US Dollar (USD) has been the international currency of exchange.
While forex seems new to many people, it truly is an old market, and one that has help shape the world as we know it.
Basic approaches to analyzing the currency market
Posted on April 8, 2008
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There are two main approaches to analyzing and investing in the currency market. Both of them have distinct simularities as their counterparts in the equity markets. They are known as technical analysis and fundamental analysis. The technical anaylst looks only at price movements as a way to predict future movements, while the fundamentalist tries to discern the underlying cause of the movements.
Technical Analysis
A Technical Analyst, or a technician, looks at the movement of a currency over a previous time frame. By looking at movements and patterns, up and down, the analyst can see things like levels of support, breakout levels, or trends. He may not know, or care to know, the rationale behind these movements, but one does not need to necessarily know why a holding goes up, they only need to know that it does go up.
Fundamental Analysis
On the opposite spectrum is fundamental analysis. This is where the the analyst studies things like wars, discoveries, governmental activities, regulations, and other factors that influence the value of a currency. This can include growth or deflation of a country, inflation, stability. or several other factors, each of which needs to be weighed against the other.
The analyst looks at macroeconomic factors, indicators, asset markets, and geopolitical considerations, and evaluates the value of one nation’s currency against another. They look at indicators such as Gross Domestic Product (GDP), interest rates, inflation rates, unemployment rates, money supply, productivity, and other items. They look at stock, bon and real estate markets, and look for a stable government.
Sometimes, governments can step in when they don’t like what a currency is doing, either propping its value up, or devaluing it, depending on their goals. Some large countries can even move the value of their currency merely by suggesting that they will take action, even when they don’t.
So which path should you take? It truly depends on your level of comfort. Technical analysis is easier to study, as once you master how to read charts, you will be able to analyze any currency, over any time frame. Fundamental analysis is harder, as it takes a deep undrestanding of complex factors, and changes constantly. However, the more you understand what you are buying and why, the better off you will eventually be.
An introduction to Forex basics
Posted on April 8, 2008
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The Foreign Exchange Market, sometimes called the “Forex” or even “FX” market, is the largest financial market in the world. On an average day, well over a trillion US dollars exchange hands, about 25 times as much as change hands in the US stock market daily. Unlike the stock markets, however, the FX market has no physical location or central point of exchange. It is a market where buyers and sellers conduct business “over-the-counter.” Buyers and sellers include banks, corporations and private and institutional investors.
The Forex market is a true 24-hour market. Trading begins each day in Sydney, Australia, and moves around the globe, to Toyko, London, and finally landing in New York. Since the market never closes, investors can respond to news, economic or geopolitical, at any time day or night. Because of this access, and the market’s huge size, it is difficult for governments and central banks to control the direction of the market. It also makes the market ideal for active traders.
It used to be that the forex market was closed to all but the biggest players. The moves were big, the action fast, and the dollar amounts out of the reach of the individual, and probably out of the reach of the big investor. However, in recent years, plenty of opportunities have opened for even retail investors to get in on the game. These platforms offer a gateway to the primary market, the Interbank.
In an FX trade, all currencies are priced in pairs. Each trade involves the simultaneous buying of one currency and selling of another. The point of trading currencies is to exchange one for another, with hopes that the market rate will move such that the new currency you hold is worth more than the one you just sold. Much like a stock, in order to actually realize a gain, you must resell your holding, and re-aquire your home currency. It is possible to have an “open” trade, that is, a trade where only the buy, or only the sell, has executed. This can be a risky proposition.
As will all markets, FX quotes are priced with a “bid” and an “ask.” The bid is the price the market maker is willing to buy the currency, relative to the other currency in the trading pair. The ask is the opposite, its’ the price that the market maker is willing to sell the base currency. The difference between the two is known as the spread.
What is the forex market?
Posted on April 7, 2008
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The foreign exchange market, forex for short, is a market which acts very much like the stock market, only what you are investing in is not stocks, it’s currencies. You can’t buy “100 shares of the US Dollar” per se, but you can make bets, one way or hte other, on the underlying value of any currency. Like the stock market, the “blue chip” currencies, such as the US Dollar, Great British Pound, the Euro and the Yen all have signficantly more volume.
Much of the trading does take place between banks, governments, and brokers or institutional investors. Retail or individual investors can also get involved, but they enter with a different purpose. Many of these institutions aren’t speculating, they are doing a business hedge, or some other complicated transaction. Banks make up about half of the volume, and that money is often moved every day or even overnight, and then used the next day in banks, savings accounts and to draw on checks.
Brokers also play a large role. Companies such as Deutsche bank, UBS, Citigroup, and others such as HSBC, Braclays, Merrill Lynch, JP Morgan Chase, and still others such as Goldman Sachs, ABN Amro, Morgan Stanley, and so on are actively trading in the forex markets to increase wealth of stock holders. Some times they are being defensive, and protecting the value of their portfolios, and sometimes they are making big bets, with the hopes to improve their own returns. Sometimes both.
Finally, Central Banks are also involved. They have certain goals about the amount of money in circulation, interest rates, how available money is, and how liquid a currency is. It’s there role in the process not to make money, but instead to control the market — and the world economy, using the markets.
So, the forex market is a place where brokers, banks, institutional and individual investors all can speculate, hedge risk, or make investments for the long term, not on stocks, but on currencies. And the Central Banks try to keep a lid on it all.
