Understanding Forex Trading; An Alternative to Stocks

Forex is the 'Foreign Exchange' marketplace for trading currencies internationally. Hence, the name. The Forex market is in fact, the largest financial network in the world accounting for daily average turnover in the trillions of dollars. Forex trading takes place through major banks, market makers, and brokerage houses around the world, and is open 24/7, five days a week. It's also a rapidly expanding market, as traders migrate over to Forex Trading and away from stocks.

In its simplest form, trading forex involves two currencies traded simultaneously, called a 'pair'. As an this example, the EUR/USD pair, trade the Euro against the US Dollar. A buyer of the pair therefore would be buying the Euro and selling the US Dollar. Forex pairs are described in the following format: XXX/YYY. The first currency in the pair; XXX, is referred to as the 'base' currency. The second symbol in the pair, YYY is the 'counter' currency. Prices will always be expressed in terms of the counter currency.

Expanding on this example, if the current price of the EUR/USD pair is shown as 1.3667, this means that 1 Euro (the base currency) equals $ 1.3667 US Dollars. Most major pairs are priced to 4 decimals, or 1/100th of one percent. The exception is the Japanese Yen pair, which trades only to 2 decimals. That's because there are typically over 100 Yen to the dollar. For instance, let's say the US Dollar is the base currency, in the USD/JPY pair where prices here are expressed in Japanese Yen. If the current price is 108.02, that means the base currency, the US Dollar, equals 108.02 Japanese Yen.

Prices in Forex are expressed in something called 'pips'. A pip is simply the minimum increment that a currency pair price can change. All that means is if the EUR/USD price changes from 1.3790 to 1.3791, the price is said to have gone up by 1 pip. Quotes on Forex pairs are on a bid-ask basis. The bid; price the market is willing to pay a seller at a point in time for a specific currency pair, the ask; the price that the market is willing to sell to a buyer in the same manner. The difference between the bid and the ask is called the bid/ask spread just like in stocks.

These Forex prices are always listed as Bid price first, Ask price second. For example, a typical EUR/USD quote could be 1.3784 Bid // 1.3787 Ask in which case the quote price would have a spread of 3 pips. The spread is how market makers are compensated, as opposed to 'commissions' paid for trading stocks or options. The spread will often vary depending on a number of factors such as: Current market conditions, specific brokers/market makers, and currency pairs being traded, just to name a few. In the EUR/USD example above, price quotes would be expressed simply as 1.3784/1.3787 or 1.3784/87.

Finally, we know that Forex trades in 'Lots' similar in a way to stocks. These lots can be delineated as types of lots including: standard, mini and micro. Standard lots trade 100,000 units of a currency pair while Mini lots trade 10,000 units and the micro lots trade 1,000 units. To illustrate this consider for example, a standard lot purchase, if the EUR/USD quote was 1.3784/1.3787, then buying this pair would mean buying 100,000 Euro dollars and selling short 137,870 US Dollars.

Essential Of Forex Trading Knowledge

It was a strange sight in the past to witness customers exchanging stacks of money with their agents at public places such as the international bus terminus, prominent official buildings or even at the airports.

These agents were prepared to sell you the foreign currency that you want with a little profit given to them. However, all these have changed over generations. Forex trading is now handled by licensed companies and unsolicited individuals are not allowed to operate illegally. With the invention of new technologies and the coming of professionals, Forex trading is now made easier and more systematic. It is also much safer to do business with these professionals to prevent scams.

At the beginning stage, most of the large companies would carry out their Forex trading via the different banks or even through the major institutes that deal with finances. These institutes had to be the ones that operate internationally. Forex trading has attracted a lot of popularity today because of the presence of modern technology. Via the use of the internet and the increasing telecom market, it is easier to spread messages and to bring across information on issues such as the economic polices worldwide. With the creation of the Forex Software that you can find on the internet, you will easily get the latest news about the Forex trading online. This has actually become a platform that facilitates the exchanges of trading since it makes it easy for you to seize opportunities on the spot and to implement your decisions immediately.

Apart from some problems at the beginning stage, Forex trading on the internet has become more standardized and the people who take part in Forex trading can now get a close to 100% secured access via the different companies that deal with Forex trading. The advantage of using these companies is that they are free from restrictions and give the customers more freedom of choice. As people now become more aware of the usefulness of Forex trading on the internet, it has helped to boost the popularity of advanced technology. Since it has been so successful to trade online, more people are entering this Forex trading platform and as a result, it has become commercially possible to use the Forex Software as a mean for trading exchanges to take place.

Surveys have shown that more and more people are getting involved in Forex trading. People joined for different reasons and in fact, some are even starting it as a hobby. In the conventional Foreign Exchange Market, this was usually dominated by big companies such as banks or Multi National Companies and you don’t get commoners involved apart from brokers. However, now there are many guide books on the trading methodologies, as well as trend analysis, so it will make it easy and safe for any newbies who might want to learn Forex trading online.

If you understand the margin trading concept that you apply in Forex, you can actually save a lot of money on deposits. It refers to the margin that is traded on and this margin differs depending on the banks’ policies but it will always in percentile terms based on the initial amount. How much you are allowed to play in Forex trading depends on what is the original amount given by the bank. The actual potential can be illustrated by the example below. Let’s say a bank has imposed a 2% as the margin deposit. This means you will only have to put in $20000 USD as a deposit in order to trade for two million dollars. As such, you will be able to increase by 200% for your profit. On the other hand, should you be unlucky and loses money in the Forex trading, the margin deposit of 2% will mean a loss of 200% too. Whether you are playing Forex trading online or offline, the rules are the same.

So long as you participate in investments, there will be the impending dangers of profits or losses. As it is, the Forex trader’s luck online can be anywhere between 2 to 25% on an average each day. As a newbie in Forex trading, it is essential that you know that your deposit’s interest rates will change depending on the currencies. As such, most traders play in a few different currencies in the world of Forex, which is what is known as the variable currency and the Base currency. This is applicable both in the conventional mode as well as the Forex online mode. In order to be a successful Forex trader, you will need to have an ability to analyze, a high level of knowledge on the subject and your intuition to act appropriately when the opportunities come. You must also be able to make full use of your Return on Investment (ROI) so as to gain the most profits from this lucrative financial market.

Has the bleeding stopped for the pound?

The UK’s concentration in financial services has compounded the problems for its economy and currency.

Concerns over the global crisis remain the key driver in the foreign exchange market as investors witness the continued dete-rioration of economies around the industrialized world. In February, the British pound stabilized somewhat vs. the U.S. dollar after dramatic losses in recent months. Looking back to what seems now like a lifetime ago, in November 2007 the pound/dollar pair (GBP/USD) touched a high of $2.1159 (the highest price since 1981) and was still trading above $2.000 in July 2008 before plunging to a late-January 2009 low of $1.3500 (the lowest price since 1985), and more recently con-solidating in the $1.4100-1.5000 range.

The British economy was especially hard hit during the fall months thanks to the UK’s strong reliance on banking and other financial services. Citing data from the British Consular Office, Charmaine Buskas, senior economic strategist at TD Securities in Toronto says, “10.7 percent of UK gross domestic product (GDP) comes from financial services. It accounts for one in 30 jobs. They had the same troubles as everyone else, but amplified and magnified.” Like the U.S., the UK also suffered a crash in its over-leveraged housing market at the same time the global financial crisis began to hit.

“The UK is suffering more than some because of its financial and housing sector exposure,” says Stephen Webster, chief European economist at 4CAST Inc. GDP freefall Webster says the UK’s economic situation is “dire in every sense.” “Economically, the UK officially slipped into recession as of the fourth quarter 2008,” he says. “Credit conditions remain tight and confidence weak.” Ruth Stroppiana, chief interna-tional economist at Moody’s Economy.com adds: “The ongoing lending logjam and the associated adverse impact on the availability of credit to households and [corporations] will take a heavy toll on the economy. Real GDP is expected to sink by almost 4 percent from peak to trough, almost double the 2-percent contraction of the early 1990s, but less than the nearly 6-percent fall in the early 1980s following the ‘winter of discontent.’

Terrorism and mafia pushing the economy downward

Due to recent global financial and economic melt-down many developed and developing economics are facing contraction in their economic indicators including GDP and international trade. Fortunately, Pakistan’s position was not so bad. Despite facing many problems Pakistan is doing fine in a number of sectors and sub-sectors. Pakistan is expected to achieve a GDP growth of about 3 per cent during FY09, as per latest estimate. However, two factors namely terrorism and increasing level of corruption are hindering achievement of rapid economic growth and social prosperity. Both those menace need to be addressed effectively and in most comprehensive manner. A latest World Bank (WB) report enlists corruption as one of the core reasons that hinder the development drive in Pakistan. Inefficient public expenditure process, higher cost of basic input, lack of skilled human resources, corruption and nepotism restrict Pakistan far behind in her development drive.

Pakistan is also facing unprecedented problem of terrorism that very few other countries are encountering. This grave problem is eroding the very socio-economic foundation of the country almost in a similar fashion as corrupt mafia is inflicting damages to the economy, although their mode of working slightly differs. The terrorists are challenging the writ of the government by creating chaos and uncertain condition. Reckless attacks and suicide bombings by the terrorists are victimising the country at large but mostly the innocent poor people and the labourers, shattering their meager sources of income and employment. Repeated terrorist acts are also triggering shock wares across the nook and corner of the country intimidating the foreign and local investors and vitiating business environment. The economic and social cost of increasing terrorism is quite colossal and unbearable. According to some estimate the country has incurred a loss of at least Rs680 billion since 2004 on war on terror. Some other estimate put the accumulated cost at over $ 34 billion. This includes both direct and indirect costs. The economy is suffering from losses of income and employment opportunities, especially in the war torn areas, cost of rehabilitation of hundred and thousands of uprooted people from FATA and Swat areas. Losses to agricultural output, mining, orchard and tourism are also very large. Other losses are reduced exports earning, reduced tax collection, reduced level of investment and escalated cost of utilities and inputs. The anti-terror campaign that began in Pakistan after the Word Trade Centre bombing in 2001, are becoming over-strained and over-stretched day by day, resulting in erosion of resources for the vital development projects all over Pakistan, particularly in FATA, parts of NWFP and Balochistan. Latest reports indicate that government is going to exercise big cuts in her development expenditures by up to Rs100 billion; this is mainly due to meeting the ever increasing expenditure being incurred on war on terror. One can easily learn the figures of costs being incurred by the lonely super power and its surrogates in Iraq and Afghanistan, which may now be approaching $ 10 trillion. Pakistan, being a poor developing country cannot think of such burden on her economy and expenditure head.

Several development projects already stated in the affected areas are afflicted with delays, which may ultimately result in large cost over-runs. Since the start of the anti-terrorism campaign, sense of uncertainty has been prevailing in the country, which is contributing to capital flight, as well as slow-down in domestic economic activities besides, making foreign investors jittery. It is apprehended that foreign direct investment, which witnessed a steep rise over the past several years may be adversely affected by the on-going anti-terrorism campaign in FATA and other areas of NWFP. Latest truce between the government and the militants in Swat and other areas of NWFP is certainly a positive development for the country both on economic and humanitarian ground. For increased economic and investment activities better law and order situation and a peaceful environment are the prerequisites.

Another serious problem facing the country is the increasing level of corruption and mismanagement prevailing in various public and the private sectors. Although, wide spread corruption is a third-word phenomenon Pakistan is increasingly becoming a hostage to it, as it is making the life of common men pathetic. People are now feeling the punch most severely and increasingly in their daily life. It is now a widely accepted notion that corruption and terrorism is a two-headed monster that is eating up the biggest chunk of the national resource pie. Like terrorism, corruption also retards the pace of development activities. It also impedes national prosperity and hinders government’s efforts aimed at providing basic social services and alleviating poverty. Among many other factors, corruption emanates primarily from poor governance. The magnitude of corruption in some leading public sector enterprises in Pakistan compels the government to pay huge subsidies amounting to hundreds of billion of rupees out of public exchequer. For example, to pay for the inefficiency and mismanagement of WAPDA and KESC, government has to keep huge provision in its national budget, every year. KESC which has the privilege of serving one of the most densely populated markets in the world of about 15 million domestic, industrial and commercial consumers, in a radius of 40 miles, perhaps, is the most corrupt and the most inefficient organisation in Pakistan. With such large number of metropolitan consumers KESC should have become a profit-earning organisation. The corruption curves of WAPDA and Pakistan Railways may not be much below. It is now widely believed that corruption and inefficiency in the implementation of development projects, both at federal, provincial, and local government levels are eating the biggest share of PSDP and provincial development budgets. Pakistan’s water sector is fraught with large and small scale corruption. According to a 2003 and 2006 survey by Transparency International (TI), Pakistan’s Water and Power Development Agency is perceived to be the second most corrupt institution in the country. Close to half of the more than 31,000 complaints received by Pakistan’s anti-corruption ombudsman in 2002 were related to this one institution. Pakistan is on the list of the most water stressed countries in the world, and forecasts indicate that available resources are depleting rapidly, possibly leading to a state of water scarcity in the next two decades.

Much of the water infrastructures are in poor condition and Pakistan has to invest almost to Rs60 billion per year in new large dams and related infrastructure over the next 5-10 years. In the energy sector, Pakistan will face acute power shortages of approximately 6,000 megawatts by the year 2010 (equivalent to about three Tarbela dams) and 30,700 MW by the year 2020.

Pakistan conducted its second National Corruption Perceptions Survey (NCPS) from April to July 2006 which indicated that the majority of respondents were of the view that corruption in Pakistan in last three years increased by 100 per cent. According to another survey conducted by TI Pakistan in 2006 bribe paid annually in Pakistan is about Rs46 billion.

Deep-rooted corruption in police and law enforcement, legal system, power and energy sector, taxation and custom, health and education etc are only adding to the woes of the common man and widening the gap of haves and have-nots. Another dimension of corruption is the rapidly emerging collusion among the ever greedy hoarders, adulterates, profiteers and smugglers who are making the life of the poor consumers from bad to worse. If Pakistan wants to accelerate her economic growth and prosperity she needs immediate and effective enforcement of good governance and transparent administration to counter the acute problems arising out of terrorism, corruption and hyper inflation.

Courtsey: The News