Exchange Rates

Because currencies are traded in pairs and exchanged one against the other when traded, the rate at which they are exchanged is called the exchange rate. The majority of the currencies are traded against the US dollar (USD). The four next-most traded currencies are the Euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP) and the Swiss franc (CHF). These five currencies make up the majority of the market and are called the major currencies or "the Majors". Some sources also include the Australian dollar (AUD) within the group of major currencies.

The first currency in the exchange pair is referred to as the base currency and the second currency as the counter term or quote currency. The counter term or quote currency is thus the numerator in the ratio, and the base currency is the denominator. The value of the base currency (denominator) is always 1. Therefore, the exchange rate tells a buyer how much of the counter term or quote currency must be paid to obtain one unit of the base currency. The exchange rate also tells a seller how much is received in the counter term or quote currency when selling one unit of the base currency. For example, an exchange rate for EUR/USD of 1.2083 specifies to the buyer of euros that 1.2083 USD must be paid to obtain 1 euro.
At any given point, time and place, if an investor buys any currency and immediately sells it - and no change in the exchange rate has occurred - the investor will lose money. The reason for this is that the bid price, which represents how much will be received in the counter or quote currency when selling one unit of the base currency, is always lower than the ask price, which represents how much must be paid in the counter or quote currency when buying one unit of the base currency. For instance, the EUR/USD bid/ask currency rates at your bank may be 1.2015/1.3015, representing a spread of 1000 pips (also called points, one pip = 0.0001), which is very high in comparison to the bid/ask currency rates that online Forex investors commonly encounter, such as 1.2015/1.2020, with a spread of 5 pips. In general, smaller spreads are better for Forex investors since even they require a smaller movement in exchange rates in order to profit from a trade.

Margin

Banks and/or online trading providers need collateral to ensure that the investor can pay in case of a loss. The collateral is called the margin and is also known as minimum security in Forex markets. In practice, it is a deposit to the trader's account that is intended to cover any currency trading losses in the future.

Margin enables private investors to trade in markets that have high minimum units of trading by allowing traders to hold a much larger position than their account value. Margin trading also enhances the rate of profit, but can also enhance the rate of loss if the investor makes the wrong decision.

Leveraged financing

Leveraged financing, i.e., the use of credit, such as a trade purchased on a margin, is very common in Forex. The loan/leveraged in the margined account is collateralized by your initial deposit. This may result in being able to control USD 100,000 for as little as USD 1,000.

There are three ways private investors can trade in Forex directly or indirectly:

* The spot market * Forwards and futures * Options

A spot transaction

A spot transaction is a straightforward exchange of one currency for another. The spot rate is the current market price, also called the benchmark price. Spot transactions do not require immediate settlement, or payment "on the spot." The settlement date, or "value date," is the second business day after the "deal date" (or "trade date") on which the transaction is agreed to by the two traders. The two-day period provides time to confirm the agreement and arrange the clearing and necessary debiting and crediting of bank accounts in various international locations.

Forwards and Futures

Forwards make up about 46% of currency trading. A forward transaction is an agreement between two parties whereby one party buys a currency at a particular price by a certain date that is greater than two business days (a spot transaction).

A future contract is a forward contract with fixed currency amounts and maturity dates. They are traded on future exchanges and not through the interbank foreign exchange market.

Options

A currency option is similar to a futures contract in that it involves a fixed currency transaction at some future date in time. However the buyer of the option is only purchasing the right but not the obligation to purchase a fixed amount of currency at a fixed price by a certain date in future. The price is known as the premium and is lost if the buyer does not exercise the option.

Risks

Although Forex trading can lead to very profitable results, there are risks involved: exchange rate risks, interest rate risks, credit risks, and country risks. Approximately 80% of all currency transactions last a period of seven days or less, while more than 40% last fewer than two days. Given the extremely short lifespan of the typical trade, technical indicators heavily influence entry, exit and order placement decisions.

Forex - Historical Inauguration Fails to Ease the Markets Negative Tone

Market optimism which was anticipated from the transition of power at yesterdays historical Inauguration failed to translate into market gains. Equity markets plunged in the US, led by losses in the financial sector, sending risk appetite lower again, as the S&P closed down over 5% (the biggest drop on inauguration day in history). President Obama didn’t provide any real details of importance in his speech. He stated that the US was at war with a ‘badly weakened economy’. He noted that the economic crisis was the consequence of ‘greed and irresponsibility on the part of some’, and promised to keep a ‘watchful eye’ to ensure that markets do not spin out of control. He also added that people in charge of managing Americas money ‘will be held to account’. 

Yesterday the Bank of Canada cut its policy rate by 50bp to 1.00% as expected. The BoC's accompanying statement was moderately hawkish with the key policy portion being " the Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent target (inflation target) over the medium term...," which the market viewed as a signal that the BoC would not commit to further easing and this gave the CAD a momentary support before risk aversion trade began weighing on the rally. 

Read more at: http://www.ac-markets.com/forex-news/daily-forex-news.aspx

Forex Trading TIPS & Tricks

Forex markets are very unpredictable. However, the major reason why money is lost relates to trading on emotion.This is a routine occurrence that happens every time a trader hesitates to make a move.

Its displayed when someone stays locked in a trade too long instead of raking money off the table. Both instances result in traders giving away potential profits to the markets.

Emotions weigh heavy on your decision making process - anxiety, shame, hope, anger, pride - you’re likely to experience them all. One of the most damaging of all is revenge. You were involved in a long trade only to suffer a huge loss that set you back tremendously. Now you’re out for vengeance, anxious to claim it on the Forex market that took your money. While it’s a part of human nature, this type of mentality can keep you out of the market for good.

Completely taming your emotions may be difficult, but you can manage them to a point where they are not interfering with important decision making. Becoming a successful trader takes discipline and the ability to replace your fears with a calm confidence. Some of the pros have termed this skill as “Emotional Intelligence”.