All you need to know about Forex

BUYING AND SELLING

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Order Basics :

Sellers are asking for a high price.
Buyers are Bidding at a lower price.
Trading is an auction.
Slippage occurs with most Market Orders.
The diffrence between the ASK and the BID price is the spread.

A trader must understand what each order is, what it and what part it plays in capturing profit.

A FOREX Trader must use three types of orders: a Market Order, a Limit Order, and a Stop Order.

The two primary orders used for entering and exciting the market are a Limit Orders, and a Stop Orders. Once an order is placed your order to enter the market, there are two critical procedures: One-Cancels-the-Other( OCO ) and Cancel-and-Replace. Properly exectuing orders and understanding these procedures are a vital step to profitables trading.

IMP : all good carpenters carry a toolbox. The sharper the tools and the more skilled he is at using them, the more effective he is. The sharper you become as a trader the more effcient and lucrative you will be.

What orders do : A clear understanding of what each order does is essential before exectuing orders.

Major Participants

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There are three major participants in the Forex market: customers, banks and brokers.
Customers

Customers can further be divided into individuals, small business and larger corporate type businesses.

Corporate Businesses often need to make cross boarder transactions in order to trade their goods or services.

Many companies have to import or exports goods to different countries all around the world. Payment for these goods and services may be made and received in different currencies.

Many billions of dollars are exchanged daily to facilitate trade. The timing of those transactions can dramatically affect a company's balance sheet.

Although you may not think it, all of us play a part in today's FX world. Every time someone goes on holiday overseas he or she normally needs to purchase that country's currency and again change it back into his/her own currency once he/she returns. Unwittingly he or she is in fact trading forex.

He or she may also purchase goods and services whilst overseas and their credit card company has to convert those sales back into his base currency in order to charge him.

If you think of just how many tourists are traveling at any given time, then you can imagine just how much this can add up.
Banks

Under the heading bank we could also include the larger of the funds who are also deposit taking institutions. As a forex speculator you are actually taking the place of a bank for the duration of a trade, if you think about you are holding large amounts of foreign exchange just as a bank would.

Policies that are implemented by governments and central banks can play a major roll in the FX market. Central banks can play an important part in controlling the country's money supply to insure financial stability.

Large banks can literally trade billions of dollars daily. This can take the form of a service to their customers, trades executed on behalf of large clients or they themselves can speculate on the FX market.

Because of the size of some transactions banks may be unable to deal directly with other banks and will state the price they are prepared to accept for a currency or pay for a currency. This is called market making.

They will quote the buying or selling rates they are prepared to pay for pairs of currencies e.g. the Dollar to Japanese Yen or Pound to Dollar.

The market maker (in this case the bank) makes its profit from the difference between the buying and selling rate (spread).
Hedge Funds

As we know the FX market can be extremely liquid, which is why it can be desirable to trade. Hedge Funds have increasingly allocated portions of their portfolios to speculate on the FX market.
Another advantage for Hedge Funds is that they can utilize a much higher degree of leverage than would typically be found in the equity markets.
Brokers

The broker’s main function is to facilitate trade between two parties.

They normally have links to other brokers, banks and institutions and often become mini market makers themselves.

Because of the varied source of clients who use brokers it is quite common to find the best rates through a broker as opposed to a bank.

With a broker you can shop for the best rates in order to transact your business.

The broker makes his commission from either the difference between the buying and selling rate or as a flat fee per transaction

All of the three main groups will also speculate in the market, which is why the market has so much volume and liquidity.

What is Forex???

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FOREX=FOReign EXchange
You can trade 24 hours a day
The FOREX is larger than all other finincial markets COMBINED

The Foreign Exchange (FOREX) market is a cash (or "spot") interbank marketestablished in 1971 when floating exchange rates begain to materialize. This market is the arena in which the currency of one country is exchanged for those of another and where settlements for international business are made.

The FOREX is a group of approximately 4500 currency trading institutions, including international banks, government central banks and commercial companies. payments for export and imports flow through the Foreign Exchange Market, as well as payments for purchase and sales of assets. This is called the "consumer" foreign exhange market. There is also a "speculator" segment in the FOREX companies, which have large financial exposures to overseas economics participate in the FOREX to offset the risk of international investing.

Historically, the FOREX interbrain market was not available for small speculators. With a previous minimum transaction size an often-stringent financial requirements, the small trader was excluded from participation in this market. but today market maker brokers are allowed to break down the large interbank units and offer small traders the opportunity to buy or sell any number of these smaller units (lots).

Commercial banks play two roles in the FOREX market:

They facilitate transactions between two parties, such as companies wishing to exchange currencies (consumers), and
They speculate by buying and selling currencies. The banks take positions in certain currencies because they believe they will be worth more (if "buying long") or less (if "selling sort") in the future. It has been estimated that international banks genrate up to 70% of their reevenue from currency speculation. Other speculators include many of the worlds' most successful traders, such as George Soros.
The third category of the FOREX include various countries' central banks, like the U.S. Federal Reserve. They participate in the FOREX to serve the financial interests of their country. When a central bank buys and sells its or a foreign currency the purpose is to stabilize their own currency's value.

The FOREX is so large and si composed of so many participants, that no one player, even the government central banks, can control the market. In comparision to the daily trading volume average of the $300 billion in the U.S. Treasury Bond market and approximately $100 billion exchanged in the U.S. stock markets, the FOREX is huge and has grown in excess of $1.5 trillion daily.

The word "market" is a slight misnomer in describing FOREX trading. There is no centralized location for trading activity ("pit") a there is in the currency features( and msny other) markets. Trading occurs over the phone and through the computer terminals at hiundereds of locations worldwide. The bulk of the trading is between approximately 300 large international banks, which process transactions for large companies, governments and for their own acounts. These banks are continually providing prices("bid" to buy and "ask" to sell) for each other and the broader market. The most recent quotation from one of these banks is concidered the market's current price for that currency. Various private data reporting services provide this "live" price information via the internet.

There are numerous advantages for parties wishing to trade in the FOREX.
They include:

Liquidity: In the FOREX market there is always a buyer and a seller! The FOREX absorbs tradign volumes ad per trade sizes which dwarfs the capacity of any other market. On the simplest level, liquidity is a powerful attraction to any invester as it suggests the freedom to open or close a position at will 24 hours a day. Once purchased, many other high-return investments are difficult to sell at will.FOREX traders never have to worry about being "suck" in a position due to lack of market interest. In the 1.5 trillion U.S. dollar per day market, major internationsl banks a "bid" (buying) and "ask" (selling) price.
Access: The FOREX is open 24 hours daily from about 6:00 P.M. Sunday to about 4:00 P.M. Friday. An individual trader can react to news when it breaks, rather than waiting for the opening bell of other markets when everyone else-has the same information. This allows traders to take position before the nes detailks are fully factored into the exchange rates. High liquidity and 24 hour trading permit marked particianats to take position or exit regardless of the hour. There are FOREX dealers in every time zone, United States, etc.) willing to continually quote by and sell pricises. Since no money is left on the market "table" this is what is referred to as "ero Sum Game" or "Zero-Sum Gain". Providing the trader pics the right side money can always be made.
Two-way Markets: Currencies are traded in pairs, for example doller/yen, or doller/swiss franc. Every position involves the selling of one currency and the buying of another. If a trader believes the Swiss franc will appreciate against the Doller, the trader can sell dollars and buy francs("selling short!"). If one holds the opposite belief, that trader can buy dollars and sell Swiss francs("buying long"). The potential for profit exists because there is always movement in the exchange rates(Prices).
FOREX trading permits profit taking from both rising and falling currency values in relation to the doller. In every currency trading transaction, one of the sides of the pair is always gaining and the other side losing.