History

History
Ancient
Currency trading and exchange first occurred in ancient times. Money-changing people, people helping others to change money and also taking a commission or charging a fee were living in the times of the Talmudic writings (Biblical times). These people (sometimes called "kollybistẻs") used city-stalls, at feast times the temples Court of the Gentiles instead. Money-changers were also in more recent ancient times silver-smiths and/or gold-smiths.

During the 4th century, the Byzantine government kept a monopoly on the exchange of currency.

Papyri PCZ I 59021 (c.259/8 BC), shows the occurrences of exchange of coinage within Ancient Egypt.

Currency and exchange was also a vital and crucial element of trade during the ancient world so that people could buy and sell items like food, pottery and raw materials.[12] If a Greek coin held more gold than an Egyptian coin due to its size or content, then a merchant could barter fewer Greek gold coins for more Egyptian ones, or for more material goods. This is why, at some point in their history, most world currencies in circulation today had a value fixed to a specific quantity of a recognized standard like silver and gold.

Medieval and later
During the 15th century, the Medici family were required to open banks at foreign locations in order to exchange currencies to act on behalf of textile merchants. To facilitate trade the bank created the nostro (from Italian translated – "ours") account book which contained two columned entries showing amounts of foreign and local currencies, information pertaining to the keeping of an account with a foreign bank.During the 17th (or 18th ) century, Amsterdam maintained an active forex market. In 1704, foreign exchange took place between agents acting in the interests of the Kingdom of England and the County of Holland.

Early modern
Alex. Brown & Sons traded foreign currencies exchange sometime about 1850 and was a leading participant in this within U.S.A. During 1880, J.M. do Espírito Santo de Silva (Banco Espírito Santo) applied for and was given permission to begin to engage in a foreign exchange trading business.

The year 1880 is considered by at least one source to be the beginning of modern foreign exchange, significant for the fact of the beginning of the gold standard during the year.

Prior to the first world war, there was a much more limited control of international trade. Motivated by the outset of war, countries abandoned the gold standard monetary system.

Modern to post-modern
From 1899 to 1913, holdings of countries' foreign exchange increased at an annual rate of 10.8%, while holdings of gold increased at an annual rate of 6.3% between 1903 and 1913.

At the time of the closing of the year 1913, nearly half of the world's foreign exchange was conducted using the Pound sterling. The number of foreign banks operating within the boundaries of London increased from 3 in 1860 to 71 in 1913. In 1902, there were altogether two London foreign exchange brokers. During the earliest years of the 20th century, trade was most active in Paris, New York and Berlin, while Britain remained largely uninvolved in trade until 1914. Between 1919 and 1922, the employment of foreign exchange brokers within London increased to 17, in 1924 there were 40 firms operating for the purposes of exchange. During the 1920s, the occurrence of trade in London resembled more the modern manifestation, by 1928 forex trade was integral to the financial functioning of the city. Continental exchange controls, plus other factors, in Europe and Latin America, hampered any attempt at wholesale prosperity from trade for those of 1930's London.

During the 1920s, the Kleinwort family were known to be the leaders of the foreign exchange market; while Japheth, Montagu & Co., and Seligman still warrant recognition as significant FX traders.

After WWII
After WWII, the Bretton Woods Accord was signed allowing currencies to fluctuate within a range of 1% to the currencies par. In Japan, the law was changed during 1954 by the Foreign Exchange Bank Law, so, the Bank of Tokyo was to become, because of this, the centre of foreign exchange by September of that year. Between 1954 and 1959 Japanese law was made to allow the inclusion of many more Occidental currencies in Japanese forex.

U.S. President Richard Nixon is credited with ending the Bretton Woods Accord and fixed rates of exchange, eventually bringing about a free-floating currency system. After the ceasing of the enactment of the "Bretton Woods Accord" during 1971,the Smithsonian Agreement allowed trading to range to 2%. During 1961–62, the amount of foreign operations by the U.S. Federal Reserve was relatively low. Those involved in controlling exchange rates found the boundaries of the Agreement were not realistic and so ceased this in March 1973, when sometime afterward none of the major currencies were maintained with a capacity for conversion to gold, organizations relied instead on reserves of currency. During 1970 to 1973 the amount of trades occurring in the market increased three-fold. At some time (according to Gandolfo during February–March 1973) some of the markets' were "split", so a two tier currency market was subsequently introduced, with dual currency rates. This was abolished during March 1974.

Risk aversion

Risk aversion
See also: Safe-haven currency

Fig.1 Chart showing MSCI World Index of Equities fell while the US dollar Index rose.
Risk aversion is a kind of trading behavior exhibited by the foreign exchange market when a potentially adverse event happens which may affect market conditions. This behavior is caused when risk averse traders liquidate their positions in risky assets and shift the funds to less risky assets due to uncertainty.

In the context of the foreign exchange market, traders liquidate their positions in various currencies to take up positions in safe-haven currencies, such as the US dollar. Sometimes, the choice of a safe haven currency is more of a choice based on prevailing sentiments rather than one of economic statistics. An example would be the Financial Crisis of 2008. The value of equities across the world fell while the US dollar strengthened (see Fig.1). This happened despite the strong focus of the crisis in the USA.

Carry trade
Main article: Carry trade
Currency carry trade refers to the act of borrowing one currency that has a low interest rate in order to purchase another with a higher interest rate. A large difference in rates can be highly profitable for the trader, especially if high leverage is used. However, with all levered investments this is a double edged sword, and large exchange rate price fluctuations can suddenly swing trades into huge losses.

Forex signals
Main article: Forex signal
Forex trade alerts, often referred to as "forex signals", are trade strategies provided by either experienced traders or market analysts. These signals which are often charged a premium fee for can then be copied or replicated by a trader to his own live account. Forex signal products are packaged as either alerts delivered to a user's inbox or SMS, or can be installed to a trader's trading platforms. Algorithmic trading, whereby foreign exchange users can programme (or buy ready made software) to place trades on their behalf, according to pre-determined rules has become very popular in recent years. This means that users can set their 'Algos' to trade on their behalf, thus reducing the need to sit and monitor the markets continuously, plus it can remove the element of human emotion around executing a trade.

Speculation

Speculation
Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Economists, such as Milton Friedman, have argued that speculators ultimately are a stabilizing influence on the market, and that stabilizing speculation performs the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do. Other economists, such as Joseph Stiglitz, consider this argument to be based more on politics and a free market philosophy than on economics.

Large hedge funds and other well capitalized "position traders" are the main professional speculators. According to some economists, individual traders could act as "noise traders" and have a more destabilizing role than larger and better informed actors. Also to be considered is the rise in foreign exchange autotrading; algorithmic, or automated, trading has increased from 2% in 2004 up to 45% in 2010.

Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona. Mahathir Mohamad, one of the former Prime Ministers of Malaysia, is one well-known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.

Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.

In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and foreign exchange speculators made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling, followed by an eventual, larger, collapse. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.

Financial instruments

Financial instruments

Spot

Main article: Foreign exchange spot

A spot transaction is a two-day delivery transaction (except in the case of trades between the US dollar, Canadian dollar, Turkish lira, euro and Russian ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract, and interest is not included in the agreed-upon transaction. Spot trading is one of the most common types of Forex Trading. Often, a forex broker will charge a small fee to the client to roll-over the expiring transaction into a new identical transaction for a continuum of the trade. This roll-over fee is known as the "Swap" fee.

Forward

See also: Forward contract

One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties.

Swap

Main article: Foreign exchange swap

The most common type of forward transaction is the foreign exchange swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange. A deposit is often required in order to hold the position open until the transaction is completed.

Futures

Main article: Currency future

Futures are standardized forward contracts and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.

Currency futures contracts are contracts specifying a standard volume of a particular currency to be exchanged on a specific settlement date. Thus the currency futures contracts are similar to forward contracts in terms of their obligation, but differ from forward contracts in the way they are traded. They are commonly used by MNCs to hedge their currency positions. In addition they are traded by speculators who hope to capitalize on their expectations of exchange rate movements.

Option

Main article: Foreign exchange option

A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.

The 5 Things that Move the Currency Markets

The 5 Things that Move the Currency Markets

The currency market is one of the most sophisticated markets in the world, attracting trillions of dollars per day in volume from central banks, corporations, hedge hunds. and individual speculators. It operates on a 24-hour basis, beginning with trading in Wellington, New Zealand, and continuing on to Sydney, Australia; Tokyo, Japan; London, England; and finally, ending with New York before the whole cycle begins all over again.

Although the currency market exists mainly for importing and exporting activities and for corporations to hedge their foreign exchange risk, like all markets, there are speculators. In the forex market, it happens that 80% of all trading activity is speculative in nature. Here are five key factors that move currency markets:

InterestEducation

Yield is the most important factor of exchange rates between currencies. Every currency’s country has a central bank that sets the interest rate on the currency. This means when the central bank of a country moves the interest rate either up or down, it affects the movement of the currency substantially. This is because, in general, speculators will buy currencies with high yields and finance those same purchases with low yielding currencies. One example is the USD/JPS pair, which is often used for carry trade. In the fall of 2006, the short-term rates in the U.S. were at 5.25%, while in Japan they were only 0.25 %. In this case, traders would buy long on dollars in order to receive 525 basis points. of interest and sell yen to only pay 25 basis points on that end of the trade, making a total spread of 500 basis points, allowing to not only gain profit from interest income flows, but also from capital appreciation (Please note: You will pay interest when you sell a currency with a high interest yield and in exchange buy a currency with a low interest yield). Similarly, when the Bank of England surprisingly raised interest rates in August of 2006 from 4.5% to 4.75%. the spread on the popular GBP/JPY pair widened from 425 basis points to 450 basis points, driving the pair to have huge speculative flows in the currency as traders tried to take advantage of the new spreads, which brought the currency up a stunning 700 points within just three short weeks.

Economic Growth

The country’s economic growth, or as otherwise expressed by gross domectice product (GDP), is the second most influential factor on currency movements. This is because the stronger a country’s economy becomes, the more likely it is for the country’s central bank to raise rates in order to tame inflation that comes about when there is growth; there's also a much larger chance that there will be large flows of foreign capital into the country's fixed income and equities markets. Case in point is the EUR/USD between 2005 and 2006. In 2005, the euro zone lagged behind significantly in terms of GDP growth, averaging a meager 1.5% rate throughout the year, while the U.S. expanded at a healthy 3%. This led to a large drop in the EUR/USD in 2005, but in 2006, the euro zone began to grow and eventually overtook the U.S.’s growth, and the EUR/USD rallied.

The influence of geopolitics on currencies is large and can best be understood through realizing that speculators run first, and ask questions later. They will quickly run to the sidelines until they are certain that the political risk has dissipated. Therefore, the rule of thumb when dealing with currency is that politics almost always trumps standard economics. One example of this influencer in action was the USD/CAD in May of 2005. Despite Canada enjoying the position of no.1 crude exporter to the U.S, then Canadian Prime Minister Paul Martin was facing a no- confidence vote from accusations of past Liberal Party corruption. Despite the country’s economics signaling a rally, the CAD stayed relatively weak to the USD until finally weeks later, currency traders began to focus on Canada’s stellar economic fundamentals instead and the USD/CAD plunged 200 points.Geopolitics

Trade Flows vs. Capital Flows

Trade flows is how much income the country brings in through trade and capital flows is how much foreign investment the country attracts are critical components of currency movement. The reason why it’s only the fourth influencer is that some countries are more sensitive to trade flows, while others are more dependent on capital flows. In this way, it’s not possible to apply the weight of trade flows and capital flows to the same country.

In general, trade flows matter much more for commodity-dollar currencies such as the Canadian, Australian, and New Zealand dollars. In Canada, oil is the primary source of revenue; in Australia, industrial and precious metals dominate trade; and in New Zealand, agricultural goods are a crucial source of income. Trade flows are also very important for other export heavy countries such as Japan and Germany. Though for countries such as the U.S. and the U.K., due to very large liquid capital markets, investment flows are much more important than trade flows.

These countries have financial services that are extremely important. In fact, US financial services represented 40% of the total profits of the S&P 500. On the surface, the U.S.’s record multi-billion dollar deficit should make the currency depreciate significantly, but historically, it has not been the case.

The U.S. offsets this deficit by attracting more than enough surplus capital from the rest of the world. Currently, the massive deficit in trade flows does not affect the U.S. but should the U.S. be unable to attract enough capital flows to offset this deficit, the currency may weaken. Understanding this, one can easily see why studying the trade flows and capital flows of a country can be so important when gauging which direction a currency may move.

Mergers and acquisitions (M&A) activity

Although this may be the fifth factor in importance for what can affect long-term currency movements, it can be the most powerful near-term-movement influencer of the five. The basic definition of mergers and acquisitions as it pertains to currency is when a company from one economic region wants to make a transnational transaction and buy a corporation from another country. For example, if a European company wishes to buy a Canadian asset for C$20 billion, it would have to buy that currency through the foreign exchange market because of the difference in currencies. Typically, these types of deals are not price sensitive but rather time sensitive because the acquirer may have a date by which the transaction must be completed.

Due to this time constraint, M&A flows can have very strong temporary effects on forex trading, sometimes skewing the natural course of the order flow. One recent example was with the USD/CAD pair, which should have responded to weakness in Canadian economic data by rallying; however, due to an extremely large demand for Canadian corporate assets from investors in Asia, the Middle East, and Europe, there were huge influences on the CAD, which kept it up against the dollar, and the pair remained near its all-time lows even as oil sustained a major correction.

Introduction to the Forex Market

Introduction to the Forex Market

What is Forex?

"Forex" stands for foreign exchange; it's also known as FX. In a forex trade, you buy one currency while simultaneously selling another - that is, you're exchanging the sold currency for the one you're buying. The foreign exchange market is an over-the-counter market.

Currencies trade in pairs, like the Euro-US Dollar (EUR/USD) or US Dollar / Japanese Yen (USD/JPY). Unlike stocks or futures, there's no centralized exchange for forex. All transactions happen via phone or electronic network.

Who trades currencies?

Daily turnover in the world's currencies comes from two sources:

Foreign trade (5%). Companies buy and sell products in foreign countries, plus convert profits from foreign sales into domestic currency.
Speculation for profit (95%).
Most traders focus on the biggest, most liquid currency pairs. "The Majors" include US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. In fact, more than 85% of daily forex trading happens in the major currency pairs.

Why trade Forex?

With average daily turnover of US$4 trillion, forex is the most traded financial market in the world.

A true 24-hour market from Sunday 5 PM ET to Friday 5 PM ET, forex trading begins in Sydney, and moves around the globe as the business day begins, first to Tokyo, London, and New York.

Unlike other financial markets, investors can respond immediately to currency fluctuations, whenever they occur - day or night.

Introduction to Foreign Exchange Trading

This is an exciting world. There is hardly anything like foreign exchange trading which provides round the clock home based business opportunity.

Working 24 hours a day from anywhere in the world, working with just a computer, with no boss, no employees, no office, no infrastructure and no big capital, online forex trading furnishes endless work from home facility.

Forex trading is a $2.5 trillion a day industry. Any other market like stock trading has much less volume, restricted hours of business and numerous factors to deal with.

As against stock trading, in forex trading, one has to concentrate just on 4 major currency pairs and pure technical analysis. The average daily range of 104 pips for all four pairs far surpasses that of any stock trading market.

Though there are risks associated with forex trading, if learned properly, there is potential for big profits. Given the vastness of this industry, there are numerous experts in this field revealing their strategies for success.

We had heard of mini accounts, but now we have even super mini accounts. With this, one can start forex trading with as little as $50, with little risk and within five minutes of registering with an online forex trading company.

No other type of online trading offers such a huge potential. Take stock market alone, one will need thousands of dollars to start trading.

Leverage factor in currency exchange trading is very huge. With just $1,000, you can have the capacity of doing hundred times more business, i.e. $100,000. Using a $1000 to buy a forex contract worth $100,000 is leveraging. In this case only $1000 is at risk, but the potential for gains is immense.

The beauty of forex trading is that here one can operate in all major markets of the world. With different time zones, one can virtually do trading in 24 hours a day. Forex market never sleeps.

One important strategy of profiting from forex market is to follow technical analysis. This strategy alone predicts peaks and troughs. If one can catch a trend, this may bring in substantial profits to any forex player.

There are numerous online brokers. While selecting one, main factors to be kept under consideration are the ease of doing trading, online tutorials, instructional material, easy transfer of funds, facility of trading in major markets and currencies, expert advice, low transaction fees, flexible accounts, availability of mini accounts etc.

One has to be careful in selecting an online forex broker. He should take care of novice and professional traders alike. A new forex trader should be able to find the ease of trading and timely guidance.

One main benefit of forex trading is that it is simple to follow unlike stock trading where one has to study thousands of stocks. This market meets the test of highest liquidity. With currency trading, one can trade and exchange millions of dollars in seconds.

Online forex trading is really thrilling. It is always live. You can not overstretch in this market. It has a relatively straightforward and short learning curve.

If you are seriously interested in any online home based business, then you must consider forex trading option. Many forex trading platforms offer mock trading. You can do free live mock trading and test your skills. Once you feel comfortable, you can start real trading.

There is no cost associated in joining any online forex trading system and testing their services. This can be a highly profitable internet business.

Forex currency trading is one of the fastest growing industries in the world. Under this system, 24 million dollars of business is done every second.