intro-to-forex(1).pdf

Introduction to

FOREX

http://wwwmyedollarscom

Stock Trading ebooks

Dscamer

Thsebook soreducatonalpurposesony. Itsnotntended orshoud be

construed asadvce regardng nvestmentsn any way. Investmentscan go down

aswelasup and pastperormance sno guarantee ofuture perormance. Any

materalmentoned n the book sorustraton purposesony and shoud not

be nterpreted asadvce.

Introducton to the FOREX

Table ofContents

A Little History ............................................................................................. 3

Market Mechanics ........................................................................................ 5

More on Market Mechanics......................................................................... 7

Leverage......................................................................................................... 9

Rollovers ...................................................................................................... 11

Accounts....................................................................................................... 13

Statements.................................................................................................... 15

The Main Players ........................................................................................ 18

What Next .................................................................................................... 22

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Introducton to the FOREX

A Little History

The purpose ofthsebook sto ntroduce the Forex marketto you. Aswth many

marketsthere are many dervatve ofthe centralmarketsuch asutures, optons

and orwards. Forthe purpose ofthsbook we wlony be dscussng the man

marketsometme reerred to asthe SpotorCash market.

The word FOREX sderved rom Foregn Exchange and sthe argestnancal

marketn the word. Unke many marketsthe FX marketsopen 24 hoursper

day and hasan estmated $1.2 Tron n turnoverevery day. Thstremendous

turnoversmore than the combned turnoverofalthe wordsstock marketson

any gven day. Thstendsto ead to a very qud marketand thusa desrabe

marketto trade.

Unke many othersecurtes(any nancalnstrumentthatcan be traded)the FX

marketdoesnothave a xed exchange. Itsprmary traded through banks,

brokers, deaers, nancalnsttutonsand prvate ndvduas. Tradesare

executed through phone and ncreasngy through the Internet. Itsony n the

astew yearsthatthe smaernvestorhasbeen abe to gan accessto ths

market. Prevousy the arge amountsofdepostsrequred precuded the smaer

nvestors. Wth the adventofthe Internetand growng competton tsnow

easy n the reach ofmostnvestors.

You wloten hearthe term INTERBANK dscussed n FX termnoogy. Ths

orgnay, asthe name mpeswassmpy banksand arge nsttutons

exchangng normaton aboutthe currentrate atwhch thercentsor

themseveswere prepared to buy orsela currency. INTER meanng between and

Bank meanng deposttakng nsttutonsnormay made up ofbanks, arge

nsttuton, brokersoreven the government. The markethasmoved on to such a

degree now thatthe term nterbank now meansanybody who sprepared to buy

orsela currency. Itcoud be two ndvduasoryourocaltravelagentoerng to

exchange EurosorUS Doars. You wlhowevernd thatmostofthe brokers

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Introducton to the FOREX

and banksuse centrazed eedsto nsure reabty ofquote. The quotesorBd

(buy)and Oer(se)wlalbe rom reabe sources. These quotesare normay

made up ofthe top 300 orso arge nsttutons. Thsnsuresthatfthey pace an

orderon yourbehafthatthe nsttutonsthey have paced the orderwth s

capabe ofung the order.

Now athough we have spoken aboutordersbeng ued, tsestmated that

anywhere rom 70%-90% ofthe FX marketsspecuatve. In otherwordsthe

person ornsttuton thatboughtorsod the currency hasno ntenton ofactuay

takng devery ofthe currency. Instead they were soey specuatng on the

movementofthatpartcuarcurrency.

Source: Bank ForInternatonalSettement shttp://www.bs.org

ExtractFrom The TrennalCentralBank Survey ofForegn Exchange and

DervatvesMarketActvty.

Currency 1989 1992 1995 1998 2001

US Doar 90 82.0 83.3 87.3 90.4

Euro 37.6

Japanese Yen 27 23.4 24.1 20.2 22.7

Pound Sterng 15 13.6 9.4 11.0 13.2

SwssFranc 10 8.4 7.3 7.1 6.1

Asyou can see rom the above tabe over90% ofalcurrencesare traded aganst

the US Doar. The ournextmosttraded currencesare the Euro (EUR),

Japanese Yen (JPY), Pound Sterng (GBP)and SwssFranc(CHF). Ascurrences

are traded n parsand exchanged one orthe otherwhen traded, the rate at

whch they are exchanged scaed the exchange rate. These ourcurrences

traded aganstthe US Doarmake up the maorty ofthe marketand are caed

maorcurrencesorthe maors.

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Introducton to the FOREX

Market Mechanics

So now we know thatthe FX marketsthe argestn the word and thatyour

brokerornsttuton thatyou are tradng wth scoectng quotesrom a

centrazed eed orndvdualquotescomprsng ofnterbank rates. So how are

these quotesmade up. We, aswe prevousy mentoned currencesare traded n

parsand are each assgned a symbo. Forthe Japanese Yen tsJPY, orthe

PoundsSterng tsGBP, orEuro tsEUR and orthe SwssFrank tsCHF.

So, EUR/USD woud be Euro-Doarpar. GBP/USD woud be poundsSterng-

Doarparand USD/CHF woud be Doar-SwssFrancparand so on. You wl

awayssee the USD quoted rstwth ew exceptonssuch asPoundsSterng,

EuroDoar, Austraa Doarand New Zeaand Doar. The rstcurrency quoted

scaed the base currency. Have a ook beow orsome exampe.

Currency Symbol Currency Par

EUR/USD Euro / US Doar

GBP/USD PoundsSterng/ US Doar

USD/JPY US Doar/ Japanese Yen

USD/CHF US Doar/ SwssFranc

USD/CAD US Doar/ Canadan Doar

AUD/USD Austraan Doar/ US Doar

NZD/USD New Zeaand Doar/ US Doar

When you see FX quotesyou wlactuay see two numbers. The rstnumbers

caed the bd and the second numberscaed the oer(sometmescaed the

ASK). Ifwe use the EUR/USD asan exampe you mghtsee 0.9950/0.9955 the

rstnumber0.9950 sthe bd prce and sthe prce tradersare prepared to buy

Eurosaganstthe USD Doar. The second number0.9955 sthe oerprce and s

the prce tradersare prepared to selthe Euro aganstthe US Doar. These

quotesare sometmesabbrevated to the asttwo dgtsofthe currency such as

50/55. Each brokerhastsown conventon and some wlquote the ulnumber

and otherswlshow ony the asttwo. You wlaso notce thatthere sa

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