The Forex History

The Foreign Exchange market, also referred to as the "Forex" or "FX" market is the largest financial market in the world, with a daily average turnover of US$1.9 trillion — 30 times larger than the combined volume of all U.S. equity markets.
"Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).
There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation.
For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.
A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.
The FX market is considered an Over The Counter (OTC) or 'interbank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets

Large Round Figures

Many traders, from the individual speculator to the large fund will focus on the large round figures or round numbers when applying their analysis to the Forex market for a number of reasons. Option traders tend to select these price levels whether their exercising American, European, or Exotic options, as well as the placement of protective stop orders.

For that reason, the 'large round figure' such as 1.3100 or 1.3250 tend to carry a greater weight of importance. However this can be deceitful as the market often times will spill over to trade slightly above or below a price level of importance. For that reason we should naturally expect the ultimate highs and lows to rest at times slightly beyond these areas. For example, we can see the following (15-minute) chart, the EURUSD has recently found major turning points very close but not exactly on the 1.3100, 1.3200, and 1.3250 figures respectively. In fact notice, how each turning point was established within 15-pips of a figure. We should suspect the market as it approaches and fails to break beyond a large round figure, even if we cannot take the exact figure literally.

How to Calculate Rollover Interest?

In the Foreign Exchange Market or Forex market, Rollover is a method of stretching the arranged clearing date or what is known as the settlement date of an open position. Mostly, in common currency trades, trades ought to be completed in two business days and traders who wish to stretch their positions with no intention of settlement must close their positions before 5:00 in the afternoon Eastern Standard Time on the date of settlement day, plus re-opening of them the next trading day. This means by rolling over the position, this at the same time closes the existing positions at the daily close rate and again coming into a new opening rate at the next trading day. This precisely means that the trader is indirectly extending the settlement day by one more day.

This is also known as tomorrow next strategy, it is functional in forex due to many traders have no purpose of getting delivery of the currency they buy but instead they have the intention of getting profit from fluctuating exchange rates. Since rollovers shove out the settlement by another two trading days, it may cause a gain or a cost to the trader depending on the existing rates.

Apparently, Rollover is when you reinvest funds from a mature security into a new issue of the similar security or same security. You are transferring the holdings of one retirement plan to another without the agony of tax effects. Plus a charge is incurred by Forex investors who extend their positions on the following delivery date.

Rollover interest is the net effect of the money borrowed by an investor to purchase another currency and such interest is paid on the borrowed currency and earned on the purchased currency. To calculate this interest, you should get the short-term interest rates on both currencies, the existing exchange rate of the currency pair and the number of the currency pair purchased. For instance, an investor possesses 15,000 CAD/USD. The present rate is 0.9155, the short term interest rate on the Canadian dollar (base currency) is 4.50% plus the short term interest on the US dollar (quoted currency) is 3.75%, so the interest would be $33.66 [{15,000 x (4.50% - 3.75%)} / (365 x 0.9155)].

If on the contrary, the short term interest rate on the base currency is lower than the short term interest rate of the borrowed currency, the interest rate would result into a negative number which may reduce the value of the investor’s account. Such interest can be avoided by taking a closed position on the currency pair. If an option is about to expire is quite favorable to grip, you can either buy or sell the later expiring option. Always note the interest rate that is paid by a currency trader or he may received in the course of these forex trades is considered by the IRS as ordinary interest income or expense. For taxation, the trader of the currency should always keep track the interest received or paid, separate from regular trading gains or losses.

The Use of Requote in the Forex Market

The Forex market holds the largest financial market trading in the world. There are more than $3 trillion value trades per day. Did you know that everyone plays a vital role in the trade of currency? Being a citizen of your country that has a currency automatically makes you as an investor of your countries currency. You decide whether you will hold on with the currency of your country or you want to trade it to other foreign currency. Currency trading is done at the Foreign Exchange market otherwise known as Forex or simply FX market.

The Forex market operates in a global electronic network which consists of financial institutions, banks and Forex traders which all involved in buying and selling national currencies. Unlike the stock exchange, the Forex market does not have any central location instead it involves an inter-bank system of trading. The Forex market transactions are done in real time which operates 24 hours a day. With a colossal number of traders around the world, the Forex is the busiest trading market in the world. Trades are made over an electronic network worldwide or by telephone. Sydney, London, Tokyo, New York and Frankfurt are the main centers of trading.

During the earlier years of the Forex market, access to trading was only made available for large business institutions and banks but later was made available for individual Forex traders and money managers. Traditionally, access to the Forex market has been made available only to banks and other large financial institutions. However, with advances in technology over the years along with the industry's high leverage options, the Forex market is now available to money managers and individual Forex traders. This was made possible through the use of computers and internet connection. Currency trading is basically instantaneous buying and selling of one currency to another. Example of trade are; Euro – US Dollar, GB Pound – Japanese Yen. This process is called cross trading.

Another type of trading which can be done is in the spot market which involves the largest volume and the most important trading in the Forex market. These trades are done on the spot which means that it doesn’t take two banking days. There are many advantages in trading in the Forex market compared to other trading systems. The major advantage is that trades can be made 24 hours a day which allows traders to immediately decide and react on breaking news which greatly affects the market price. Another great advantage for investors is that trades which are done in the Forex market do not charge any commission. With the Forex market there are always opportunities to gain a profit. Currencies sometimes weaken and sometimes strengthen. When you trade currencies, they exactly work against each other. For example, if you think that the Euro will decline against the US Dollar or vice versa, you would sell your Euro and later buy Euro again at lower price to earn a profit.

However requotes occur which may lead to decrease of profit and even lose of your investment. Requotes happen when a broker quotes one price but then quotes another. Brokers might even fill your order at a different price commonly higher when you attempt to trade. So before investing your money, make sure to check the policy of the broker regarding requotes.

Rate of Change (ROC) and its Computation

Rate of Change or ROC is a technical indicator that measures the changes between the percentage compared to the most recent price and the price "n" periods in the past. It is also said that it monitors the momentum of the market. It estimates the market’s rate of change comparative to the previous trading intervals. In the highest level, the indicator might say a market is quite overbought. Valleys or troughs also points out an oversold market situation.

It can also stand alone as an essential indicator used by many technicians interested in market momentum. It has a horizontal median called equilibrium. It is this median that tells us everything we need to know about this type of rate. A few technicians in the market often use a very simple approach for the Rate of Change learning. It is concern with buy and sells signals based upon the zero line or the midpoint. This presumes oversold or overbought market conditions which pave the way of crossover. You may sell when the rate of change line go across from above to below on the other hand you may buy when the indicator intersect from below to above.

It trades with price changing amount during the exact time and match to it as an oscillator that shows the cyclical movement. It goes up along with the prices up-trending and it decreases when the prices go down. If prices go high, changes gives the according significant rate changing.

Mostly, it is best to use this indicator as an antecedent to change in market direction. One good thing to do is to establish extreme zones for the study, much like the Relative Strength Index or Stochastic. However, a good technical analyst must know how to tolerate the study in extreme bull and bear markets. It can generate many sham signals under those market conditions. In addition, the indicator is parallel to an oscillator when it comes to the market accelerating or decelerating.

To compute it, here’s a good example:

Period (10) - the number of bars, or interval, used to calculate the study using the value you specify, it may be computed as the change from the current price relative to the price from the number of specified intervals prior to the current price.

The general formula is as follows:

ROCt = (Pricet / Pricen) * 10000

ROCt is the rate value for the current period. Pricet is the current price. Pricen is the price you specify for the nth interval (open, high, low, close, midpoint or average).

Take the example below which use current price of 7485 and a 7440 price n intervals ago:

ROC = (7485 / 7440) * 10000 = 1.006 * 10000 = 10006

There is a tendency to loss in futures trading. Past results on the other hand are not analytical of future results.

It may also be calculated by using the following formula:

(Closing Price Today - Closing Price "n" Periods Ago) / Closing Price "n" Periods Ago

The Value of Trade Balance to Local Economy

The balance of trade also referred as trade balance, which sometimes is symbolized as NX, is the difference of the monetary value of imports and exports in one economy in a given period of time. The balance of trade is considered the biggest part of a country’s balance of payments.

Imports, domestic spending, foreign aid, and investment abroad are called debit items while credit items includes exports, foreign investments in domestic economy and foreign spending in domestic economy.

A trade surplus is a positive balance of trade which is consists of more exporting than importing. A trade deficit is the negative balance of trade or sometimes called a trade gap. The trade balance can sometimes be divided as services balance and goods balance just like in the United Kingdom which they use the terms invisible and visible balance.

The balance of trade is a part of current account which includes transactions that includes income derived from international investment and international aid. Thus, if the current account comes as a surplus then the nation’s international net asset increases also while deficit will decrease the international net asset.

A good trade surplus is achieved when a country exports products more than buying imported goods. A trade deficit is eventually experience as a result of the opposite of a trade surplus. The trade balance is alike to the difference of a country's output and the domestic demand. These factors may affect the trade balance: prices of goods manufactured, taxes and tariffs, trade agreements, business cycle (home or abroad), and exchange rates.

The trade balance is different in many business cycles. For instance, export growth like oil and industrial goods which improves when there is economic expansion.

In developed countries like; Japan, China and Germany usually run at trade surpluses in which they experience a higher savings rate. Around the world there are different natural resources which a country may have for instance, countries from the coastal regions are major producers of fish, Canada can be a major producer of lumber because of its huge forests while in the Middle East, has the most oil reserves.

International trade is important so in order to sustain the balance of trade. A country should be totally self sufficient without international trade. Through international trades, each country will have the opportunity to produce specialize goods efficiently. In relation, when a nation specializes in producing these goods, the total production increases instead of trying to be self sufficient. Nations will benefit from international trades and also meets their needs. Generally, nations will trade to other nations when they gain from the trade. But the gains are not usually equal in terms of benefits and profit.

Transaction cost and its Calculation

In economics, transaction costs are the rate acquired when making an economic exchange. This costs incurred when buying or selling securities or stocks. This is also referred as transaction fees. Transaction costs also comprise of brokers’ commissions ad spreads (difference between the price that the dealer paid for a security and the price it may be sold. This is what the broker or bank produce for being a middleman in a transaction.

For instance, most people when buying or selling a security or stock, pays a commission to their broker and that commission can be considered as the fee or transaction cost for doing that stock deal. When evaluating a potential transaction, it is crucial to think about these costs that might prove significant. Mostly, in financial markets, the initial cost for these transactions is commission which is paid to brokers upon trade execution. This costs becomes increasingly important the shorter the holding time of an investment.

Many market models disregard transactional costs, presumptuous instead those markets are non resistant. While this thought is invalid, for many applications such costs are low enough that they can be disregarded. The lesser the cost for a transaction, the more effective and competent a market is said to be. The Foreign exchange market and stock market have lower costs for such transactions of any major asset class.

It is considered to be much more cost- efficient to trade in Forex in terms of both commissions and transaction fees. An online website for example charges no fees or commissions and at the same time offer traders an access to all relevant market information and trading tools. On the contrary, online stock trade commission ranges from $7.95 - $ 29.95 per trade and up to $100 or more per trade with full service brokers.

Another thing to consider, which is an important point is the width of the bid / ask spread. Regardless of the deal size, foreign exchange dealing spreads are normally or common in 3-4 pips (anyway a pip is .0001 US cents) in the major currencies. Generally, the width of the spread in a foreign exchange market transaction is less than one tenth (1/10) that of a stock transaction, which could contain a .125 or one eight (1/8) wide spread.

Since transaction costs are paid via bid/ask spread, there has to be no charges to trade or hidden fees. There are instances that there would be extra charges asked by good brokers for some non compulsory services or access to particular reports. A smaller spread is visibly better. Since brokers are taking the other side of all the customer trades, brokers gain profit by making the spread between the bid and offer prices. You may find that find spreads vary by broker.

In order to be successful in trading on the foreign exchange market, you have to find a good broker.

Forex: Role of Interest Rate in Currency Markets

Interest rates play the foremost important role in moving the prices of currencies in the Forex market. As the institutions that set interest rates, central banks are therefore the most influential factors. Interest rates dictate flows of investment. Since the currencies are representations of a country’s economy, differences in interest rates affect the relative worth of currencies in relation to one another. When central banks change interest rates they cause the Forex market to experience movement and volatility. In the realm of Forex trading, accurate speculation of central banks’ actions can enhance the trader's chances for a successful trade.
An increase in interest rates encourages traders to invest within that market and causes the demand for the currency to rise. As demand rises, the currency becomes scarcer and consequently more valuable. Investors are drawn to the currency, causing it to appreciate, because they will gain a higher yield on their investments, as in the Jane example. In order to purchase the country's assets (stocks or bonds), Jane will have to convert her domestic currency to the target country's currency also increasing demand. Conversely, a fall in interest rates discourage investors from purchasing assets in that particular economy, as the return on their investment is now smaller. The economy's currency will depreciate as a result of the weaker demand.