Foreign Exchange (FX)

Foreign Exchange (FX)

Unlike other financial markets that operate at a centralized location (i.e., the stock exchange), the worldwide Forex market does not have a central location. It is a global electronic network of banks, financial institutions and individual Forex traders.

FX market is 24 hrs market, Major world trading starts each morning in Sydney and Tokyo, then moves west to Hong Kong and Singapore, continuing to Europe and finishing on the West Coast of the U.S.

– Max. intensity at 8:00 and 14:00 (GMT)
– Min. intensity at 4 (Tokyo lunchtime) and 23 (end of NY)

FX market is the largest and most liquid market in the world, with a daily turnover of 4.5 trillion USD last year.
For comparison, the GDP of US 2008 is 14.4 trillion USD.

Golden Rules for investment in FX market:

– The exchange rate is determined through the interaction of market forces dealing with supply and demand.
– The value of a currency, in the simplest explanation, is a reflection of the condition of that country’s economy with respect to other major economies.

More specifically, two primary factors that affect supply and demand are

– Interest Rates, usually set by central bank. Increasing or decreasing interest rate is always the top focus of currency traders. The higher the interest rate, the more valuable the currency would be.
– The Fundamental indicators of the originating country’s economy as a whole. such as foreign investment, PPI, CPI, GDP, and the trade balance, echo the overall health of the economy, and alter the supply and demand for that currency. The stronger the economy, the more valuable the currency would be.

– High sensitivity to government policies, especially central bank decisions. The central bank usually step in to help restore order in the market in the event of excessive currency rate volatility.
– High sensitivity to macroeconomic indicators, focusing on big pictures of certain country, ignoring details about specific stocks and industry. The skills to interpret macroeconomic news are sophisticated.
– High volatility than equity market (because of margin trading), 24 hours running make it hard to monitor real time price quote.
– Retail investors are high recommended not to take excessive risk in FX market.

– Minimum capital requirement.
– It is always quoted in pairs like the USD/SGD. (the US Dollar and Singapore Dollar)
– Interest is payable or receivable due to the differences between the interest rate of 2 currencies.

– It is generally quoted in multiple sizes of 100,000 of the first currency.
– Commission is charged for each transaction or through the spread of the currency pair.
– Interest rate differential also called swaps points are credited or debited daily.

– It begins each day in Sydney, and then moves around the globe as the business day begins in each financial center, first to Tokyo, then 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.

– Familiarity
– Liquidity and spreads
– Volatility
– Cost of carrying the trade
– Availability of information