About Forex. Transactions in the foreign exchange market
Forex is an abbreviation of the English expression Foreign Exchange Operations, which translates as "conversion currency transactions." Such operations constitute a large share of the entire global financial market. If the share of securities trading accounts for about 300 billion dollars a day, then the Forex market exceeds this value by more than three times.
The currency market came to its present appearance after 1973, when the EU member states abandoned the fixed exchange rate.
Leading market currencies include the US dollar, British pound sterling, Euro, Swiss franc and Japanese yen. In addition to the main currencies, a number of dealing centers offer customers the trade of the Canadian and Australian dollars, the Swedish and Norwegian kroner, etc.
Forex cannot be called a market in the direct sense of the word. It does not have a specific trading location; forex trading can take place by telephone or electronic terminal. He works around the clock throughout the work week. Be sure at every moment of the day in a particular corner of the globe there are dealers who want to buy or sell a particular currency. The world's leading exchanges open with a change of time zones, from Wellington to California.
The undoubted advantage of the Forex market is the principle of margin trade. The essence of this principle is that the client is given a leverage of 50, 100, or sometimes more than his funds to complete trading operations. Thus, a market participant with even modest sums can make very solid transactions.
The composition of the foreign exchange market is diverse. It involves banks, international corporations, brokerage houses, small firms and private investors. However, the decisive factor for price movement is the actions of leading world states. The main constituent factors include economic development, domestic and foreign policy, actions of central bank management bodies.
All Forex consists of four fundamental parts, only after deep study of which you can start trading:
psychology of trading;
Management of risks.
Each of these sections is a separate layer of information, without which it is impossible to comprehend the science of successful trading. Therefore, a novice trader is strongly recommended to refer to the sections of the same name on our site, as well as look at the "useful tips" section, which contains notes on the proper organization of trading.
Key Forex Fundamental Factors
News of an economic, political and natural nature can affect, sometimes even within a few minutes, the exchange rate of a national currency of a country. Owning information on expected events, their forecast values and the degree of influence of each event on the market, a trader can increase his capital in a few minutes, if used correctly. All Forex news is divided into two main varieties:
1. Forex news is random and unexpected.
Unexpected and random news includes news of political and natural origin, less often economic. Wars and terrorist attacks have a particularly strong impact on financial markets. If you recall September 11, 2001, the terrorist attack in New York contributed to a sharp appreciation of the Swiss franc by almost 400 points over three hours. An earthquake or other natural disaster in any country can weaken the national currency of that country, since recovery will require funds, which can lead to increased inflation. Major wars, such as the military operations of Iraq or the United States in Afghanistan, are of particular importance. It is difficult to predict the outbreak of war, but usually such companies are announced in advance, and such announcements must be considered when planning a trading strategy.
2. Forex news planned and expected.
The expected and planned news usually include news of an economic, less often political nature.
According to the degree of importance and, accordingly, the strength of the market reaction, fundamental factors can be divided into three groups:
gross national product;
trade deficit. (payment defecit);
inflation indices (consumer price index CPI and wholesale price index PPI);
data on unemployment or employment (unemployment) (employment);
data on money supply (M4-M0);
official discount rates;
parliamentary elections, congress, senate. President elections. (the effect on the currency is determined by the election promises of candidates and the historical preferences of parties).
sizes of retail sales (retail sales);
dimensions of housing construction (housing starts);
the value of industrial orders and durable goods orders (manufacture orders, factory orders);
industrial production index;
industrial price index
futures exchange rates;
stock indices (Nikkey, Dow Jones, DAX, etc.) - the growth of these indices indicates the good condition of the national economy and increases the demand for the national currency of this country.
dynamics of prices of government bonds (T-bills, T-bonds).
There are three options for market influence on the fundamental event.
Occurs when market expectations are met. Then the price dynamics may not experience strong changes.
In the second variant, the market expectations are not justified only by virtue of the current event, i.e. the market underestimated this factor. In this case, the price can make a sharp fluctuation in order to reduce this underestimation and the real price.
In the third option, market expectations are not only not met, but are completely erroneous. Then we can expect a strong change in course in the opposite direction.
If fundamental news contradicts the current trend, then the time of its influence on the dynamics of the market may be limited to an hour or several hours.
If, on the contrary, the fundamental factor confirms the trend, then there is some increase with subsequent possible rollback.
The ratio of potential profits and losses in the Forex market.
The most successful traders make a profit of only 40% of all their transactions. Do not be surprised, as a result, most of the transactions concluded are unprofitable. How then do traders manage to make money if more than half of the decisions they make turn out to be wrong? The fact is that in futures transactions the size of the guarantee deposit is very small and even a slight price movement in an undesirable direction forces the trader to liquidate the position. Therefore, sometimes you have to move to the touch: enter into several transactions until you "catch" a profitable price movement.
Suppose a trader believes that gold prices should rise from 300 to 500 dollars. He buys a contract at a price of $ 300, deciding that he can risk no more than $ 10. The price drops to $ 290 and the trader liquidates his contract. Then he opens another long position at a price of $ 295 and again loses $ 10. Finally, the third contract, which he bought for $ 305, rises in price to the desired mark of $ 500, that is, $ 195. So, our trader bought contracts three times. The first two transactions were unsuccessful and brought him a total loss of $ 20. But the third position was successful and brought a profit of 195 dollars. Although only one out of three transactions turned out to be successful, in general, trading in the "gold" market was successful for the trader, making a profit of $ 175 ($ 195 - $ 20). If we move from nominal to actual profit, then the trader received $ 17,500 ($ 175 x 100 ounces).
Since most transactions are unprofitable, to succeed in the futures market is possible only if in monetary terms profitable transactions will exceed unprofitable ones. This can be achieved by analyzing the ratio of possible profits and losses. For each potential transaction, the rate of return is determined. The rate of return should then be balanced with potential losses if the market goes in an undesirable direction. Usually this ratio is set as 3: 1, that is, the potential profit should be at least three times the potential loss. Otherwise, entry into the market should be abandoned. If in the example with the "gold" contract the predetermined risk was 10 dollars, then the potential profit should be at least 30 dollars in this case.
Some traders, calculating the ratio of potential profits and losses, include a probabilistic factor in it. They argue that it is not enough to simply determine the rate of profit and loss, assuming that the values of potential profit and loss should be multiplied by a percentage probability coefficient (that they occur). Although from the point of view of statistics this approach looks quite logical, at the same time it turns out that the trader is able not only to assess in advance the potential profit and loss, but also assign them percentage values.
“Keep profitable positions as long as possible, close unprofitable ones on time” - one of the oldest futures trading aphorisms that is directly related to our topic. Great profit in the commodity futures market can be obtained only by following the most stable market trends. Since only a relatively small number of transactions during the year can bring significant profit, it is necessary to try to maximize this profit by "maintaining profitable positions as long as possible." On the other hand, it is necessary to minimize losses from unsuccessful transactions. It is surprising that so many traders, as a rule, do the opposite.