Future Market

A market in which contracts are traded for future delivery of commodities (coffee, gold ) , currencies (marks, ponds ) and financial instruments ( Treasury bills, certificates of deposit). The purchase or sale of a futures contract requires that a deposit, called margin, be maintained with a broker. The market is designed in such a way that it is easy to get out of a contract or cancel it.

The vast majority of the participants , the buyers and seller of futures contracts , do not intend to take delivery or deliver , what they bought or sold. Futures contracts are used as an investment vehicles and as a vehicle for hedging positions.

As an example, a manufacturer of gold jewelry who has bought gold on the spot or cash market will sell gold in the futures market until the time when the jewelry is completed and sold in the wholesale or retail market. At that time the manufacturer will buy gold in the futures market. If the price of gold rose in the meantime , he losses on the futures contracts but obtains a higher price for his gold jewelry.

If the price of gold fell down in the meantime . he makes profit on the futures contract but obtain a lower price for his gold jewelry. The sale of a futures contract protected him against fluctuations in the price of gold; however, he never intended to deliver gold under that contract.

Certificate of Deposit. ( CD )

A placement of funds for a certain period of time with a bank for which the depositor of the funds receives a confirmation which makes the deposit receipt a negotiable instrument . Investment bankers create a secondary market where CD’s can be purchased and sold prior to maturity.

Investors usually accept a smaller interest rate on CD’s than on regular time deposits because investment is more liquid , that is, the CD can be converted into cash at any time without asking the bank to break the deposit. CDs were originally invented in the United States in the early sixties and were used in the domestic U.S money market.

They were later also used for external dollar in several financial centers. The technique is so attractive that the instrument has also been introduced into the domestic money market of several other countries .

Effective Interest Rates.

The amount of money , expressed as per annum percentage , actually paid on a loan or deposit. The effective interest rate may differ from the nominal interest rate, depending on interest payment schedule .

For instance , when the interest is deducted from a loan when the load is first made , the actual proceeds available to the borrower are less than the nominal loan principal used to calculate the interest payments. The effective interest rate in this case is the interest payments expressed as a percentage of the actual proceeds on a per annum basis.

Actors in the Foreign Exchange Market

In principle anyone who exchanges currency of a given country for currency of another country participates in the foreign exchange market. However it is useful if we concentrate on the major actors in this market. Under any priority system commercial banks are the main participants in the foreign exchange market. Indeed one can say that it is the commercial banks that “make a market “ in foreign exchange. Next in importance are the large corporations with foreign trade activities or direct investment abroad. Finally central banks are omnipresent in the foreign exchange market.

Commercial Banks.

Obviously when we talk of the commercial bank as the leading actor in the foreign exchange scene we are speaking mostly of large commercial banks with many clients engaging in imports and exports which must be paid for in foreign currencies or of banks which specialize in the financing of trade.

Commercial banks participants in the foreign exchange market as an intermediary for their corporate customers who wish to operate in the market. They also operate on their own account.

Central Banks

These institutions are not only responsible for the printing of domestic currency and the management of the money supply (as well as all the other objectives of monetary policy ) but in addition they are often responsible for maintaining the value of the domestic currency vis-à-vis the foreign currencies. This is certainly true under the system of “fixed exchange rates”. However even within systems of “floating exchange rates “ the central banks have usually felt compelled to intervene in the foreign exchange market at least to maintain “orderly markets”.

What the Foreign Exchange Market is

Like the money market, the foreign exchange market is a market where financial paper with a relatively short maturity is traded. However, the financial paper traded in the foreign exchange market is not all denominated in the same currency. In the foreign exchange market, paper denominated in a given currency is always traded against paper denominated in a given currency is always traded against paper denominated in another currency. One justification for the existence of this market is that nations have decided to keep their sovereign right to have and control their own currency. There would not be a foreign exchange market.

Like the money market, the foreign exchange market considers the time when the transaction is closed to be one of the elements in the market. In describing the money market, we made this point by comparing currency and treasury bill. Currency provides immediate acquisitive power, whereas a treasury bill provides this purchasing power at some specified future date (assuming the bill is held to maturity and not sold in the secondary market). In the foreign exchange market into spot and forward markets. The spot market is for foreign exchange to be delivered within 2 business days; the forward market is for exchange to be delivered at some specified future date. However foreign exchange transactions for immediate delivery or for delivery up to 7 days later are traditionally considered to be spot transactions, although they carry a different rate depending on the specific deliver date. The date of delivery is technically called the value date

Foreign Money Market

Domestic money markets trade in funds denominated in the local currency and operate under regulations governing domestic markets. When funds in any currency are traded outside the regulations governing domestic markets in that currency , then we have a foreign or external money market. This is the case when U S dollar deposits are traded outside the banking regulations governing domestics U.S dollar deposits, usually outside the United States. This type of transaction is the core of the so - called eurodollar market. When speaking of all the currencies traded in foreign markets, one usually refers to them as the Eurocurrency markets; these include Euro – French francs, Euro - German marks, and so on.

We should note, too that in addition to the Eurocurrency markets, foreign money markets have also emerged in Aisa. The Middle East and to a much lesser extent , in other regions. These other markets are often identified by names such as the “ Asian dollar market.” The limitations on the term “Eurodollar market” also apply to terms such as Asian dollar market.”

What the money market is

We begin with the money market because it is the one in which we all have operated at one time or another. Anybody who has a checking account is a participant in the money that one person (or enterprise ) owes to another. In the case of currency , that is cash in your pocket, it is the government that owes the money to you as the bearer of the currency. In the case of a treasury bill it is also the government that owes an equivalent value to the owner of the bill. Here however a specified time has to elapse before the piece of financial paper - the treasury bill – becomes payable in hard cash by the government i.e before the date of the maturity of the document. In the first case , the government currency is actually money. In the second instance, the treasury bill is only near money. It would not be very hard to sell the treasury bill to another person. However the govt itself is not liable for the payment of the money represented by the bill until the instrument matures.

The bulk of the financial assets traded in the money market have a maturity of less than a year. However active trading is carried on in documents of up to 5 years maturity. Anything above 5 years is pretty much the domain of the investors in the capital markets where these longer term securities are traded.market. The article that is bought and sold in this market is “money” or “near – money “. Money or near-money is nothing more than financial paper representing a sum of money

Liquidity crisis for a business

A liquidity crisis occurs when a business experiences a lack of cash required to grow the business, pay for day-to-day operations, or meet its debt obligations when they are due, causing it to default. When "liquidity crisis" is used to refer to an economy as a whole it means that liquidity crises affecting principal players in the economy are resulting in diminished availability of credit.

Some businesses choose to "trade through" a liquidity crisis in the hope of finding additional cash flow needed to survive the temporary crisis. This often involves delaying payment of creditors, issuing bonds, making additional loans, selling assets, and encouraging more prompt payment from customers. Continuing to trade through a liquidity crisis in circumstances where the underlying business is not viable (or where the market itself is experiencing a prolonged recession or credit crunch) will only delay the inevitable bankruptcy and result in further losses.

When a liquidity crisis occurs, it is vital that the stakeholders accurately and objectively assess whether the business is viable and ultimately can succeed with the injection of further cash to stave off insolvency, or whether it is incapable of surviving long term in the current market. The financier or bank lender is often the ultimate arbiter of whether a business survives a liquidity crisis or not.

The decision whether to "trade through" a liquidity crisis or declare bankruptcy is quite possibly the most difficult and complex decision any business leader can face.

Money market

The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.

The core of the money market consists of banks borrowing and lending to each other, using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked to (i.e. priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and currency.

Finance companies, such as GMAC, typically fund themselves by issuing large amounts of asset-backed commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP conduit. Examples of eligible assets include auto loans, credit card receivables, residential/commercial mortgage loans, mortgage-backed securities and similar financial assets. Certain large corporations with strong credit ratings, such as General Electric, issue commercial paper on their own credit. Other large corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines.

In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issue municipal paper, while the US Treasury issues Treasury bills to fund the US public debt.

• Trading companies often purchase bankers' acceptances to be tendered for payment to overseas suppliers.
• Retail and institutional money market funds
• Banks
• Central banks
• Cash management programs
• Arbitrage ABCP conduits, which seek to buy higher yielding paper, while themselves selling cheaper paper.
• Merchant Banks

Balance of trade

The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports.^[1] A favourable balance of trade is known as a trade surplus and consists of exporting more than is imported; an unfavourable balance of trade is known as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance.

Ways to Trade Forex

Essentially there are two ways to analyze and make forecasts in a market: Technical Analysis and Fundamental Analysis.

Technical Analysis is when a trader looks at past price patterns in order to analyze the market and make any future predictions. This is typically done by looking at charts such as the ones shown above and extrapolating price movement patterns from the past.

The graph below is an example of a typically used chart pattern known as a head and shoulders. This pattern was formed from October 2006 through November of 2007. Because of the nature of supply and demand and psychology of investors this pattern is suggested to predict downward movements in the markets, according to some technical analysis theories.

Technical Analysis patterns can be used over long time frames such as the one depicted above or over much shorter time frames.

Technical Analysis can be used stand alone or in conjunction with Fundamental Analysis.

The basic premise of fundamental analysis is analyzing and forecasting the market based on economic fundamentals similar to those described above: like interest rates, geo-political situations, economic growth and merger and acquisition activity in various countries. The Forex market reports on various economic events such as the key unemployment numbers, and supply and demand analysis. Various reports are put out on an almost daily basis. Typically the reports have a consensus before the report is put out. However when the report comes out it is sometimes not in line with the forecast. When this is the case for a particular currency pair, it will make a quick move to adjust, as the forecasted consensus is already priced in.

Below is an example of the ISM Manufacturing Report that came out higher than expected which strengthened the US Dollar causing the GBP/USD to fall at 10 am eastern time. Within 10 minutes the market moved over 35 pips. Keep in mind that this type of trading can be very risky as the market moves very quickly when these types of reports come out.

However, fundamental traders can also trade investment positions that are more long term. For example, a trader can believe that a certain countries economy will flourish over time relative to another economy and then he can take a position in that currency pair to reflect his/her economic outlook.

There are many different ways to trade Forex. And due to the fact that forex is a 24 hour a day market, people are able to find ways to participate that fit around their schedules. For example, you can use trading robots that are readily available on the internet to trade on your behalf or you can trade manually based on your own analysis as you watch the forex market yourself.

Although trading Forex can easily be a full time job most retail traders trade part time within their schedule, either after work or in the wee hours of the morning.

Some of the popular ways to trade forex are using trading robots that execute trades based on pre set parameters on your behalf, trading based on fundamental announcements and discretionary trading using fundamental and technical analysis.

There are some very strong benefits to using a robot. For starters it removes one of the greatest factors that negatively impacts traders. That factor is human emotion. Whether you believe it or not emotions such as greed and fear are the number one culprits to a trader's demise. Imagine being convinced that your trade will become profitable and not walking away from a loss because of fear of taking a loss and greed of giving up money. As you trade, these emotions are there and they need to be continuously managed. A trading robot enters and exits positions on your behalf and you do not need to be there to press the button on losing or winning trades. This feature of a trading robot has a diminishing effect on human emotions. Another key aspect of a trading robot is that it is making trades for you while you are not in front of your computer. This way, in the 24 hours per day forex market, you are consistently making trades even when you are at work or asleep.

There are many robots available, some good and some that are very dangerous to use. We offer our clients multiple trading robots for the Metatrader 4 platform and many other stand alone platforms. When dealing with trading robots it is highly suggestible that you test them on a demo forex account before risking your hard earned money with the robot. Please keep in mind that people can make promises on the internet without any substance behind them.

Another way of trading is through a managed account. Where you have a professional trader trade your money along with others, then everyone that has invested in these trades will get a portion of the profits or take on a portion of the losses, depending on the percentage they put in. You need to be very careful when selecting a manager for your account and making sure they are qualified to trade on your behalf. Managers typically charge a management fee and performance fees in return for them trading your account. Most retail traders prefer to trade themselves and experiment with different dealing firms, currencies and trading styles. However, some traders prefer to use managed accounts in order to have someone who they believe is more qualified control their investments.

Forex Trading Features

The forex market is traded over the counter through an electronic network of Banks, Broker Dealers and Hedge Funds. There is no centralized physical exchange like with equities or futures. There are some key advantages to this. One key advantage is that the Forex Market is open 24 hours a day 6 days per week. The hours are from Sunday starting at 5pm going to Friday at 5pm New York Time. The market begins in Australia (Sydney) and continues around the world to the United States (New York).

Because the network of banks, brokers and dealers is so large, liquidity becomes a smaller issue than if you were dealing with some stocks or futures. During normal market conditions getting in and out of trades is a fairly smooth process, with a counterparty or a market maker usually available to facilitate your trade.

Another benefit of forex trading is that since you are not taking positions in companies there is no uptick rule. Therefore you can take a particular currency pair and speculate on it going up or down without any restrictions.

Information and market news broadcasts are broadly available to all traders in the FX Market. Therefore, particularly through the use of technology, the market is fairly transparent to the investor.

In most retail forex dealing firms trading is conducted commission free. However the dealing firm does have a bid/ask spread in place which the client pays in order to facilitate transactions. You can try out forex trading by using a demo forex platform.

One nice advantage about forex trading is flexible contract sizes. We will later address how forex contracts are set up and learn more about leverage but for now there is a key concept to understand. If you are completely new to forex trading you can trade a real money account with relatively small contract sizes where currency price fluctuation will translate to relatively small moves in dollar terms. You can control real money with an account as small as $200. With every lot you will control 1000 units worth of currency. This means that every tick in the price will be approximately 10 cents. Because you cannot lose more than you put in with many retail forex dealing firms that we work with you can practice with a real money micro account with an investment risk as small as $300

Forex Basics

Introduction

Have you ever exchanged your currency to go on a trip? If you did, whether you knew it or not you were trading forex. Due to easily available, high speed interned forex trading, for speculation purposes, is becoming significantly more and more popular to the retail crowd. There are many names for forex trading, here are just a few examples so you don't get confused as you read along. Forex Trading is also known as Foreign Exchange Trading, Currency Trading, Spot Forex Trading, FX Trading, and the list goes on and on.

The simple definition of forex trading is the simultaneous selling of one currency and the buying of another. Forex Trading can be done for both business and speculation purposes. For example of a business forex transaction is a company buying a resources in a foreign country exchanging their currency into the other country's currency.

An example of speculation is an individual expecting a particular currency to appreciate relative to another therefore buying one and selling the other simultaneously. To take this example one step further you may think that the Euro will appreciate relative to the US Dollar, thus you will buy Euros and sell US Dollars. If the value of the Euro goes up you can sell your Euros back for the US Dollars and lock in your profit. If the value goes down you will incur a loss.

To sum it up, the retail forex market allows you to speculate on the price movements of various currency pairs around the world. The Forex market is the largest market in the world. The average daily volume in the forex market is around $2 trillion per day. Over 85% of this volume is traded for speculation purposes. There are many participants in the forex market including: banks, commercial companies, central banks, investment management firms, hedge funds, retail Forex brokers and individual traders.

Until the late 90's it was difficult for retail traders to speculate in the forex markets. Minimum investments were typically as high as $10 million. Through the development of retail Forex brokers and the internet retail spot FX now makes up over 10% of the Forex market. You can trade forex online for speculation purposes with as little as $200 in your account from you home computer.

What is traded on the Foreign Exchange market?

The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the euro and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY).

Because you're not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.

In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to the other countries' economies.

Unlike other financial markets like the New York Stock Exchange, the Forex spot market has neither a physical location nor a central exchange. The Forex market is considered an Over-the-Counter (OTC) or 'Interbank' market, due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.

Until the late 1990's, only the "big guys" could play this game. The initial requirement was that you could trade only if you had about ten to fifty million bucks to start with! Forex was originally intended to be used by bankers and large institutions - and not by us "little guys". However, because of the rise of the Internet, online Forex trading firms are now able to offer trading accounts to 'retail' traders like us.

All you need to get started is a computer, a high-speed Internet connection, and the information contained within this site.

BabyPips.com was created to introduce novice or beginner traders to all the essential aspects of foreign exchange, in a fun and easy-to-understand manner.

What is FOREX?

The Foreign Exchange market, also referred to as the "FOREX" or "Forex" or "Retail forex" or "FX" or "Spot FX" or just "Spot" is the largest financial market in the world, with a volume of over $4 trillion a day. If you compare that to the $25 billion a day volume that the New York Stock Exchange trades, you can easily see how enormous the Foreign Exchange really is. It actually equates to more than three times the total amount of the stocks and futures markets combined! Forex rocks!