The Reader

Forex Market Introduction
Forex, or Foreign Exchange, is the simultaneous exchange of one country’s currency for that of another. An investor wishes to purchase or sell one currency for another with the hope of making a profit when the value of the currencies changes in favor of the investor, whether from market news or events which take place in the world. This market of exchange has more daily volume, both buyers and sellers, than any other in the world. Taking place in the major financial institutions across the globe, the forex market is open 24-hours a day.

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.
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.

Money or currency is the ultimate commodity. Every time a company or government buys or sells products and services in a foreign country, they are subject to a foreign currency trade; the exchanging of one currency for another. Many individuals and organizations also trade currencies for speculative purposes. With all of these currency transactions going on daily, it is no wonder that the foreign currency exchange market, also known as "forex" or "fx" market, is the largest financial market in the world. It is much bigger than all of the U.S. stock markets combined, with a daily trading volume larger than that of all the world's stock markets put together.

Trillions of dollars of foreign exchange activity takes place every day. From 1997 to the end of 2001, daily forex trading volume surged from US$5 billion to US$1.5 trillion. The forex market continues to grow at a phenomenal rate.

Factors Affecting the Market
Currency prices are affected by a variety of economic and political conditions, most importantly interest rates, inflation and political stability.
Moreover, governments sometimes participate in the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price. This is known as Central Bank intervention. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and volume of the Forex market makes it impossible for any one entity to "drive" the market for any length of time.

Before the internet came along, only corporations and wealthy individuals could trade currencies in the forex market through the use of the proprietary trading systems of banks. These systems required as much as US$1 million to open an account. Thanks to advancements in online technology, today investors with only a few thousand dollars can have access to the forex market 24 hours a day.

For traders, forex trading provides an alternative to stock market trading. While there are thousands of stocks to choose from, there are only a few major currencies to trade (the Dollar, Yen, British Pound, Swiss Franc, and the Euro are the most popular). Forex trading also provides a lot more leverage than stock trading, and the minimum investment to get started is a lot lower. Add to that the ability to choose flexible trading hours and you have the reason why so many stock traders have flocked to day trade currencies.

Forex Quote - How to Read a Currency Quote
Before trading currencies an investor has to understand the basic terminology of the forex market, including how to interpret forex quotes. In every foreign exchange transaction and investor is simultaneously buying one currency and selling another. These two currencies make up a currency pair. This is an example of a foreign currency exchange rate of the dollar versus the yen:USD/JPY = 119.72

The currency to the left of the slash ("/") is called the base currency (in this example, the US dollar) and the one on the right is called the quote currency or counter currency (in this example, the Japanese Yen). This notation means that 1 unit of the base currency (that is, 1 dollar) is equal to 119.72 Japanese Yen. If buying, the exchange rate specifies how much you have to pay in units of the quote currency to buy one unit of the base currency; in the above example, you have to pay 119.72 yen to buy 1 US dollar. If selling, the foreign currency exchange rate specifies how much units of the quote currency you get for selling one unit of the base currency; in the above example, you will receive 119.72 Japanese Yen when you sell 1 US dollar.

Even though there are many currencies all over the world, 85% of all daily transactions involve trading a group of currencies known as the "Majors." These currencies include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. The four most actively traded currency pairs are the US Dollar / Japanese Yen (USD/JPY), Euro / US Dollar (EUR/USD), British Pound / US Dollar (GBP/USD), and the US Dollar / Swiss Franc (USD/CHF). The US Dollar / Canadian Dollar (USD/CAD) and the Australian Dollar / US Dollar (AUD/USD) are also actively traded pairs. For traders, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies; i.e., the "Majors."

Buying/Selling
In this market you may buy or sell currencies. The objective is to earn a profit from your position. If you have bought a currency, for example, and the price appreciates in value, then you will earn a profit by closing your position. When you close your position, sell the currency back in order to lock in the profit, you are in actuality buying the counter currency in the pair. By trading currency pairs, one currency valued against another, a rate of worth has been established. After all, a country’s currency has value only relative to the currency of another country.

Margin
The margin deposit is not a down payment on a purchase of equity, as many perceive margins to be in the stock markets. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value. Most brokers online trading platform has margin management capabilities, which allow for this high leverage. In the event that funds in the account fall below margin requirements, the Dealing Desk will close all open positions. This prevents clients' accounts from falling into a negative balance, even in a highly volatile, fast moving market.

Rollover
For open positions, there is a daily rollover interest rate that a trader either pays or earns interest rate, depending on your established margin and position in the market.

Trading in the Forex market is a challenging opportunity where above average returns are available to educated and experienced investors who are willing to take above average risk. However, before deciding to participate in Forex trading, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose.
There is considerable exposure to risk in any foreign exchange transaction. Any transaction involving currencies involves risks including, but not limited to, the potential for changing political and/or economic conditions that may substantially affect the price or liquidity of a currency.
More over, "The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin call within the time prescribed, your position will be liquidated, without prior notice to you, and you will be responsible for any resulting losses." Investors may lower their exposure to risk by employing risk-reducing strategies such as 'stop-loss' or 'stop-limit' orders. There are also risks associated with utilizing an Internet-based deal execution software application including, but not limited, to the failure of hardware and software.

Fundamental vs. Technical Analysis
Currency traders make decisions using both technical factors and economic fundamentals. Technical traders use charts, trend lines, support and resistance levels, and numerous patterns and mathematical analyses to identify trading opportunities, whereas fundamentalists predict price movements by interpreting a wide variety of economic information, including news, government-issued indicators and reports, and even rumor.
The most dramatic price movements however, occur when unexpected events happen. The event can range from a Central Bank raising domestic interest rates to the outcome of a political election or even an act of war.

What Every Currency Trader and individual investor Should Know
The forex market is one of the most popular markets for speculation due to its enormous size, liquidity, and tendency for currencies to move in strong trends. An enticing aspect of trading currencies is the high degree of leverage available. WPP allows positions to be leveraged up to 100:1. Without proper risk management, this high degree of leverage can lead to enormous swings between profit and loss. Knowing that even seasoned traders suffer losses, speculation in the forex market should only be conducted with risk capital funds that if lost will not significantly affect one's personal financial well being.