New to FOREX?

Knowledge is the key to success.

Trading in financial markets can be profitable but risky. Is it very difficult to make
money in the Forex market? Definitely not, provided you know all about Forex and
currency trading. It is very important to know everything you can about Forex and
currency trading before you start trading. For those of you who are new to Forex, the
information given in this section covers the basics of currency trading. Alpari
recommends that you read it carefully and open a demo account before you start
trading with us on a live account.
In this section you will find articles on trading, written by our experts. More detailed
information on Forex and CFD is given here. We have also developed a tutorial in
order you could better understand how to make a deal.
Trading successfully in the Forex market is not an easy task. However, knowing a lot
about Forex and currency trading you can make it possible.

What is FOREX?
Foreign Exchange Market (Forex) is the arena where a nation's currency is
exchanged for that of another at a mutually agreed rate. It was created in
the 70's when international trade transitioned from fixed to floating
exchange rates, and nowadays is considered to be the largest financial
market in the world because of its tremendous turnover.
Probability of earning on Forex is based on the fact that every national currency
is a good, as well as wheat or sugar, and a medium of exchange, as gold or
silver. As the world is changing so fast, economic conditions of every country
(production, inflation, unemployment etc) are getting more and more dependant
on each other, as a result, the rate of a currency changes against other
currencies. This is the main reason of the process of rate fluctuations.



Why FOREX?
Nowadays Foreign Exchange Market (FOREX) is the
most profitable sector for your investments.
Unlike other financial markets the Forex market has no physical location, like
stock exchange, for example. It operates through the electronic network of
banks, computer terminals or just by phone. The lack of physical exchange
enables the Forex market to operate on a 24-hour basis, spanning from one zone
to another across the major financial centers (Sydney, Tokyo, Hong Kong,
Frankfurt, London, New York etc). In every financial center there are a lot of
dealers, who buy and sell currencies 24 hours a day during the whole business
week.
Here the most important reasons why Forex is so popular nowadays:
• Liquidity. Forex is the largest financial market in the world, with the
equivalent of over 3-4 trillion changing hands daily when the volume on the
stock markets is only 500 billions of dollars.
• Flexibility. Because of 24-hour trading participants of the foreign exchange
market would not wait to react on some events, as this happens on other
markets (for example: stock markets). On other markets you simply can be
late if you have to wait till morning to show your reaction, as in the morning
the event will be already in the price, greatly differ from the desired level.
• Lower transaction costs. Traditionally the Forex market has no
commissions, except spread, the difference between ask and bid prices.
• Price stability. High liquidity helps ensure price stability, when unlimited
contract size can be executed at a fair price. It helps to avoid the problem of
instability, as it happens in the stock market and other exchange-traded
markets because of the lower trade volume, where at one price only limited
number of contracts can be executed.
• Margin. Margin size for trading on Forex is defined in the contract entered
between a client and a bank or a brokerage company, which gives the
opportunity to enter the market for the individuals and usually it is 1:100. So,
the collateral of 1000 US dollars allows a trader to make deals on $100.000.
Such high leverage combining with the rapid rates fluctuation make this
market profitable but at the same time extremely risky.
FOREX may be classified by several features:
Type of transactions. For example, there is an international conversion market
(conversion transactions such as US Dollar / Japanese Yen or US Dollar /
Canadian Dollar etc.).
Geographic feature. Unlike other financial markets the Forex market has no
physical location, like stock exchange, for example. It operates through the
electronic network of banks, computer terminals or just by phone. The lack of
physical exchange enables the Forex market to operate on a 24-hour basis,
spanning from one zone to another across the major financial centers (Sydney,
Tokyo, Hong Kong, Frankfurt, London, New York etc). In every financial
center there are a lot of dealers, who buy and sell currencies 24 hours a day
during the whole business week. Trading session starts in Far East, in New
Zealand (Wellington), then Sydney, Tokyo, Hong Kong, Singapore, Moscow,
Frankfurt-on-Maine, London and ends in New York and Los Angeles.

Main FOREX Participants
Let’s consider the main FX participants
• Commercial banks
They execute the main volume of currency operations. Other market
participants hold their accounts in banks and make necessary conversional,
depositary and credit transactions on them. Banks cumulate (through operations
with clients) market requirements of currency conversions and funds
attraction/depositing and refer with them to other banks. Besides filling clients’
requests banks can make transactions independently at own their expenses.
Finally, Forex represents a market of interbank transactions, and under currency
and interest rates fluctuations we should consider interbank foreign exchange
market.
Large international banks, daily operation volumes of which reach 1 bln
dollars, have the most important impact on the world exchange markets. These
are such banks as Deutsche Bank, Barclays Bank, Union Bank of Switzerland,
Citibank, Chase Manhattan Bank, Standard Chartered Bank and others. Large
transaction volumes that may cause significant changes in quotations or
currency prize are the most evident distinction of these banks. Large players are
usually divided into bulls and bears. Bulls are the market participants who play
for the currency prize increasing; bears are the market participants who play for
the currency prize decreasing. The market is usually in balance between bulls
and bears, and the difference in currency quotations usually fluctuates in quite a
narrow range. Although when bulls or bears overpower, currency rates
quotations fluctuate quite sharply and significantly.
• Firms that realize foreign trade operations
Companies that take part in the international trading have a great demand on the
foreign currency (with regard to importers) and offer of the foreign currency
(with regard to exporters), and also deposit and attract free currency remains.
As a rule, these organizations have no direct access to Forex and make
conversional and deposit transactions via commercial banks.
• Companies that realize depositing of foreign assets (Investment Funds,
Money Market Funds, International Corporations)
These companies represent different international investment funds. They
realize policy of diversifying management of assets portfolio, depositing funds
in securities of governments and corporations of different countries. They are
called just funds in slang of dealers. The most popular funds are «Quantum» of
George Soros and «Dean Witter».
Large international corporations also refer to this kind of firms. They realize
foreign industrial investments: affiliates and joint enterprises foundation, such
as Xerox, Nestle, General Motors, British Petroleum, etc.
• Central banks
Currency regulation on the foreign market is the main duty of the central banks,
particularly, prevention from national currency sharp bounces in order to avoid
economical crises, support balance between exports and imports etc. Central
banks have a direct influence on Forex. Their influence may be both: direct –
currency intervention, and indirect – money funds and interest rates regulating.
They can’t be referred to bulls or bears, as they may play both for rising and
falling depending on concrete tasks they have currently. Central banks may act
alone on the market to influence on the national currency, or they may act
together with the other central banks to conduct the collective currency policy
on the international market or for collective interventions.
The following banks have the greatest influence on the world currency market:
the US Central bank — US Federal Reserve (FED), German Central bank —
Deutsche Bundesbank and GB Central bank — Bank of England (Old Lady).
• Foreign exchanges
In some countries with transition economy currency markets operate. They
realize currency exchange for entities and formation of the market currency
rate. The State usually regulates the exchange rate, making use of currency
markets compactness.
• Currency brokerage firms
Their function is to bring together a buyer and a seller of the foreign currency
and to accomplish conversional or loan-depositary operation between them.
Broker firms take broker commission in the form of percent from the
transaction charge.
• Physical bodies
Physical bodies make a great deal of noncommercial transactions as related to
traveling abroad, wages, pension and earned income transfer, foreign exchange
cash buying and selling. In 1986 due to margin introduction physical bodies got
an opportunity to invest free cash on Forex to take profit.
The main volume (90-95%) on Forex is earned by the largest world commercial
banks by making conversional transactions both in clients’ interests and by
their own expense. Nevertheless, advance in computer technologies let to find
field of application for funds of private and retail investors. More and more
brokerage firms and banks give access for private investors to Forex via
Internet.

Mini Forex
Work on mini-forex means work with contracts less than 100 000$. Mini-forex
offers an opportunity to receive the services equal to those that traders who
work with several thousands/tens of thousands dollars deposits receive, but
depositing only 100$.
When trading on mini-forex a trader just makes less than 1.0 lot deals. Till 2003
there was difference between mini-forex and forex in trading terms. Till 2003
3$ commission was charged for each transaction on mini-forex without
reference to the transaction volume.
Forex is an interbank market with the minimal transaction size $1 mln. A
logical question occurs – How transactions of $10,000 size, made on miniforex,
get into the interbank market? Broker is clients’ counterparty for such
transactions. If a broker has a lot of clients who trade on mini-forex he can
transfer a joint client position to Forex. If a company works for a long time and
has thousands/tens of thousands clients (both on Forex and mini-forex), then as
a rule the joint client position is transferred to Forex and a broker isn’t
interested in his clients to lose. Every client’s transaction (without reference to
its financial result) brings 1-2 pips to broker. The more successful a client is,
the more transactions he/she will make and the more profit a broker will take.
So, work on mini-forex in large companies doesn’t differ from work on Forex.




Forex Glossary
In banking practice there are special code abbreviations: for example, the
exchange rate for dollar against yen refers to USD/JPY, British pound against
US Dollar to GBP/USD. The first currency is referred to as the base currency
and the second as quote currency:
USD / JPY = 120.25
Base currency Quote currency Rate
This abbreviation specifies how much you have to pay in quote currency to
obtain one unit of the base currency (in this example, 120.25 Japanese Yen for
one US Dollar). The minimum rate fluctuation is called points or pips.
Most currencies except USD/JPY, EUR/JPY and GBP/JPY where pip is 0.01
has 4th decimal system as 0.0001.
The currency pairs on Forex are quoted as bid and ask (or offer) prices:
Bid Ask
USD / JPY = 120.25 / 120.30
Bid is the rate at which you can sell the base currency, in our case it’s dollar,
and buy the quote currency, i.e. Japanese Yen.
Ask (or offer) is the rate at which you can buy the base currency, in our case
dollars, and sell the quote currency, i.e. Japanese Yen.
Spread is the difference between the bid and the ask price.
Margin trading assumes that Forex dealing is based on the margin, the
collateral, and the provided leverage.
This means that a client places minimal cash deposit, much smaller than the
underlying value of the contract, but can operate with larger amounts sufficient
to enter the real market. Such credits are provided by the brokerage companies
besides their informational services and make it possible for a trader to enter
into positions larger than his/her account balance. This collateral is typically
referred to as margin.
Leverage is the term used to describe margin requirements: the ratio between
the collateral and borrowed funds 1:20, 1:40, 1:50, 1:100. Leverage 1:100
means then when you wish to open a new position, then you must have 100
times less then the contract size.
Currency Rate is the ratio of one currency valued against another value of a
currency of one country. It whether depends on the demand and supply on free
market or restricted by a government or by central bank.
Lot is a fixed standard currency amount for trading provided on the collateral
— margin. Sometimes it is called the contract size. The 1.0 lot contract size for
each currency pair is listed in Contract Specification.
Storage is the charge to rollover the position overnight. It can be both positive
(credited to your account balance!) or negative (debited from you account
balance) depending on the interests rate in the countries which currencies you
trade.
Trader's Textbook
For profitable work on the financial markets a trader should follow the
principles specified below.
Forecast which way a market is expected to trend (Analysis).
There is a wide range of methods of analysis: Fundamental Analysis, Technical
Analysis, Elliott Wave Analysis, Candlesticks, Tomas Demark Theory, Chaos
Theory or any other. With the help of these methods a trader can forecast prices
behaviour in the future.
Choose a right moment to open or close a position (Trading Strategy).
Trend identification is not enough for profitable trading. It is essential to choose
the right moment to enter the market. E.g. if having identified the bullish trend
you enter the market before a retreat starts, this retreat may cancel your stop
order. Your position is closed. You lose money and the market reverses and
goes in the direction you’ve identified.
Follow the rules of money management (Money Management).
It will decrease the risks of your financial operations. Your money management
system will allow you to make deals only with the minimal risk.
Do not allow your emotions to operate your account (Psychological
Peculiarities of Trading). When making a decision emotions should be kept
under control. Emotions are the first enemies of a trader.