About Forex Trading
Today, a British regulator announced that the first set of rules to govern the unregulated, multi-trillion dollar foreign currency market would be forthcoming. The new standards will be finalized after a current probe into possible currency rate manipulation.
The British regulator, the Financial Conduct Authority (FCA), is collaborating with regulators in the US and in Asia to determine potential manipulation of foreign exchange benchmarks, which in the UK happens at the “London fixing” at 4:00p.m. every business day.
Major banks, including Barclays, UBS and Deutsch Bank are cooperating with the investigation. The Royal Bank of Scotland announced that it was reviewing its Forex processes. Earlier this year, substantial fines were levied against lenders who manipulated the widely used interest rate benchmark, the London interbank offered rate (Libor).
Depending upon how the probe plays out, the regulators will have policy decisions to make. FCA CEO, Martin Wheatley said; “One response says you have to enforce against poor behavior, and the other response is to look at the conditions that allowed that behavior to exist. That is what we did with Libor and came up with a set of structural changes.
“Frankly, it’s an unregulated market and that would be a big policy change for global regulators to decide that Forex needed to be a regulated market. The truth is we are at a very early stage and a long way off before we can make any conclusions.”
London Heart of Forex Trading
40 percent of global Forex trading occurs in London. As of April, 2013, the FCA is the only regulator of Libor. The FCA has declared that rigging of Libor rate sis a criminal offense.
Brokers who handle oil, gold and other major, non-interest rate related benchmarks have been requested to cooperate with the FCSA by assesses their individual compliance protocols. Regulating these markets would be an expansion of the FCA’s parameters.
What is Forex?
Forex is the acronym for the Foreign Exchange Market. This is a marketplace where many of the global currencies are traded. The Forex market was create in 1971 when international trade transitioned from fixed to floating exchange rates.
More than $4 trillion is traded daily in the Forex marketplace. The Forex market is the largest and most significant financial market in the world. By comparison, the Forex market is 100 times larger than the New York Stock Exchange and three times larger than the US Equity and Treasury markets combined.
Forex is an over the-counter market with no central trading arena. Forex transactions are typically conducted via telephone, Internet, or by a centralized network of banks, multinational corporations, importers, exporters, brokers and currency traders.
The main participants in the Forex marketplace are:
- · Central banks
- · Commercial banks
- · Individual investors
Forex trading is a risk-oriented strategy. Investors participate for several reasons:
Speculation – Investors seeks to make profits from currency fluctuations.
Hedging – Investors try to protect against fluctuating currency pairs when trading good and services.
The Internet has become a leading facilitator for Forex traders.
Basic Principles of Forex Trading
- Forex is the buying of one currency and the selling of another concurrently.
- Typically, the major currencies—the British Pound (GBP), the Euro (EUR), the Japanese Yen (JPY), and the Swiss Franc (CHF)—are traded against the US Dollar (USD).
- Trade pairs in which the USD is not included are called cross pairs, and occur much less frequently.
- The currency pairs are expressed with a base currency as the first part of the pair, followed by the quote currency. For example, USD/JPY would be the US dollar as the base against the Japanese Yen as the quote.
- Accompanying the currency pair is the quota, or bid/ask price. This is expressed in the following format: EUR/USD : 1.2836 1.2839. The first number in the series represents the bid price, the cost of selling the Euro against the Dollar, or going ‘short’ on the Euro. The second number is the ask price, the cost of buying the Euro against the dollar, or going ‘long’ on the Euro.
- The difference between the bid/ask price is called the pip spread.
- A pip is the smallest unit of measure for any currency. In most currencies, this is the fifth digit, or the fourth after the decimal point; in dollars, each pip is equivalent to one-hundredth of a penny. The Japanese Yen is the exception where each pip is the second unit after the decimal point, meaning each pip equals one cent.
Glossary of Forex Terms
Account overview -An overview of your account(s), including base currency, value, cash available, unrealized margin profit/loss, funds available for margin trading, and margin utilization.
Account Summary – The status and trading activity of a specific account. If you maintain multiple accounts, the Account Summary shows information about individual accounts, as well as an aggregate of all the accounts.
Account value -The current value of the account, combining Cash balance, unrealized value of positions, and Transactions not booked.
Asset – In Options trading, a common term for the underlying asset. This is the financial instrument upon which Options, a derivative product, are based. For example, the underlying asset for IBM stock Options is the IBM stock itself.
At the Money (ATM) – A condition in which the strike price of an Option is equal to (or nearly equal to) the market price of the underlying security.
At-the-Money (ATM) forward strike – The ATM forward strike price of an Option is the strike price of the corresponding forward outright price at a specific forward date, as calculated via interest rate differentials.
Available for margin trading -The funds available for margin trading, derived from subtracting Used for margin requirements from Account Value.
Ask price -The price at which you can buy the specified instrument. This is also called the Offer price. For Forex trading, it is the price at which you can buy the trade/base currency (quoted first) by selling the price currency of the pair. For example, if you buy EURUSD 100,000, you are buying euros 100,000 against US dollars.
Tags: Barclay's, Deutsch Bank, Euro, Financial Conduct Authority, Foreign Exchange Market, forex, GBP, Glossary of Forex Terms, London Fixing, pip, Principles of Forex Trading, UBS, US Treasuries, usd, yen