a forex market overview 03 - orbex · a forex market overview 01 disclaimer risk disclosure the...

A FOREX MARKET OVERVIEW

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CONTENTS

Disclaimer

Introduction

Recent Forex Market History

Composition of the Forex market

How Currencies Trade on the Forex market

Valuation of Currencies

Fundamental Analysis

Technical Analysis

Trading In the Forex Market

Contact Orbex

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DISCLAIMER

RISK DISCLOSURE

The information contained in this eBook is provided for information purposes only. The information is not intended to be and does not constitute financial advice, is general in nature and is not specific to you. Before using the information contained in this eBook to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence. None of the information contained in this eBook is intended as investment advice, as an offer or solicitation of an offer to buy or sell or as a recommendation, endorsement or sponsorship of any security. Orbex is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

There is a substantial amount of risk in trading currencies and CFDs and the possibility exists that you can lose all, most or a portion of your capital. Orbex does not, cannot and will not assess or guarantee the suitability or profitability of any particular investment or the potential value of any investment or informational source. The securities mentioned in this eBook may not be suitable for all investors. The information provided by Orbex, including but not limited to its opinion and analysis, is based on financial models believed to be reliable but it is not guaranteed, represented or warranted to be accurate or complete. Your use of any information from this eBook or Orbex site is at your own risk and without recourse against Orbex, its owners, directors, officers, employees or content providers.


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INTRODUCTION

The forex market is the largest capital market in the world, with an average of $5.3 trillion worth of currency transactions made each trading day. Although exchange traded currency futures do exist, the vast majority of this forex trading is conducted over the counter, which means transactions are executed through a computerized network of banks, brokers and market makers instead of on a centralized exchange.

The forex market spans the globe, with the bulk of transactions taking place in the world’s most prominent financial centers — such as London, New York, Tokyo and Sydney — with Paris, Hong Kong, Zurich, Frankfurt, Singapore and Wellington also seeing some sizeable trading volume.

While most large scale currency transactions are conducted with financial institutions located in these major financial centers, forex trading can now also be done in much smaller amounts over the Internet by anyone with adequate funds in a live forex account opened with an online forex broker.

Participants in the forex market consist of a wide array of banks and financial institutions, central banks, hedge funds, investment management companies, major multinational corporations, retail forex brokers and their clients, high net worth traders, and investors. The forex market is open 24 hours a day, five and half days a week.

Other than on bank holidays, trading in the global forex market begins in New Zealand on Sunday afternoon at 5PM New York time and continues until the New York close on Friday afternoon at 5PM. The forex market remains open continually throughout that typical trading week.


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RECENT FOREX MARKET HISTORY

In 1913, most global currency transactions included the Pound Sterling, which gained considerable prominence among dealers in Paris, Berlin and New York, which were the other major currency exchange centers at the time. By 1924, currency dealers in the City of London had increased to 40 from just two in 1902. The 1920’s were also the time of German hyperinflation, which saw the German Reichsmark currency plunge in value.

The fixed exchange rate system that preceded the present free floating currency system in force today was the post World War II Bretton Woods Accord. This agreement pegged the value of European and Japanese currencies to the U.S. Dollar, which was in turn pegged to the value of gold at $35 per ounce. The Bretton Woods Accord allowed the major currencies to fluctuate by one percent against the Dollar, which became the world’s reserve currency after the war.

In 1971, the Smithsonian agreement expanded the limit, allowing currencies to fluctuate up to two percent from one percent, which led to a threefold increase in forex transactions. By 1973, a sharp rise in transactions trading U.S. Dollars for gold led then-U.S. President Richard Nixon to abandon the Bretton Woods accord and effectively take the U.S. Dollar off the gold standard by unilaterally ending the Dollar’s convertibility into gold at $35 per ounce.

The abandonment of the Bretton Woods Accord eventually led to the forex market closing for two weeks in March of 1973. This marked the end of central bank and nation state controlled foreign exchange rates and the beginning of the relatively free floating exchange rate system that continues to this day.


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COMPOSITION OF THE FOREX MARKET

AS OF 2013, THE TWELVE CURRENCIES THAT ARE MOST ACTIVELY TRADED IN THE FOREX MARKET, INCLUDING THEIR ISO 4217 CODE AND SYMBOL AND LISTED IN ORDER OF THEIR SHARE OF VOLUME TRADED DAILY IN THE FOREX MARKET ARE:

The United States Dollar – USD ($) European Union Euro – EUR (€) Japanese Yen – JPY (¥) Pound Sterling — GBP (£) Australian Dollar — AUD ($) Swiss Franc — CHF (Fr) Canadian Dollar — CAD ($) Mexican Peso — MXP ($) Chinese Yuan — CNY (¥) New Zealand Dollar — NZD ($) Swedish Krona — SEK (kr) Russian Ruble — RUB

EUR/USD USD/JPY GBP/USD USD/CHF AUD/USD

The currency pair symbols above show two currencies, the first currency, which is known as the base currency, and the second currency, which is known as the counter currency. The base currency is the unit being bought or sold, while the counter currency represents the currency used for purchasing or selling the base currency. As a rule of thumb, the base currency is always the currency gaining or declining when an exchange rate quote is expressed. For example, if the base currency is the U.S. Dollar, then if the rate increases, the counter currency declines in value while the Dollar goes up. If the base currency is the Euro or the Pound Sterling, then the value of those currencies declines or appreciates when the rate quoted rises or declines.


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HOW CURRENCIES TRADE ON THE FOREX MARKET

USD/CAD NZD/USD EUR/JPYEUR/GBP

THE FOREX MARKET HAS A NUMBER OF PROTOCOLS TO ENABLE TRADING INVOLVING THE EXCHANGE OF CURREN-CIES, WITH THE MOST IMPORTANT BEING THE PAIRING OFF OF CURRENCIES. A VERY LONG LIST OF CURRENCIES FROM NATIONS ALL OVER THE WORLD ARE TRADED IN THE FOREX MARKET, TO A GREATER OR LESSER EXTENT, BUT THE MAJOR AND CROSS CURRENCY PAIRS WITH THE MOSTTRADING ACTIVITY ARE:

DETERMINING THE VALUE OF A CURRENCY RELATIVE TO ANOTHER IN A FLOATING EXCHANGE RATE REGIME SUCH AS THE ONE IN FORCE TODAY IS GENERALLY ARRIVED AT USING ONE OF THREE MODELS:

The Relative Purchasing Power Parity model - takes into account interest rate parity and the price of goods and services in each country as a basis for the valuation of the country’s currency. Applying this model to determine exchange rates generally falls short in the near term due to differences in the flow of goods and capital from each country, as well as other factors such as central bank intervention.

The Balance of Payments model - once popular and determined by the trade in goods and services, this method was largely discredited by the soaring U.S. Dollar in the 1980s and 1990s despite the U.S. Trade Deficit, which ballooned during the same period.

The Asset Market model - uses a nation’s assets as a basis for the valuation of its currency. This includes a country’s future assets and a projection of what those assets could be worth in the future. The problem with this model is fairly obvious since underlying commodities generally fluctuate, thereby making a valuation of a nation’s currency based on an underlying — constantly changing — value inaccurate.


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VALUATION OF CURRENCIES


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Essentially, the value of a nation’s currency versus another nation’s currency is determined by interest rates, asset flows, investor risk appetite, the nations’ balance of trade, and the stability of the countries’ economies. Asset flows are largely dependent on interest rates. The amount a country is willing to pay out in interest, in addition to the stability of the country’s economy, forms a basis for an approximation to the valuation of that country’s currency. Relative interest rates, as determined by the two countries’ central bank monetary policies, will attract or repel foreign assets and investors depending on the interest rate cycle, the prospects of each economy, and geopolitical risk factors like wars and elections. Risk appetite is generally dependent on the perception in the financial markets regarding the safety of funds invested. If a country is thought to be politically or economically unstable, then that country’s currency will decline versus othercurrencies because investors perceive their funds will be more safely placed in the currency of a more stable country.

FUNDAMENTAL NUMBERS IN FOREX ANALYSIS WHICH STRONGLY AFFECT THE DIRECTION OF CURRENCY EXCHANGE RATES AND WHICH MAKE UP MAJOR FOREX NEWS INCLUDE:

Interest Rates – one of the most important elements in a currency’s valuation is the nation’s rate of interest. High interest rates tend to attract asset flows into a nation’s currency, while low interest rates tend to repel such investment, provided that the safety of deposited funds is considered similar. GDP – the Gross Domestic Product of a country can have a strong effect on a currency’s valuation.Employment Data – growth in employment generally means that the economy is gaining strength, which would cause a central bank to raise interest rates, thus making a currency more desirable. The Trade Balance – a nation’s balance of trade directly affects the valuation of its currency. If the nation’s products are in demand, more of its currency is required to purchase its items for export. Conversely, if a country imports more than it exports, more foreign currency is required to purchase imports, which consequently weakens that nation’s currency.In addition to the above major fundamental indicators, a slew of other numbers can generally affect a currency pair’s value, such as CPI and PPI, Retail Sales, Industrial Production, PMI numbers and housing prices,to name just a few.

FUNDAMENTAL ANALYSIS

Many forex traders, in addition to paying attention to major economic releases, analyze the forex market using what is known as technical analysis. This type of market analysis relies on historical exchange rate data and other market observables like open interest and volume to determine the future direction of a currency pair.

Technical analysis can be used to measure the levels of supply and demand in the forex market by determining support and resistance levels by perusing a chart. Classic chart patterns can also be looked for due to their predictive value. Furthermore, one or more technical indicators, including oscillators and moving averages, are often used by technical traders as a forex signal system to determine optimum market entry and exit points to profit from. Volume figures are also carefully

considered by some technical analysts, since chart pattern breakouts can be confirmed by a rise in volume, for example. Another advantage of technical forex analysis is that long and medium term trends can be observed and traded with. Nevertheless, on a short term basis, the volatility in exchange rates can invalidate a large por-tion of a trader’s careful technical analysis if an unforeseen fundamen-tal event — such as an interest rate hike —occurs.


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TECHNICAL ANALYSIS

Basically, anyone with the appropriate funds — which today could be as little as $25 — and access to the Internet through a computer can begin trading in the forex market. Forex trading has many advan-tages over trading in stocks, commodities or any other asset class because of the unregulated nature of the forex market.

This current widespread availability of the forex market is vastly different from how things were not too long ago, when only major financial institutions, banks, funds, large traders and corporations were the only ones that had access to making foreign exchange transactions. Today, gaining access to the forex market is relatively easy.

Opening a forex account is now a simple matter of transferring funds to a reputable online forex broker, opening a foreign exchange account with a major bank, or trading forex futures through a U.S. CFTC regulated broker. In addition, a forex demo account can be opened with many online brokers, allowing a novice trader the opportunity to test strategies and experience forex trading without com-mitting any actual funds.

Many of these online forex brokers offer their services through a Metatrader 4 online trading platform or one they have developed for the use of their clients. The Metatrader 4 platform is not only an order execution program, but it is also a complete technical analysis and automated trading platform. While forex trading is unregulated worldwide, the United States has implemented a number of restric-tions on its residents as to leverage, margins and other important details. Nevertheless, forex trading still offers the highest leverage of any tradable asset, with some brokers offering as much as 500 to

one leverage ratio on forex trades to non-U.S. residents.Forex trading is not for everyone, however, since with the increased leverage the market offers, a small trader could have their account wiped out in a matter ofminutes — if not seconds — after the release of an important economic number. Even though prudent measures can, and should, be taken for limiting risk, the inherent volatility in the forex market makes it difficult for traders with limited funds to hold large positions for any significant length of time.

The keys to successful forex trading consist in having a succinct and easy to follow trading plan, incorporating prudent money and risk management techniques and having the discipline to adhere to both. While forex trading may not be for everyone, for some people, trading currencies can be a viable path to achieving financial independence.


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TRADING IN THE FOREX MARKET


LICENSES & REGULATIONS

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