FOREX the stock markets

At first glance, the stock markets seem to importance in the media and in our dealings with our surroundings. However, there is a market just as important, a much larger scale on which each of us has dealt without knowing (for most). This is the currency market or Forex. We will try in the following pages give you information on what it is, what are its benefits, where it comes from, who is involved and finally how it participates.

What is it?
The FOREX market (short for Foreign exchange) market means buying a currency coupled simultaneously selling another currency. Its main function is to allow the international monetary exchange and to determine the exchange rates between currencies. This is the largest financial market in the world with a volume of 1.5 trillion dollars a day. It's more than 3 times the amount traded on all U.S. markets.
Several factors influence market prices:-The interest rates announced by central banksThe government debt--Political events and economicReports-government and procurement capacity indexIndustrial Production, Unemployment-Market Assessment made by commentators and the media
Unlike some other markets such importance, the FOREX market has no physical location or central exchange. This is a market that is trading through electronic networks. Exchanges take place between banks, companies or individuals. There are 5% of the original transactions of governments and large companies and 95% that comes from speculation.





The distribution of major currencies is as follows:
 Two types of transactions are possible:
- "Spot" FOREX- "Currency Futures"
The "spot" is the FOREX currency exchange in real time, 24 hours a day. It provides more liquidity at a cost generally lower. The pairs traded are listed as the currency against the USD, or vice versa.The "currency futures" are traded like currency against the USD only. Trading is done on a limited market in time (closes at the end of the day), non-US currency, may be subject to some lack of liquidity and delay time, as well as higher fees (including those of the NFA or "National Futures Association").
Advantages of FOREX:
Market 24 hours:
There is no waiting to complete the transaction because there is no opening and closing of the markets. The market is open Sunday 14:00 (Eastern Time) at the opening of the market in Sydney, Australia until Friday 17:00 (Eastern Time). Depending on the time of the day the various sites are available (Tokyo 21:00 Sydney 22:00 2:00 London, New York 8:00). This allows you to transact in the market in response to certain news or events in real time.


High liquidity:
This is the market with more liquidity.There is very little risk of not being able to dispose of foreign currency. In addition, most transactions can be executed at one price. This prevents the imprisonment of funds, especially when the major currencies are traded (USD, EUR, CHF, GBP, CAD and AUD)
Flexibility:
FOREX can transact with or without variable amounts of leverage as risk tolerance and needs now and in time.
Leverage:
Investors can use very powerful tools for trading on the FOREX.
Low transaction cost:
The cost of each transaction is small, usually less than 0.1% (10 pips or points). When large amounts are traded, the costs can be as high as 3-4 pips.
Lack of correlation with the stock market and not limitation:
The opportunity to settle depends on the value of currency in itself. A good trading opportunities is always present because the devaluing currencies and increase in value relative to another. Moreover, these opportunities are present in the short and long term.
Inter bank market:
There is no organized market between large banks, which does not favor any particular site.
Lack of market manipulation:
The market is so vast that few players can not get to control the value of currencies for long periods (even central banks).The daily variability is about 1% compared to the stock market which is around 4-5%.

FOREX History
Origins of monetary systems:
To understand the principles governing the operation of the FOREX, it is important to review some concepts closely linked to concepts of money, exchange and currency.
Man has indeed always sought to simplify procedures relating to the acquisition of goods or services and that maintaining a degree of mutual trust between sellers and buyers. This led him to create the first metal coins in antiquity and, at the time of the Renaissance, the bill of exchange. The use of increasingly widespread in the latter opens, slowly but surely the way to the printing of paper money, a process that will soon become an exclusive privilege of central banks in different states.
A new trend appears in the 19th century following the internationalization of trade. In the absence of a common currency, it is imperative to create an international system to facilitate transactions and to stabilize exchange rates. Two of these systems, which want somehow the precursors of the FOREX, exist in the 19th and 20th century. This is the gold standard (which peaked between 1870 and 1914) and the system of Bretton Woods (1944-1971).
The gold standard:
The gold standard is a monetary system based on the convertibility of national currencies into gold, which serves as the reference unit. It became effective on a global scale in the 1870s.
Under this standard, gold was exchanged in local currency in all participating countries, and this has helped to stabilize exchange rates around the world. The gold standard also favored price stability and had a corrective effect on the balance of payments, since the money was closely related to the size of the gold reserves held by central banks.
Malfunctions due to an increase in the amount of pounds in circulation and the outbreak of World War I in 1914 should lead to the end of the gold standard, at least in its original form.
Britain, France, Germany and some forty other countries have tried to restore the system in 1925, but their experience was a failure because of the international situation of the 1930s.

 The Bretton Woods system:
The Bretton Woods system was established at an international conference held in the village of the same name in 1944. Representatives from forty-four countries gathered to lay the groundwork for a new international monetary order that would promote trade between nations and prosperity.
The rules of the Bretton Woods institutions are in part similar to the gold standard, since gold also plays the role of the reference unit. The major difference, however, the addition of a reference currency, namely the U.S. dollar. The system of exchange rates proposed by the system is not fixed and floating, as it is specified that the variations between classes of different currencies should be neither higher nor lower than a certain level. The United States thus become the new global economic power, a role occupied by Great Britain at the time of the gold standard.
The Bretton Woods system would last until 1973, when the U.S. decides, after the dollar devalued several times, the exchange rate is now floating their currencies.
FOREX today:
Since no formal monetary system has replaced the Bretton Woods system is, at present, only the law of supply and demand determines the value of a currency relative to another. A gradual relaxation of rules governing the purchase and sale of currencies and, later, the gradual liberalization of capital markets should increase the amplitude of financial flows around the world. It was therefore imperative to create a money market that would serve as a framework for all transactions at any time of day worldwide. The FOREX has, to some extent, responded to this request.
Participants
Banks:
Banks are commercial establishments licensed as deposit takers. These banks are primarily concerned to make and receive payments. However, they also support a variety of other services including foreign exchange.

 These banks will exchange them as currency in a system of balancing accounts. The interbank market covers the majority of commercial turnover as well as much of the speculation (speculative trading) day.
Some of this trading activity is undertaken on behalf of clients, but a large amount of trade is also carried out by industrial property offices, where dealers trade to the benefit of banks. While the exchange rates for their largest customers are extremely competitive, small and medium businesses and individuals will pay a high premium typically by exchanging foreign currency with their local branch.
A large bank can sell billions of dollars daily.Transactions by volume are:• 53% between banks;• 33% between a bank and a fund manager or a nonbank financial institution;• and finally to 14% between a bank and a non-financial firm.National central banks:
They play an important role in the currency market. They try to control the money supply, inflation and / or interest rates and trying to get official rates for their currencies. They can use their foreign exchange reserves, and often substantial, to stabilize the market.
Eg The Canadian central bank usually gives the market determine the value of the Canadian dollar. But there are some exceptions to this policy. The central bank will intervene to buy or sell Canadian dollars if it believes a substantial decrease or an overvalued dollar, which could cause a negative effect on the economy.
But usually a mere rumor of central bank intervention may be sufficient to stabilize a currency but aggressive intervention may be necessary in countries with floating exchange rate.
However, central banks do not always reach their goals. Sometimes, the combined resources of the market can easily overwhelm any central bank.
Eg ERM collapse of 1992-93 (Bank of England) and more recently in Southeast Asia.Interbank brokers:Up to recently, foreign exchange brokers did much business, facilitating anonymous market counterparties and sets fees for interbank relatively small. Today, however, many of these cases go to more efficient electronic systems that operate as closed for banks only. The box still provides broker the opportunity to see current interbank trade in most trading rooms, but turnover is noticeably smaller than it is a year or two.Speculators:In short, speculative activity is to buy and sell a currency with the sole purpose of profit. It's a fast transaction, 80% of cases, is within 7 days.In terms of volume:- 5% means governments and businesses- 95% of transactions is still on speculationMany people consider speculation, particularly currency speculation, such as antisocial behavior. The political maneuvering about currency speculators and their effect on the devaluation of the currency and the level of the national economy are a regular occurrence.Ex: September 1992: the speculator George Soros orchestra an attack against the British pound. Believing that the British currency is overvalued, he sells it in bulk. Others follow. Within hours, and despite the efforts of the Bank of England to stop the collapse of its currency, this scheme yields a billion dollars to Soros. In the process, the raid led to the implosion of the European Monetary System. A debacle which had a theater named FOREX market, where the wildest dreams alongside the darkest nightmares.
Commercial companies:An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. The market for commercial companies are often small compared to banks or speculators and their trades often have little short term impact on market rates but nevertheless, trade flows are an important factor in the direction of long after a rate change.Note: Some multinational companies can have an unpredictable impact."Hedge funds" (Hedge funds):Hedge funds is a way of portfolio management applied by certain investment funds known as "hedge funds" or "hedge funds" or English "hedge funds").They control billions of dollars of equity and may borrow billions more. They can overwhelm and interposition by central banks to support almost any currency if the economic fundamentals are in favor of''hedge fund.''
Eg George Soros's Quantum fund has earned a reputation for aggressive currency speculation since 1992
Example Transaction
Here is an example of a transaction "spot" EUR-USD.
First, it is necessary to specify that the FOREX transactions are made on margins, it is not necessary to have U.S. dollars to play on the USD - EUR, in fact, you take the necessary and USD you pay after .
Each transaction has two phases: opening (short sell a currency to buy another) and closing (selling the currency purchased and repay its short on the currency sold).
A lot is usually 100,000 units. It should therefore hundreds of thousands of dollars to speculate in this market. This is not, in fact, most brokers offer leverage of 20, 50, 100 or even 200 to one. Thus, with a leverage of 100 to 1, you invest 1000 USD and the broker provides the remaining 99 000 USD.
Example:
EUR-USD is at 1.2075 1.2074 1.2077
1.2075 is the 'last' ie price of the last transaction1.2074 is the "bid" ie selling price of euro-USD1.2077 is the "ask", ie the purchase price of euro-USD
In addition your broker offers leverage of 100 to 1.
You buy Euro at 1.2077
Investment leverage * / ask = amount of the target currency
For 1000 USD so you get 1000 * 100 / 1.2077 = 82 802.02 euro
Later the price rises (as you predicted!)
EUR USD 1.2097 1.2096 1.2098
So you sell the bid price of 1.2096
82 100 802.02 * 1.2096 = 157.32 USD
You repay the lever 99 000 USD
You repay your overdraft of 1000 USD
Your profit is therefore 157.32 USD

FOREX and what it costs
When sending an order to buy or sell currency, it is that each transaction is not free. Currency exchanges are characterized by a small fee compared to the amount of currency exchanged. The costs consist of transaction fees and interest charges. Also, some broker reserves the right to close any position considered too risky. It can occur if the collapsing currency in the opposite direction in favor.
Insurance costs:
There is a likelihood that the transaction goes wrong. Indeed, it is not all transactions that can generate a profit. It should then come out at some point with a loss. The customer, if he has not used a stop loss, is seen in some cases unable to leave his position at a profit. There are agents that impose automatic output to the positions held by customers. It is insurance agent that they are not in a position of debt (bankruptcy).
Suppose an automatic output is 25% of the amount invested for any transaction. So if we know the probability that a transaction is coming to an automatic exit, and may have insurance costs.
Formula: Insurance costs ($) = p * amount * (1 - Output (%))
Example: Assume a probability that the transaction of 0001 EUR / USD goes wrong.
Insurance costs ($) = 0,001 * 1000 $ * (1 - 0.25) = (0.75 USD)
Transaction Fee:
Transaction fees may vary depending on the broker with whom a client does business. Also, fees vary by time of day and types of currencies that are considered.
Example: You can find a broker offering 3 pip between supply and demand for all transactions between EUR and USD but this gap will be 10 pips during the weekend.
Transaction costs are not always given for each transaction but it may be possible to make a good approximation. The rule is to take the difference between the price bid and the ask price in the sale and purchase and average them. Should be multiplied by the value of the leverage and the amount invested.
Formula= = EcartVente EcartAchat PrixAsk - PrixBid
Free (in pips) = 0.5 * (+ EcartVente EcartAchat)Fees ($) = 0.5 * (+ EcartVente EcartAchat) * (currency ($) / 10000pips) * Amount * * Lever conversion
Example: For our example transaction where we used $ 1000 USD with a leverage of 100 to 1 we find the value of the costs and profits made by the broker.
EcartAchat EcartVente = = 3 pipsFees ($) = 0.5 * (3 + 3) * (1EUR/10000) * 100 * 1000 $ * ((USD / EUR) / 1.2096Fees ($) = 20.67 USD

Interest expense:
Interest costs are the difference in interest rates in the short term that the broker provides to the customer. For short periods, one can believe that these costs are negligible but it is not.
Array of short-term ratesCurrency Rates 'Bid' rate 'Ask'AUD 02.05 55754.35 GBP 04.06CAD 3 3.4CZK 1.5 2DKK 1.9 2.5EUR 1.9 2.3HUF 25.5 25.63.85 HKD 4.250165 JPY -0.17MXN September 8NZD 7.1 7.6NOK 2.1 2.6PLN 4 4.75SAR 4 4.5SGD 2.5 3.57.55 ZAR 06.03SEK 1.35 1.85CHF 0.65 0.87THB 2.75 05.043.75 USD 03.04

Some brokers can capitalize on a daily or every second interest. The instruction of interest does not change the value of the position but can damage the profit made on sale. Also, be aware that professionals do their positions a few minutes, hours or days at most.
FormulaInterest Expense (%) = = r_int Bid_Rate - Ask_Rate
Fees ($) = r_int lever * * * Amount (Heures_tenus / (24 * 365.25))

Example: For our example, we held the trade EUR / USD from 10 am to 10:57 approximately one hour.
Interest expense = 1.9 - 4.3 = - 2.4Fees ($) = -0,024 * 100 * 1000 $ * (1 / (24 * 365.25)) = (0.27 USD)






In conclusion, FOREX is a very important market, the result of supply and demand of currencies and many players are involved for different reasons. By cons, we must remember that speculation is interesting, either, with the possibility of quick profit, but also with the risk of losses in a short time, mainly related to the leverage that is used for transactions to be profitable.