An Introduction to Forex

“Forex” or “FX” is the common name for the Foreign Exchange market, which is the largest financial market in the world. With a daily turnover of over $1.5 trillion, the Foreign Exchange market conducts more than three times the aggregate amount volume of the United States Equity and Treasury markets combined. Unlike other financial markets, the Forex market has no physical location or central exchange. It operates through an electronic network of banks, corporations, and individuals trading one currency for another. Since the Forex market lacks a physical exchange, the market trades continuously on a 24-hour basis, moving from one time zone to the next, across each of the world’s major financial centers every day.

The term “foreign exchange” means the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

The best trading opportunities for speculators occur in the most liquid (i.e. most commonly traded) currencies such as the US Dollar, British Pound, Australian Dollar, Japanese Yen, Eurodollar and Swiss Franc. Often referred to by traders as “the Majors”, these currencies account for well over 85% of all daily Forex transactions.

Forex vs. Equities and Commodities

The Foreign Exchange market offers a number of advantages over the equities market to online traders. Some of these advantages are:

High Liquidity - Forex markets have a daily trading volume that is approximately fifty times that of the New York Stock Exchange. Regardless of time, there are always traders participating in the purchase and sale of foreign currencies, creating a greater liquidity and price stability for online traders.

A True 24-Hour Market - Unlike the US equities market, Forex is a true around-the-clock market with traders participating in the buying and selling of foreign currencies at every time of day, six days a week. Since the Foreign Exchange market has no physical location, it is not restricted to a particular time zone or set of trading hours, making it a true 24-hour global market from 4:30 Sunday p.m. to 4:30 p.m. Friday.

Tradability in Rising and Falling Markets - Unlike the US Equity markets, which require that investors only short a stock if the prior trade was equal to or lower than the short sale price, Forex markets allow the short sale of currencies without any requirements. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or which way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market.

No Commission - The FCM/IB charges no commission or transaction fees for allowing traders to participate in the Forex markets, or for access to a trading platform or market quotes & charts. In the equity market, traders must pay a spread and a commission. The over-the-counter structure of the Forex market eliminates exchange and clearing fees, which in turn lowers transaction costs. Costs are further reduced by the efficiencies created by a purely electronic market place that allows clients to deal directly with the market maker, eliminating both ticket costs and middlemen. Because the currency market offers round-the-clock liquidity, trader receive tight, competitive spreads both intra-day and night. Equity traders are more vulnerable to liquidity risk and typically receive wider dealing spreads, especially during after hours trading. Please note that the FCM/IB is remunerated for its services from the spread between the bid and ask prices.

Cytrade Futures is compensated by revenues from its activities as a currency dealer, including proceeds from buying, selling, converting, as well as holding currencies and interest on deposited funds and rollover fees.

No One Can Corner the Market - The Forex market is so vast and has so many participants that no single entity, not even a central bank, can control the market price for an extended period of time. As the market has grown, even central bank interventions have become increasingly ineffectual and short lived as a tool for controlling the value of a particular currency.

Greater Leverage - Whereas the common margin offered by equities brokers is 2:1, the leverage most often offered by online Forex dealers is 100:1. In terms of margin, this means that $1000 margin will leverage a $100,000 position for a normal Forex account or $100 margin will leverage a $10,000 position for “mini” Forex accounts with the FCM/IB.

Risk Warning: Trading foreign currencies is a challenging and potentially profitable opportunity for educated and experienced investors. However, before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not risk 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.

Moreover, the leveraged nature of FX trading means that any market movement will have an effect on your deposited funds proportionally equal to the leverage factor. 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 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’ 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 and communications difficulties.