What is FOREX?

Since the demise of fixed foreign currency exchange rates in the early 1970's, the world economy has undergone sweeping changes. The collapse of the Bretton Woods Agreement in 1971 signaled an increase in currency market volatility and trading opportunities. What is the lure of the Foreign Exchange markets? What is its power? How does it grow to be the most important market in the World? How can you benefit from it?

The Foreign Exchange (Forex) market is the most liquid market in the world with participants ranging in size from banks and investment corporations to small business and private speculators that use it to make between 40 to 60% of their annual profits. The fascination of this market lies in its sheer size, its complexity and almost limitless reach of influence. During the past decade, the foreign exchange market has been the invincible hand guiding the purchase and sale of goods, services and raw materials in every corner of the globe.

The foreign exchange market directly affects every country's bonds, equities, private property, manufacturing and all assets that are accessible to foreign investors.

Foreign exchange rates play a major role in determining who finances government deficits, who buys equity in companies, who owns real-estate, who hires and fires employees and who owns the bank at which to maintain your corporate or personal account(s).

There is little doubt that this market affects every aspect of our daily personal and corporate financial lives and influences the economic and political destiny of every nation.

The foreign exchange market, then, is the one stabilizing factor in the worlds system of monetary exchange. This market was created not by design but necessity. And this dynamic market that serves not only as a mere exercise of foreign exchange but also as a hedging exercise against interest rates, Futures and Options and other derivatives is now open to you - the private investor!

Over the past 10 years the world has witnessed globalization of the Forex market, its transformation into the world’s only 24-hour market and its easiness of access for everybody. The volume of foreign exchange transactions effected globally and daily amounts to approximately 1.5 trillion US dollars, wherein 51% is in spot f/x transactions, followed by 32% in currency swap transactions, and forward outright f/x transactions represents another 5% of this daily turnover.

Spot transactions and forward outright f/x transactions all take place in the interbank market with options on interbank F/X transactions making up another 8%, the interbank market accounts for 96% of the global foreign exchange market, the remaining 4% is divided among all the global futures exchanges.

Interbank currency contracts and options, unlike futures contracts, are not traded on exchanges and are not standardized: rather banks and dealers act as principles in these markets, negotiating each transaction on an individual basis. Forward "cash" or "spot" trading in currencies is substantially unregulated; there are no limitations on daily price movements and SPECULATIVE POSITIONS LIMITS ARE NOT APPLICABLE. During problems of liquidity dealers can place trades through a larger number of market participants for better execution.

The market has its own momentum, it follows its own imperatives, and arrives at its own conclusions. Since the conclusions of value, fortunately or unfortunately affect the value of all assets it is crucial that every individual or institutional investor have an understanding of the foreign exchange markets and the forces behind this ultimate free-market system.

The combination of these factors gives to the private investor an opportunity to trade a wide range of the most liquid currencies at the same prices as the largest banks and corporations. Among them are the US dollar, the most traded currency, the Pound Sterling, the German Mark, the Swiss Franc and the Japanese Yen. Let’s take an example: if the private investor supposes the Japanese economy to be in trouble, he would go to sell Japanese Yen, say against US Dollars. If his suppositions come true and the Japanese Yen falls, he could buy back Yens at a much cheaper price, therefore making a profit. If, however, the Yen goes up, he would suffer a net loss on his account.

Foreign Exchange Risk Disclosure Statement

The risk of loss in trading the foreign exchange markets can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or authorize someone else to trade for you, you should be aware of the following:

If you purchase or sell a foreign exchange option you may sustain a total loss of the initial margin funds and additional funds that you deposit with your broker to establish or maintain your position. If the market moves against your position, your broker could call you to deposit additional margin funds, on short notice, in order to maintain your position. If you do not provide the additional required funds within the prescribed time, your position may be liquidated at a loss, and you would be liable for any resulting deficit in you account.

Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example when a currency is deregulated or fixed trading bands are widened. Potential currencies include, but are not limited to the Thai Baht, South Korean Won, Malaysian Ringitt, Brazilian Real, Hong Kong Dollar.

The placement of contingent orders by you or your trading advisor, such as a "stop-loss" or "stop-limit" orders, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.

A "spread" position may not be less risky than a simple "long" or "short" position.

The high degree of leverage that is often obtainable in foreign exchange trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains.

In some cases, managed accounts are subject to substantial charges for management and advisory fees. It may be necessary for those accounts that are subject to these charges to make substantial trading profits to avoid depletion or exhaustion of their assets.

Currency trading is speculative and volatile - Currency prices are highly volatile. Price movements for currencies are influenced by, among other things: changing supply-demand relationships; trade, fiscal, monetary, exchange control programs and policies of governments; United States and foreign political and economic events and policies; changes in national and international interest rates and inflation; currency devaluation; and sentiment of the market place. None of these factors can be controlled by any individual advisor and no assurance can be given that an advisor’s advice will result in profitable trades for a participating customer or that a customer will not incur losses from such events.

Currency trading can be highly leveraged - The low margin deposits normally required in currency trading (typically between 3%-20% of the value of the contract purchased or sold) permit an extremely high degree leverage. Accordingly, a relatively small price movement in a contract may result in immediate and substantial losses to the investor. Like other leveraged investments, in certain markets, any trade may result in losses in excess of the amount invested.

Currency trading presents unique risks - The interbank market consists of a direct dealing market, in which a participant trades directly with a participating bank or dealer, and a brokers’ market. The brokers’ market differs from the direct dealing market in that the banks or financial institutions serve as intermediaries rather than principals to the transaction. In the brokers’ market, brokers may add a commission to the prices they communicate to their customers, or they may incorporate a fee into the quotation of price.

Trading in the interbank markets differs from trading in futures or futures options in a number of ways that may create additional risks. For example, there are no limitations on daily price moves in most currency markets. In addition, the principals who deal in interbank markets are not required to continue to make markets. There have been periods during which certain participants in interbank markets have refused to quote prices for interbank trades or have quoted prices with unusually wide spreads between the price at which transactions occur.