Foreign Exchange Market

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Economic Trends

Current Account Sustainability

Owen F. Humpage and Michael Shenk

The dollar has softened a bit since early October, largely because of changing beliefs about the probable course of monetary policies here and abroad. Market participants seem to believe that the Federal Reserve will move to lower the federal funds target sometime this year and that the European Central Bank and the Bank of Japan are likely to raise their target rates.

Leveraging the impact of changing beliefs about monetary policy, however, is the longer-held expectation that the dollar must depreciate to correct what has become an unsustainable U.S. balance-of-payments pattern. The United States has financed a nearly unbroken twenty-year string of current account deficits by issuing financial claims in unprecedented amounts. Many observers fear that the market is becoming saturated with dollar-denominated assets. They warn of portfolio diversification accompanied by sharp dollar depreciation and higher U.S. interest rates. Projections of a hard landing have been around for a number of years now, but so far the landing has been nothing if not soft. Current account deficits are likely to persist for the foreseeable future, and their financial burden will set the general tone for the dollar.

Foreign Exchange Indexes*

*The Major Currency Index includes large industrialized countries; the Broad Dollar Index includes these plus the important developing countries.
Source: Board of Governors of the Federal Reserve System, “Foreign Exchange Rates,” Federal Reserve Statistical Releases, H.10.

Foreign Exchange Rates*

*Foreign currency units per dollar.
Source: Bloomberg Financial Information Services.

The United States has run a current account deficit every year save one since 1982; this is likely to continue for the foreseeable future. Although the current account incorporates more than trade in goods and services, our propensity to import more goods than we export largely explains the current account deficit.

Current Account Balance*

*Data for 2006 are quarterly data shown at an annual rate.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Components of Current Account*

*Data for 2006 are authors' estimates.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

The United States pays for its surfeit of imports by issuing financial claims (for example, stocks, bonds, Treasury securities, and bank accounts) to the rest of the world. Private individuals and organizations hold most of these claims, but foreign governments, their central banks, and international agencies own a significant share. Governments such as China, Japan, and the oil-producing nations often add a substantial portion of these claims to their official foreign exchange reserves.

Net Financial Flows*

*Data for 2006 are authors' estimates.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Since 1986, foreigners have held more financial claims against the United States than U.S. residents have held against them, giving us a negative net international investment position. In 2005, the last year for which we have complete information, foreigners’ net claims against the United States equaled approximately $2.7 trillion, mostly held by the private sector in a relatively liquid form. Official reserves, for example, amount to 17 percent of foreign financial claims on the United States, and direct investments, which presumably are relatively illiquid, amount to 15 percent of these claims.

Net International Investment Position*

*Data for 2006 are authors' estimates.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Composition of Foreign Claims

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Because these ultimately are claims on future U.S. output, we typically gauge their size relative to GDP. In 2005, the net stock of outstanding foreign claims against the United States amounted to 22 percent of GDP. Given projections for this year’s current account deficit, our negative net international investment position could reach $3.5 trillion (approximately 27 percent of GDP) this year.

The ratio has increased sharply since 1999, but it cannot rise indefinitely. As foreign portfolios become saturated with dollar-denominated assets, global investors will become increasingly reluctant to hold additional dollar-denominated assets without compensation for the risk of doing so. They may eventually begin to diversify their portfolios out of dollars. Should we reach this point, the dollar will depreciate and U.S. interest rates will rise. The dollar depreciation will help reduce the current account deficit by raising the dollar price of foreign goods, lowering the foreign-currency price of U.S. goods, and shifting worldwide demand towards U.S. markets. The rise in interest rates will reduce investment in the United States and encourage saving.

Economists are fairly certain about the nature of these adjustments. Nevertheless, no one knows when they might commence, how long they might take, or how disruptive they may be.

Net Savings and Investment

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Net Savings: Private and Government

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

A change in investment and savings patterns is a necessary, but often forgotten, aspect of the adjustment pattern. A country’s savings and investment pattern corresponds to its current account position. A nation, like the United States, that maintains a current account deficit also invests more than it saves. Foreign savings, channeled into the country when foreigners buy U.S. financial instruments, makes up the difference between domestic investment and savings.

The pattern of investment and savings in a deficit country often has implications for the sustainability of its negative net international investment position. Throughout most of the 1990s, for example, foreign savings went to support an investment boom in the United States. Both investment and savings rose as a share of GDP. The added capital seemed to boost the pace of our long-term economic growth, making it easier—in terms of foregone domestic consumption—to service and repay foreign financial claims on the United States. Since 2000, however, investment has fallen along with domestic savings. Inflows of foreign savings have financed consumption spending—notably government spending—in the United States. This pattern is not likely to foster the economic growth necessary to repay our foreign obligations without a drop in private domestic consumption.

Introduction to the Forex Foreign Exchange Currencies Market

As with many financial markets there are many derivatives of the central market such as futures, options and forwards. For now we will only discuss the main market or as sometimes referred to "Spot or Cash market." aka Forex Market. For additional Forex Market knowledge you will find a good forex trading guide very helpful in understanding and trading forex markets.
The word FOREX is derived from Foreign Exchange and is the largest financial market in the world. Unlike many markets the FX market is open 24-hrs per day and has well over 1 Trillion US Dollars in trading volume every day. This tremendous trading activity is more than the combined turnover of all the world's stock markets on any given day combined. This tends to lead to a very liquid market and thus a desirable market to trade.
You may have noticed our website domain is "Forex Markt" Of course, the English spelling is "forex market" However, the German spelling is "forex markt" where Forex market trading is very popular with traders based in Germany and nearby European nations too involved in the FX Forex market and international currenciestrading. The German language paragraph below will help German traders understand the Forex Markt.
Foreign Exchange market (FX Market, Markt für Devisengeschäfte, FOREX) ist der größte Finanzmarkt der Welt (Tagesumsatz ca. 1,9 Billionen US Dollars). Ein Devisengeschäft beinhaltet den gleichzeitigen Kauf und Verkauf von unterschiedlichen Währungen am Interbanken-markt. Dadurch bilden sich Tauschverhältnisse, so dass der Wert jeder Währung in der jeweils anderen ausgedrückt werden kann. Ab und zu findet sich auch die Bezeichnung "4X" oder "FX" als "Abkürzung der Abkürzung"
Unlike many other trading markets (all financial instruments that can be traded) the FX Forex markt does not have a fixed exchange. It is primarily traded through banks, brokers, dealers, financial institutions and private individuals. Forex trades are executed thru phone and increasingly online via the Internet. It is only in the last few years that the smaller investor has been able to gain access to this market. Previously the large amounts of deposits required precluded the smaller investors. With the advent of the Internet and growing competition it is now easily in the reach of most financial traders amd investors.
You will often hear the term INTERBANK discussed in FX terminology. This originally, as the name implies was simply banks and large institutions exchanging information about the current rate at which their clients or themselves were prepared to buy or sell a foreign currency. INTER meaning between and Bank meaning deposit taking institutions normally made up of banks, large institution, brokers or even the government. The currency futures market has moved on to such a degree now that the term inter bank now means anybody who is prepared to buy or sell a currency.
It could be two individuals or your local travel agent offering to exchange Euros for US Dollars. You will however find that most of the brokers and banks use centralized feeds to insure reliability of price quotes. The quotes for Bid (buy) and Offer (sell) will all be from reliable sources. These quotes are normally made up of the top 300 or so large institutions. This insures that if they place an order on your behalf that the institutions they have placed the order with is capable of fulfilling the order.
Although we have discussed orders being fulfilled, it is estimated that anywhere from 70%-90% of the FX market is speculative and involves daytraders. In other words the person or institution that bought or sold the currency has no intention of actually taking delivery of the currency. Instead they were solely speculating on the movement of that particular currency.
90% of all currencies are traded against the U.S. Dollar. The four next most traded currencies are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc(CHF). As currencies are traded in pairs and exchanged one for the other when traded, the rate at which they are exchanged is called the exchange rate. These four currencies traded against the US Dollar make up the majority of the market and are called major currencies or the majors.

Market Mechanics

So now we know that the FX market is the largest in the world and that your broker or institution that you are trading with is collecting quotes from a centralized feed or individual quotes comprising of inter bank rates. So how are these quotes made up. Well, as we previously mentioned currencies are traded in pairs and are each assigned a symbol. For the Japanese Yen it is JPY, for the Pounds Sterling it is GBP, for Euro it is EUR and for the Swiss Frank it is CHF. So, EUR/USD would be Euro-Dollar pair. GBP/USD would be pounds Sterling-Dollar pair and USD/CHF would be Dollar-Swiss Franc pair and so on. You will always see the USD quoted first with few exceptions such as Pounds Sterling, EuroDollar, Australia Dollar and New Zealand Dollar. The first currency quoted is called the base currency. Have a look below for some example.
Currency Symbol Currency Pair
EUR/USD - Euro / US Dollar
GBP/USD - Pounds Sterling/ US Dollar
USD/JPY - US Dollar / Japanese Yen
USD/CHF - US Dollar / Swiss Franc
USD/CAD - US Dollar / Canadian Dollar
AUD/USD - Australian Dollar / US Dollar
NZD/USD - New Zealand Dollar / US Dollar
When you see FX quotes you will actually see two numbers. The first number is called the bid and the second number is called the offer (sometimes called the ASK). If we use the EUR/USD as an example you might see 0.9950/0.9955 the first number 0.9950 is the bid price and is the price traders are prepared to buy Euros against the USD Dollar. The second number 0.9955 is the offer price and is the price traders are prepared to sell the Euro against the US Dollar. These quotes are sometimes abbreviated to the last two digits of the currency such as 50/55. Each broker has its own convention and some will quote the full number and others will show only the last two. You will also notice that there is a difference between the bid and the offer price and that is called the spread. For the four major currencies the spread is normally 5 give or take a pip (will explain pips later)
To carry on from the symbol conventions and using our previous EUR quote of 0.9950 bid, that means that 1 Euro = 0.9950 US Dollars. In another example if we used the USD/CAD 1.4500 that would mean that 1 US Dollar = 1.4500 Canadian Dollars.
The most common increment of currencies is the PIP. If the EUR/USD moves from 0.9550 to 0.9551 that is one Pip. A pip is the last decimal place of a quotation. The Pip or POINT as it is sometimes referred to depending on context is how we will measure our profit or loss.
As each currency has its own value it is necessary to calculate the value of a pip for that particular currency. We also want a constant so we will assume that we want to convert everything to US Dollars. In currencies where the US Dollar is quoted first the calculation would be as follows.
Example JPY rate of 116.73 (notice the JPY only goes to two decimal places, most of the other currencies have four decimal places)
In the case of the JPY 1 pip would be .01 therefore
USD/JPY: (.01 divided by exchange rate = pip value) so .01/116.73=0.0000856 it looks like a big number but later we will discuss lot (contract) size.
USD/CHF: (.0001 divided by exchange rate = pip value) so .0001/1.4840 = 0.0000673
USD/CAD: (.0001 divided by exchange rate = pip value) so .0001/1.5223 = 0.0001522
In the case where the US Dollar is not quoted first and we want to get to the US Dollar value we have to add one more step.
EUR/USD: (0.0001 divided by exchange rate = pip value) so .0001/0.9887 = EUR 0.0001011 but we want to get back to US Dollars so we add another little calculation which is EUR X Exchange rate so 0.0001011 X 0.9887 = 0.0000999 when rounded up it would be 0.0001.
GBP/USD: (0.0001 divided by exchange rate = pip value) so 0.0001/1.5506 = GBP 0.0000644 but we want to get back to US Dollars so we add another little calculation which is GBP X Exchange rate so 0.0000644 X 1.5506 = 0.0000998 when rounded up it would be 0.0001.
By this time you might be rolling your eyes back and thinking do I really need to work all this out and the answer is no. Nearly all the brokers you will deal with will work all this out for you. They may have slightly different conventions but it is all done automatically. It is good however for you to know how they work it out. In the next section we will be discussing how these seemingly insignificant amounts can add up.

More On Market Mechanics

Spot Forex is traditionally traded in lots also referred to as contracts. The standard size for a lot is $100,000. In the last few years a mini lot size has been introduced of $10,000 and this again may change in the years to come. As we mentioned on the previous page currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments it is desirable to trade large amounts of a particular currency in order to see any significant profit or loss. We shall cover leverage later but for the time being let's assume we will be using $100,000 lot size. We will now recalculate some examples to see how it effects the pip value.
USD/JPY at an exchange rate of 116.73
(.01/116.73) X $100,000 = $8.56 per pip
USD/CHF at an exchange rate of 1.4840
(0.0001/1.4840) X $100,000 = $6.73 per pip
In cases where the US Dollar is not quoted first the formula is slightly different.
EUR/USD at an exchange rate of 0.9887
(0.0001/ 0.9887) X EUR 100,000 = EUR 10.11 to get back to US Dollars we add a further step
EUR 10.11 X Exchange rate which looks like EUR 10.11 X 0.9887 = $9.9957 rounded up will be $10 per pip.
GBP/USD at an exchange rate of 1.5506
(0.0001/1.5506) X GBP 100,000 = GBP 6.44 to get back to US Dollars we add a further step
GBP 6.44 X Exchange rate which looks like GBP 6.44 X 1.5506 = $9.9858864 rounded up will be $10 per pip
As mentioned earlier your broker may have a different convention for calculating pip value relative to lot size, however they do it, they will be able to tell you what the pip value for the currency you are trading is at that particular time. Remember that as the market moves so will the pip value depending on what currency you trade.
So now we know how to calculate pip value lets have a look at how you work out your profit or loss. Let's assume you want to buy US Dollars and Sell Japanese Yen. The rate you are quoted is 116.70/116.75 because you are buying the US you will be working on the 116.75, the rate at which traders are prepared to sell. So you buy 1 lot of $100,000 at 116.75. A few hours later the price moves to 116.95 and you decide to close your trade. You ask for a new quote and are quoted 116.95/117.00 as you are now closing your trade and you initially bought to enter the trade you now sell in order to close the trade and you take 116.95 the price traders are prepared to buy at. The difference between 116.75 and 116.95 is .20 or 20 pips. Using our formula from before, we now have (.01/116.95) X $100,000 = $8.55 per pip X 20 pips =$171
In the case of the EUR/USD a forex markt trader involved in euro day trading may decide to sell the EURO and is quoted say 0.9885/0.9890 you take 0.9885. Now please do not get confused here. Remember you are now selling and you need a buyer. The buyer is biding 0.9885 and that is what you take. A few hours later the EUR moves to 0.9805 and you ask for a quote. You are quoted 0.9805/0.9810 and you take 0.9810. You originally sold EUR to open the trade and now to close the trade you must buy back your position. In order to buy back your position you take the price traders are prepared to sell at which is 0.9810. The difference between 0.9810 and 0.9885 is 0.0075 or 75 pips. Using the formula from before, we now have (.0001/0.9810) X EUR 100,000 = EUR10.19: EUR 10.19 X Exchange rate 0.9810 =$9.99($10) so 75 X $10 = $750.
To reiterate what has gone before, when you enter or exit a trade at some point your are subject to the spread in the bid/offer quote. As a rule of thumb when you buy a currency you will use the offer price and when you sell you will use the bid price. So when you buy a currency you pay the spread as you enter the trade but not as you exit and when you sell a currency you pay no spread when you enter but only when you exit.

Leverage

Leverage financed with credit, such as that purchased on a margin account is very common in Forex. A margined account is a leverageable account in which Forex can be purchased for a combination of cash or collateral depending what your brokers will accept. The loan(leverage) in the margined account is collateralized by your initial margin (deposit), if the value of the trade (position) drops sufficiently, the broker will ask you to either put in more cash, or sell a portion of your position or even close your position. Margin rules may be regulated in some countries, but margin requirements and interest vary among broker/dealers so always check with the company you are dealing with to ensure you understand their policy.
Up until this point you are probably wondering how a small investor can trade such large amounts of money (positions). The amount of leverage you use will depend on your broker and what you feel comfortable with. There was a time when it was difficult to find companies prepared to offer margined accounts but nowadays you can get leverage from a high as 1% with some brokerages. This means you could control $100,000 with only $1,000.
Typically the broker will have a minimum account size also known as account margin or initial margin e.g. $10,000. Once you have deposited your money you will then be able to trade. The broker will also stipulate how much they require per position (lot) traded. In the example above for every $1,000 you have you can take a lot of $100,000 so if you have $5,000 they may allow you to trade up to $500,00 of forex.
The minimum security (Margin) for each lot will very from broker to broker. In the example above the broker required a one percent margin. This means that for every $100,000 traded the broker wanted $1,000 as security on the position. Margin call is also something that you will have to be aware of. If for any reason the broker thinks that your position is in danger e.g. you have a position of $100,000 with a margin of one percent ($1,000) and your losses are approaching your margin ($1,000). He will call you and either ask you to deposit more money, or close your position to limit your risk and his risk. If you are going to trade on a margin account it is imperative that you talk with your broker first to find out what their polices are on this type of accounts.
Variation Margin is also very important. Variation margin is the amount of profit or loss your account is showing on open positions. Let's say you have just deposited $10,000 with your broker. You take 5 lots of USD/JPY which is $500,000. To secure this the broker needs $5,000 (1%). The trade goes bad and your losses equal $5001, your broker may do a margin call. The reason he may do a margin call is that even though you still have $4,999 in your account the broker needs that as security and allowing you to use it could endanger yourself and him. Another way to look at it is this, if you have an account of $10,000 and you have a 1 lot ($100,000) position. That's $1,000 assuming a (1% margin) is no longer available for you to trade. The money still belongs to you but for the time you are margined the broker needs that as security. Another point of note is that some brokers may require a higher margin at the weekends. This may take the form of 1% margin during the week and if you intend to hold the position over the weekend it may rise to 2% or higher. Also in the example we have used a 1% margin. This is by no means standard. I have seen as high as 0.5% and many between 3%-5% margin. It all depends on your broker.
There have been many discussions on the topic of margin and some argue that too much margin is dangerous. This is a point for the individual concerned. The important thing to remember as with all trading is that you thoroughly understand your brokers policies on the subject and you are comfortable with and understand your risk.

Rollovers

Even though the mighty US dominates many markets most of Spot Forex is still traded through London in Great Britain. So for our next description we shall use London time. Most deals in Forex are done as Spot deals. Spot deals are nearly always due for settlement two business days day later. This is referred to as the value date or delivery date. On that date the counter parties take delivery of the currency they have sold or bought.
In Spot FX the majority of the time the end of the business day is 21:59 (London time). Any positions still open at this time are automatically rolled over to the next business day, which again finishes at 21:59. This is necessary to avoid the actual delivery of the currency. As Spot FX is predominantly speculative most of the time the trades never wish to actually take delivery of the actual currency. They will instruct the brokerage to always rollover their position. Many of the brokers nowadays do this automatically and it will be in their polices and procedures. The act of rolling the currency pair over is known as tom.next which, stands for tomorrow and the next day. Just to go over this again, your broker will automatically rollover your position unless you instruct him that you actually want delivery of the currency. Another point noting is that most leveraged accounts are unable to actual deliver of the currency as there is insufficient capital there to cover the transaction.
Remember that if you are trading on margin, you have in effect got a loan from your broker for the amount you are trading. If you had a 1 lot position you broker has advanced you the $100,000 even though you did not actually have $100,000. The broker will normally charge you the interest differential between the two currencies if you rollover your position. This normally only happens if you have rolled over the position and not if you open and close the position within the same business day.
To calculate the broker's interest he will normally close your position at the end of the business day and again reopen a new position almost simultaneously. You open a 1 lot ($100,000) EUR/USD position on Monday 15th at 11:00 at an exchange rate of 0.9950. During the day the rate fluctuates and at 22:00 the rate is 0.9975. The broker closes your position and reopens a new position with a different value date. The new position was opened at 0.9976 a 1 pip difference. The 1 pip deference reflects the difference in interest rates between the US Dollar and the Euro. In our example your are long Euro and short US Dollar. As the US Dollar in the example has a higher interest rate than the Euro you pay the premium of 1 pip.
Now the good news. If you had the reverse position and you were short Euros and long US Dollars you would gain the interest differential of 1 pip. If the first named currency has an overnight interest rate lower than the second currency then you will pay that interest differential if you bought that currency. If the first named currency has a higher interest rate than the second currency then you will gain the interest differential.
To simplify the above. If you are long (bought) a foreign currency and that currency has a higher overnight interest rate you will gain. If you are short (sold) the currency with a higher overnight interest rate then you will lose the difference.
I would like to emphasis here that although we are going a little in-depth to explain how all this works, your broker will calculate all this for you. The purpose of this forex markt report is just to give you an overview of how the forex market works. It should help your trading if you are also familiar with trading high yield capital markets in addition to FX trading, as they both involved considerable trading risk of loss.

Accounts

Although the trend today is towards all transactions eventually finishing in a profit and loss based on the US Dollar it's important for you to realize your profit or loss (P&L) may not actually be in US Dollars. From my observation the trend is more pronounced in the US as you would expect. Most US based traders assume they will see their balance at the end of each day in US Dollars. I have even spoken with some traders who are oblivious to the fact the their profit may have actually been based on the Japanese Yen and Japan's Yen trading market.
Let me explain a little more. You sell (go short) USD/JPY and as such are short USD and Long (bought) JPY. You enter the trade at 116.10 and exit 116.90. You in fact made 80,000 Japanese Yen (1 lot traded) not US Dollars. If you traded all four major currencies against the US Dollar you would in fact have made or lose in EUR, GPY, JPY and CHF. This might give you a ledger balance at the end of the day or month with four different currencies. This is common in London.
They will stay in that currency until you instruct the broker to exchange the currency you have a profit or loss into your own base currency. This actually happened to me. After dealing with mainly US based brokers it had never occurred to me that my brokers statement would be in anything other than in the USDollar Bill. This can work for you or against you depending on the rate of exchange when you change back into your home currency. Once I knew the convention I simply instructed the broker to change my profit or loss into US Dollars when I closed my position. It is worth checking how your broker approaches this and simply ask them how they handle it. A small point but worth noting.
It's a sad fact that for many years the forex market largely remained unregulated. Even today there are many countries that still don't regulate companies that trade forex. London has been regulated for many years and the US is now getting its act together and has also started regulating companies dealing forex. It was only recently in the US you could with no more than a website and a few thousand dollars set up your own forex operation and give the impression that you were larger than you are. I am all for the entrepreneurial flair and everyone need to start somewhere but when dealing with people's money it is imperative that the company you choose is solid.
Preferably you want a company that is regulated in the nation it operates in, insured or bonded and has some kind of track recorded. I cannot advise you on which broker you should use as there are just to many variables to each person, but as a rule of thumb, nearly all countries have some kind of regulatory authority who will be able to advise you. Most of the regulatory authorities will have a list of brokers that fall with their jurisdiction and will give you a list. They probably wont tell whom to use but at least if the list came from them you can have some confidence in those companies. Once you have a list give a few of them a call, see who you feel comfortable with, ask for them to send you their polices and procedures. If you live near where your broker is based, go spend the day with him. I have been to many brokerage firms just to check them out. It will give you a chance to see their trading operation and meet them.
This brings up another interesting point. When you open a forex-account with a forex-broker you will have to fill in some forms basically stating your acceptance of their polices. This can range from a 1 page document to something resembling a book. Take the time to read through these documents and make a list of things you don't understand or want explained. Most reputable companies will be happy to spend some time with you on this. Your involvement with your futures broker is largely up to you. As a forex trader you will probably spend long hours staring at the screen without talking to anyone. You may be the sort of person who likes this or you may be the sort of person who likes to chat with the dealer in the trading room. You will normally get a call once a week or once a month from someone in the brokerage asking if everything is OK.

Statements

Before we move on to account statements I just want to touch on segregation of funds. In times past there was a danger that traders who deposited money with their broker who did not segregate their clients money from their own companies money were at some risk. The problem arose if the broker misused the deposited funds to either reinvest or otherwise manipulated these deposits to enhance their own standing. There were also instances were the broker became insolvent and many complications ensued as to what was the clients money and what was the broker's money. With the advent of regulation most broker now segregate their clients funds from the brokerage funds.
Margin deposits are normally held with a bank or other large financial institutions who are also regulated, bonded or insured. This protects you money should anything happen to your forex broker. The deposit taking institution is normally aware that these deposits are client's funds. Depending on regulation in the particular country you live, each client may have their own segregated account or for smaller depositors they may be pooled. The point is that segregation of funds is a safeguard. Ask yourcommodity broker if your funds are segregated and who actually has your funds.
Just as with a bank you should are entitled to interest on the money you have on deposit. Some broker may stipulate that interest is only payable on accounts over a certain amount but the trend today is that you will earn interest on any amount you have that is not being used to cover your margin. Your broker is probably not the most competitive place to earn interest but that should not be the point of having your money with him in the first place. Payment on your account that is not being used and segregation of funds all go to show the reputability of the company you are dealing with.
In this section I will discuss briefly the basic account statement. I have to keep this basic as there are as many flavors of account statements as you can imagine. Just about every broker has their own way of presenting this. The most important thing is to know where you stand at the end of each day or week. Just because your broker is web-based and has all the bells and whistles does not mean they are infallible. Many of the actions taken before information is imputed are still done by hand and if humans are involved there will be a mistake at some point. The responsibility lies with you. It is your money so make sure that all the transactions are correct.
FX Some Company New York Statement for: Mr. Joe Smith Statement Date: 16th July 2002 Account No: 123456 Summary Of All Trades From: 15/07/05-17/07/05

Ticket #	Time	Trade Date	Value Date	B/S	Symbol	Quantity	Rate	Debit	Credit	Balance
123458	09:05	15/07/2005	17/07/05	B	EUR/USD	100,000	0.9850			$10,000
123459	13:01	15/07/2005	17/07/05	S	EUR/USD	100,000	0.9870		$200.00	$10,200
123460	14:05	16/07/2005	18/07/05	V	USD/JPY	100,000	116.85			$10,200

Total Equity $10,200
Margin Available $9,200
Margin Requirements $1,000
Current Position Short USD/JPY
Normally there is a ticket or docket number to help identify the trade. You will nearly always find the time and date of the trade. The value date if the currency were to be delivered. You should always see the direction of the trade, buy or sell (Long or Short). The amount and rate you bought or sold. Balance to let you know if you made a profit or a loss. You should also see any open positions you may have and the margin requirements for that position. A lot of the more modern systems will show your open position as though it has been closed just to give you an up to the minute balance.

The Main Players of the Forex Markets

Central Banks And Governments
Policies that are implemented by governments and central banks can play a major roll in the FX market. Central banks can play an important part in controlling the country's money supply to insure financial stability.
Banks
A large part of FX turnover is from banks. Large banks can literally trade billions of dollars daily. This can take the form of a service to their customers or they themselves speculate on the FX market.
Hedge Funds
As we know the FX market can be extremely liquid which is why it can be desirable to trade. Hedge Funds have increasingly allocated portions of their portfolios to speculate on the FX market. Another advantage Hedge Funds can utilize is a much higher degree of leverage than would typically be found in the equity markets.
Corporate Businesses
The FX market mainstay is that of international trade. Many companies have to import or exports goods to different countries all around the world. Payment for these goods and services may be made and received in different currencies. Many billions of dollars are exchanges daily to facilitate trade. The timing of those transactions can dramatically affect a company's balance sheet.
The Man In The Street
Although you may not think it the man in the street also plays a part in toady's FX world. Every time he goes on holiday overseas he normally need to purchase that country's currency and again change it back into his own currency once he returns. Unwittingly he is in fact trading currencies. He may also purchase goods and services while overseas and his credit card company has to convert those sales back into his base currency in order to charge him.
Speculators And Investors
We shall differentiate speculator from investors here with the definition that an investor has a much longer time horizon in which he expects his investment to yield a profit. Regardless of the difference both speculators and investors will approach the FX market to exploit the movement in currency pairs. They both will have their reason for believing a particular currency will perform better or worse as the case may be and will buy or sell accordingly. They may decide that the Euro will appreciate against the US Dollar and take what is called a long position in Euro. If the Euro does in fact gain ground against the US Dollar they will have made a profit.

Conclusion for Trading the Forex Market

Well now we have a basic understanding of how the FX market works and who the main players are, what next? You are now going to have to decide the best way to trade the market. The two most common approaches are that of fundamental analysis and technical analysis.
Fundamental analysis concentrates on the forces of supply and demand for a given security. This approach examines all the factors that determine the price of a security and the real value of that security. This is referred to as the intrinsic value. If the intrinsic value is below the market price then there is an opportunity to buy and if the market is above the intrinsic price then there is an opportunity to sell.
Technical analysis is the study of market action, mainly through the use of price charts and indicators to forecast the future price of a financial trading market. There are three main points that a technical analyst applies. A. Market action discounts everything. Regardless of what the fundamentals are saying, the price you see is the price you get. B. The price of a given security moves in trends. C. The historical trend of a security will tend to repeat.
Of all of the above things the most important of them is point A. The tools of the technical analyst are indicators, patterns and systems. These tools are applied to charts. Moving averages, support and resistance lines, envelopes, Bollinger bands and momentum are all examples of technical indicators and forex markt technical analysis.

Countries all over the world have their own currencies. The act of exchanging currencies for personal use or for profit is known as foreign exchange or Forex trading.

Know Your History!

At the end of the World War II, the whole world was experiencing so much chaos that the major Western governments felt the need to create a system to stabilize the global economy.

Known as the "Bretton Woods System," the agreement set the exchange rate of all currencies against gold. This stabilized exchange rates for a while, but as the major economies of the world started to change and grow at different speeds, the rules of the system soon became obsolete and limiting.

Soon enough, come 1971, the Bretton Woods Agreement was abolished and replaced by a different currency valuation system. With the United States in the pilot's seat, the currency market evolved to a free-floating one, where exchange rates were determined by supply and demand.

At first, It was difficult to determine fair exchange rates, but advances in technology and communication eventually made things easier.

Once the 1990s came along, thanks to computer nerds and the booming growth of the internet (cheers to you Mr. Al Gore), banks began creating their own trading platforms. These platforms were designed to stream live quotes to their clients so that they could instantly execute trades themselves.

Meanwhile, some smart business-minded marketing machines introduced internet-based trading platforms for individual traders.

Known as "retail forex brokers", these entities made it easy for individuals to trade by allowing smaller trade sizes. Unlike in the interbank market where the standard trade size is one million units, retail brokers allowed individuals to trade as little as 1000 units!

Retail Forex Brokers

In the past, only the big speculators and highly capitalized investment funds could trade currencies, but thanks to retail forex brokers and the Internet, this isn't the case anymore.

With hardly any barriers to entry, anybody could just contact a broker, open up an account, deposit some money, and trade forex from the comfort of their own home. Brokers basically come in two forms:

1. Market makers, as their name suggests, "make" or set their own bid and ask prices themselves and


2. Electronic Communications Networks (ECN), who use the best bid and ask prices available to them from different institutions on the interbank market.

Market Makers

Let's say you wanted to go to France to eat some snails. In order for you to transact in the country, you need to get your hands on some euros first by going to a bank or the local foreign currency exchange office. For them to take the opposite side of your transaction, you have to agree to exchange your home currency for euros at the price they set.

Like in all business transactions, there is a catch. In this case, it comes in the form of the bid/ask spread.

For instance, if the bank's buying price (bid) for EUR/USD is 1.2000, and their selling price (ask) is 1.2002, then the bid/ask spread is 0.0002. Although seemingly small, when you're talking about millions of these forex transactions every day, it does add up to create a hefty profit for the market makers!

You could say that market makers are the fundamental building blocks of the foreign exchange market. Retail market makers basically provide liquidity by "repackaging" large contract sizes from wholesalers into bite size pieces. Without them, it will be very hard for the average Joe to trade forex.

Electronic Communications Network

Electronic Communication Network is the name given for trading platforms that automatically match customer's buy and sell orders at stated prices. These stated prices are gathered from different market makers, banks, and even other traders who use the ECN. Whenever a certain sell or buy order is made, it is matched up to the best bid/ask price out there.

Due to ability of traders to set their own prices, ECN brokers typically charge a VERY small commission for the trades you take. The combination of tight spreads and small commission usually make transaction costs cheaper on ECN brokers.

All the money in the world

Doing business in places others haven’t heard of? While we may not know where you are either, rest assured that we’ve got your expense needs covered – your purchases can now be recorded in any of 159 currencies.

Any expense in a foreign currency will automatically be converted to your home currency once added to a report. We use Oanda, the touchstone foreign exchange rate calculator used by corporations, tax authorities, auditing firms, and financial institutions worldwide, to do the currency conversion based on the day’s exchange rate when the expense was incurred. Check out the full list of supported foreign currencies on our currency conversion help page.

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Market Psychology, Macroeconomics and Forex Exchange Rates

                                                     There are many factors that influence Forex exchange rates, from macroeconomic data to trading volumes and market psychology. Many people, though, are surprised to learn that market psychology often plays a bigger role in price movement than any other factor.

Macroeconomic Data Moves Forex Exchange Rates

The Forex market exhibits the highest degree of fluctuation in reaction to economic data of any financial market in the world. Forex exchange rates tend to react with extreme volatility to economic news releases and do so virtually instantly, sometimes even before the data is released. This makes the Forex market one of the most accurate reflections of world economic health.

There are a wide range of economic variables that impact currency exchange rate fluctuations including the trade balance, inflation, GDP, employment levels, trade deficits or surpluses and more. Generally, when such economic data is released, the Forex market will exhibit volatile fluctuations that can range from a meager ten pips to as much as a few hundred pips.

The movement is usually caused by data that is unexpected in comparison to forecasted figures. In other words, if actual employment numbers are lower than forecasted figures, then there will a significant weakening of the currency in question. Likewise, if consumer confidence is higher than expected, the currency will strengthen.

However, the Forex market does not always move as expected, which is where market psychology plays an important role. Next, we'll take a look at the power gained when you know what to expect from the Forex unexpected.