Forex for Beginners Part 1: Financial Markets

INTRODUCTION

Financial markets, at first glance, seem abstract, alien, and frightening, and the people who trade and work on them look like some higher beings. But suppose you take a closer look and remove that layer of legends, rumors, and universal adoration, which is generously created by a variety of media. In that case, it turns out that financial markets are created and controlled by ordinary people. Of course, they have a touch of caste, but almost any person can fall into this caste; you need to make a certain amount of effort.

Almost everyone who is now the most famous financier once started from the very beginning. They became well-known and achieved great heights in the financial markets only thanks to their perseverance and desire to learn and improve.

So what is FOREX, and what will we have to study in the near future?

The term FOREX is an abbreviation of the English expression Foreign Exchange Operations, which means “currency conversion operations”. Such operations make up a significant share of the entire global financial market.

We will track the movement of the world’s leading currencies, which make up the bulk of the FOREX market. In the course of training, we will understand that these currencies are nothing but a glorious calling card of those countries that dictate the rules of the “game” to the rest of the world. These are the British pound sterling, the Swiss franc, the Japanese yen, the euro, which replaced the German mark, and, of course, the US dollar.

We will study what drives the FOREX market and how the actions of states determine the current value of their currencies in the market. We will see a variety of factors affecting the development of the economy and, as a result, the movement of exchange rates.

To become a participant in the FOREX market means to become a trader, a CURRENCY SPECULANT. The stereotype that has developed over the past 70 years in our country characterizes a speculator as an illegal immigrant. Well, for the definition of “currency,” one could get to the fullest at one time. So, the dictionary of S.I. Ozhegov, published in 1970, unambiguously interpreted the term “speculation”: “criminal buying and reselling to individuals of products, consumer goods, property, valuables, etc. for profit (usually using price differences, their illegal increase, etc.). P.)”. The term “speculator” is rooted in the distant past. Translated from Latin, it means “observant”, which actually characterizes a person very well. So don’t be embarrassed!

There is no gender discrimination among currency speculators. Along with the representatives of the more vigorous sex, shoulder to shoulder, not inferior in ingenuity and ingenuity, women also work. The New York Stock Exchange (NYSE) will never forget Muriel Zabert, the first woman to get her seat on the stock exchange in 1960 and later to found a major brokerage firm in the US.

The name Soros, known throughout the world not only to financial specialists, is mentioned here for a reason. His fund received and continues to receive most of the profit from operations in the FOREX market. George Soros’ classic 1992 sale of the British pound (GBP) against the German mark (DM) and the US dollar (USD) netted him a billion dollars within two weeks, making Soros famous and launching his charitable work. He also had losses (let us recall at least August 1998 – then even Soros suffered significant losses).

Therefore, it is immediately necessary to warn that the high liquidity of this market, on the one hand, attracts investors from all over the world to it, and on the other hand, makes it one of the riskiest activities in our already complicated life. And this should not be forgotten. But the final choice will be yours.

So, what is it that attracts the FOREX market to a vast army of investors, speculators, and players?

1. A large number of participants, a large trading volume, and the fastest cash flow characterize FOREX. This determines its almost absolute liquidity. The problem of buying or selling the required amount of a given currency at the right time does not exist (unlike other markets). For example, it is not always possible to buy the desired number of shares on the stock market or the required amount of goods on the commodity market.
2. 
   Round the clock. Unlike the stock market, which operates within a strictly defined period (for example, the US stock market is open from 17:00 to 24:00 Moscow time), the FOREX market is not limited by strict time frames. To date, the FOREX market has become a global market, united by a single communication network, which opens on Monday morning in New Zealand and closes on Friday evening in the USA. Unlike other markets, there is no need to wait to react to this or that event, and this is a significant attraction of FOREX. You can work on the FOREX market at any time convenient for you: before or before work (or maybe instead), during the day, or at night. The choice depends only on the desire or ability of the trader.
3. Ubiquity. The development of the FOREX market became possible only with the advent of robust telecommunication systems. In today’s world, which is entering the era of the Internet, those who better use the technical capabilities of obtaining and analyzing information win. The Internet is beginning to play a very significant role in the global economy, accelerating the circulation of financial and information flows around the globe many times over. With the development of the Internet, any person, without knowing it, got access to the center of world capital – the world currency market. The essential difference of the FOREX market is the absence of a specific trading venue. So, no matter where you live, you can work in this market.
4. 
   Objectivity. FOREX is the most objective market – there are no participants with the ability to influence its condition greatly. This market does not have an external regulatory body, so prices are determined solely by supply and demand. The objectivity of the presented market also lies in the fact that all investors receive the same quality and volume of initial exchange information. Thanks to the Internet, getting up-to-date stock information is not a big deal.
5. Among other things, ease of entry into the market and the absence of commission costs associated with the execution of his orders, in addition to the natural difference between bid and offer prices, make him attractive to any investor. I want to note that in the stock market when buying a standard block of shares, you have to pay a commission to the broker. The amount of commission depends on the level of the broker and its capabilities. For example, a discount broker, which has minimal capabilities, is paid a commission of $20-30 per package. The brokerage firm Charles Schwebs (about 10% of transactions concluded via the Internet go through this brokerage house) will take a commission of $ 40-50 (although this is also a discount broker), which, when buying a block of shares worth $ 2,000, will be 2%, plus a natural spread between the buy and sell rate.
6. Until recently, the prominent participants in the FOREX market were banks, transnational corporations, and large brokerage firms. The minimum requirements of banks for the amount of funds to operate in this market amounted to about one million US dollars. With the introduction of margin trading in the mid-eighties, the picture changed dramatically. The provision of bank leverage by the counterparty allows you to receive large profits with a relatively small deposit, which makes the FOREX market accessible to any investor.

A. Elder, in his book “Trading for a Living” most accurately described the FOREX market: “You can be free, life and work in any corner of the globe, be independent of the daily routine and unaccountable to superiors – such is the life of a successful trader.” To these words, one can add that one can be free from negligent subordinates, optional and dishonest partners, frequently changing legislation, economic turmoil in the country, and political instability. In addition, the business that will be discussed is considered one of the most profitable types of legal activity.

Two popular misconceptions:

The first popular misconception among us is that operations on the FOREX market are analogous to playing roulette – players place bets, someone wins a lot at once, and everyone else loses. FOREX is not a roulette, as specific patterns lie at the heart of changes in exchange rates. Firstly, the value of a currency depends on the economic performance of the country, and secondly, it is determined by the preferences and expectations of market participants. Although all this is difficult, it is possible to predict. It is no coincidence that a sharply negative and skeptical attitude towards working on the world currency market is expressed only by those who have never actually worked on it. Direct work in the market changes this attitude since its analysis is more objective than accidental.

Second, rather than a delusion, it is a frequently asked question that the gain of some can only be achieved at the expense of the loss of others. However, in the FOREX market, not everyone plays on changes in rates. There are large groups of participants who use currency exchange operations for other purposes (exporters-importers, large investors, tourists), for whom short-term fluctuations in rates do not play a significant role. The main customers of these operations are export-import companies. Selling their products abroad, they receive the currency of the country where the sales take place. To invest this money in production, they need the currency of the country where the production is located. On the orders of such companies, banks (or brokerage companies) carry out conversions. Due to the fact that the world’s leading currencies are freely convertible at freely floating rates,

In reality, the foreign exchange market, like all financial markets, is never in equilibrium. His state can be defined as a constant search for an elusive balance.

What is needed for successful trading?

The main terms can be formulated as follows:

1. correct forecasting of the direction of movement of exchange rates;
2. minimization of losses in case of unfavorable market movement;
3. competent management of capital involved in operations;

Successful rate forecasting depends on in-depth market research. Experts distinguish three main types of market analysis: fundamental, technical, and psychological. The proper combination and use of these factors are the keys to successful forecasting in the foreign exchange market.

Fundamental analysis includes the study of economic and political factors that affect the state of the foreign exchange market. These are, for example, the policy of the US Federal Reserve Bank, emerging macroeconomic indicators, statements by influential government officials, and other important events. The primary purpose of fundamental analysis is the analysis and forecast of essential factors and their impact on the price dynamics of the foreign exchange market. Working on the FOREX market, you will be constantly aware of current events in the international life of the planet.

Technical analysis is an analysis of the state of the market based on the previous history of price changes. In this analysis, charts that reflect price changes over specific periods are used. Technical analysis also allows you to understand the general state of the market at the moment to determine a forecast for the future of changes in currency quotes by a number of signs.

Technical analysis is based on the fact that the price movement takes into account all the factors that can affect the market – economic, political, psychological, and other factors – all of them are already taken into account by the price movement.

FINANCIAL MARKETS

Trading processes and operations carried out in any segment of the financial market are very similar and often do not differ in anything. Moreover, each market segment has the following standard features:

1. huge volumes of cash flow;
2. participants: the state, transnational companies and banks, large financial and credit institutions;
3. standardization and a high degree of information technology in operations.

The difference between financial markets is the financial instruments and transactions which are carried out on them. It is on this basis that global financial markets can be conditionally divided into:

1. Stock market;
2. capital market;
3. Managed Money Markets;
4. Commodity markets;
5. Currency market;
6. Futures Markets.

Classification of financial markets

Stock market

The stock market is the leading economic institution. The goods in this market are shares of companies, as well as securities, which can be of a wide variety of types and forms, from pledge receipts and certificates of deposit in banks to bills of exchange. Each type of security has specific characteristics: liquidity (the ability to easily buy and sell at any time and in any quantity) and income from owning a particular financial instrument. Based on these characteristics, the investor independently decides against the purchase or sale of a security.

The largest stock exchanges are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the North American Electronic Stock Exchange (NASDAQ) in Europe – the London Stock Exchange.

Stock indices are often used to predict the state of the securities market and to obtain generalized information about the state of the market. They fix the change in the prices of shares circulating on the largest stock exchanges in the world.

Сapital market

The capital market is the market for bonds and other long-term fixed-income financial obligations issued for more than one year. The federal government, local governments, corporations, and banks give and sell bonds (bonds) in order to raise additional capital. Bonds are usually backed by a fixed interest rate and guaranteed to be paid back after a certain period, and the provision of them by the state purchases bonds beautifully.

Managed Money Markets

The term “managed” money markets arose as an alternative to the “ordinary” financial market, differing in that this market segment is managed by highly professional managers of various financial institutions (Funds) who are fluent in multiple tactics and strategies for diversifying and hedging their open positions in selected segments of the financial market Interest in such markets arises as a result of the high profitability and reliability that professionals provide.

Managed funds are a collective type of financial intermediary providing professional money management for private investors. A fund or investment company raises funds from depositors. It acquires financial instruments from various market segments, and depositors have certain rights in relation to the assets acquired by the fund and the profit received from them. For investors, the placement of assets in different funds can have a number of advantages due to savings on the costs associated with investing (as funds acquire assets in larger volumes, thereby incurring lower costs), and each fund strives to conduct the most professionally sound operations (fund traders have significant experience and qualifications, as well as access to information, often even insider information).

The most common types of managed funds in Europe are investment trusts, unit trusts, insurance, pension funds, and offshore funds. In America, the analog of the European-managed money market is mutual funds.

Product Markets

The goods in this market include raw materials, foodstuffs, and primary materials. But the most liquid goods on the commodity exchange are energy carriers and precious metals. Suffice it to mention that contracts worth tens of billions of US dollars are concluded daily in this segment of the financial market. Operations in the commodity markets are associated not only with high income but also with significant risk. Therefore, as a rule, a relatively small number of highly professional traders work in this market and act as speculators.

Derivatives Markets

All segments of the financial market are markets with immediate delivery of the asset selected under the contract. The futures market is based on the principle of deferred delivery. Those. Derivatives market – a set of all types of transactions for which the sale is made after a certain period. The instrument of this financial market is derivative securities (Derivative security). Derivative security – financial security, the value of which is derived from the value and characteristics of another security (underlying asset – an exchange commodity that is delivered or the value of which is the basis for settlement in the execution of a futures contract. Securities and shares can act as underlying assets, commodities, stock indices, or futures underlying futures contracts).

At the same time, no more than 5% of futures contracts end with accurate delivery, and all other futures contracts act as ordinary speculative transactions. Traded financial instruments in this market include futures, forward contracts, and options.

Currency market

Currency market – a system of sustainable economic and organizational relations for transactions of purchase and sale of foreign currencies and payment documents in foreign currencies. In terms of size, it is the largest financial market in the world. The main commodity of the foreign exchange market is any financial requirement denominated in foreign currency.

The main participants in the foreign exchange market are dealer banks and other banks, exporters, multinational companies, financial institutions, investors, government agencies, enterprises, and individuals. They all have diverse needs, including the need to hedge open positions in the foreign exchange market, the need to invest in different parts of the world, and to transfer purchasing power from one country to another.

The foreign exchange market will obey the laws of competition. The behavior of its participants is determined by the desire to maximize their profits by playing on the difference in exchange rates. The magnitude of these profits depends on a combination of a wide range of political and economic risks. Under certain conditions, the behavior of foreign exchange market participants leads to significant exchange rate fluctuations and destabilization of the foreign exchange market. Instability in the foreign exchange market can lead to social costs and severe economic problems.

From an institutional point of view, the foreign exchange market is a set of large commercial banks and other financial institutions connected by a complex network of modern communication means (from telephones and telexes to electronic and satellite systems) through which currencies are traded. In this sense, the foreign exchange market is not a specific gathering place for sellers and buyers of currencies.

The vast majority of foreign exchange transactions are carried out in a non-cash form, that is, on current and urgent bank accounts, and only a tiny part of the market falls on trade and cash exchange.

Modern means of communication allow you to trade around the clock (excluding weekends). For example, a Western European bank with an extensive branch network around the world can sell dollars in Sydney; Frankfurt is Main, New York, and San Francisco, moving operations from one time zone to another.

Thus, at present, we can say that the national currency markets are closely interconnected and mutually intertwined and are an integral part of the global world currency market.

The foreign exchange market primarily provides foreign exchange and credit and settlement services for export-import transactions, as well as foreign exchange transactions related to capital investment outside the national economy.

In addition, the foreign exchange market provides opportunities for hedging, that is, insurance of foreign exchange risks. When hedging, economic agents, wanting to reduce the risk associated with exchange rate fluctuations that can have a negative impact on their capital, seek to get rid of net liabilities in foreign currency, that is, to achieve a balance between assets and liabilities in this currency.

Finally, the foreign exchange market allows you to carry out currency speculation, that is, to play on the future price of the currency. The behavior of foreign exchange market participants who want to get the maximum benefit from a foreign exchange transaction depends on the difference between interest rates in the national and foreign money markets, as well as on expected changes in the exchange rate.

The FOREX market is a significant segment of the foreign exchange market, the youngest and most rapidly developing. The profitability of investing in this market depends on changes in exchange rates. The attractiveness of investing in this market is associated with the speed of the transaction and an additional banking service – lending transactions.

FOREX market

In 1971, when US President Nixon eliminated the relationship between gold and the dollar, the international currency market FOREX (Foreign Exchange operations – currency exchange operations) began to form. To date, the FOREX market has become a global, interconnected market that opens on Monday morning in New Zealand and closes on Friday evening in the US. Depending on the time zone and the appearance of different regional market participants on the FOREX market, daily trading on the FOREX market is divided into several trading sessions. The table below shows the main regional sessions on the FOREX market.

FOREX Market Opening Hours

(Kiev Time)

Region	City name	Opening time	Closing time
Oceania	Wellington Sydney	23:00 00:00	07:00 – 08:00 08:00 – 09:00
Asia	Tokyo Hong Kong Singapore	02:00 03:00 03:00	10:00 – 11:00 11:00 – 12:00 11:00 – 12:00
Europe	Frankfurt Zurich London	08:00 08:00 09:00	16:00 – 17:00 16:00 – 17:00 17:00 – 19:00
America	New York Chicago	15:00 16:00	22:00 – 23:00 23:00 – 00:00

Together with the sunrise in New Zealand and Australia, the first currency trading begins. But, due to the small amount of funds operated by the countries of Oceania, there are no significant changes in exchange rates. However, the appearance of Japan and Asian countries on the market is characterized by a large trading volume and, accordingly, a wide range of changes in currency quotes.

Around 8 am (from now on referred to as Kyiv time), the first European currency dealers begin to trade, and by 9, you can notice a surge in activity. The beginning of the European session takes place against the backdrop of cross-trading of the European and Asian financial markets. The time from 9 am to 12 pm is the most productive time for working on FOREX since the movements at this time are the most predictable and have sufficient amplitude. In 12, when there is a gradual closure of Asian financial markets, there is a gradual decrease in trading volumes, and along with the volumes, the volatility (volatility) of the market decreases.

At 15, American financial markets begin to operate. Very often, important economic reports are published at 15:30, showing the trend of US economic development. It is this period that is the most unpredictable, and beginners in the FOREX market are not recommended to conduct trading operations.

At 20, European financial institutions begin to curtail their activities, and trade gradually decreases with an almost complete fading around 1 am. With the advent of 2 Japan, the trading cycle is repeated.

Almost the entire volume of conversion transactions passes through several world financial centers such as London, Paris, Zurich, New York, San Francisco, Tokyo, Singapore, and Hong Kong. According to the Bank for International Settlements (Basel, Switzerland), the volume of conversion operations in 1989 amounted to 932 billion US dollars. By the end of 1993, it exceeded 1,100 billion US dollars. The annual increase in the volume of international trade in currencies is 5-7%. The most significant volume of transactions is made in the London market. It makes up about 20% of the total volume of transactions carried out on the market. In second place is the New York market – about 10%. The Tokyo market holds volumes up to 170 billion US dollars per day (about 8%). All others work with much smaller volumes.

Today, up to 3 trillion dollars a day flows through the international interbank currency market, and the volume of transactions continues to grow. Just imagine that this is about three annual US budgets.

You can read other chapters.