Foreign Exchange
Having been in banking for 33 years I wrote this article.
If you are buying property in Cyprus you will need to have an understanding of Forex.
This is how one astute person saved CY£4500.
“Because the exchange rate was CYP/GBP 0.86 and I knew I had seen it as low as CYP/GBP 0.79I wanted to pay a lump sum, leaving only £4000 to completion. The developer reduced the price by CY£4500.
And don’t just accept the general rate that they are using in-branch on the day.
The trading desk publishes rates at the beginning of each day to the branch network in a band of up to say 5000 in the base currency of the forex trading books notably Cyprus Pounds in this case. This rate incorporates a wide margin in case of adverse movements during the day or the next day when the bank consolidates these small amounts and deals it in to the main book.
The rate you get is the branch rate unless your booking goes outside of these bands when the branch bank is asked to call the “branches desk” in the bank’s forex centre. They have access to the trading screens that the bank puts out to the bank market. Up to about 50,000 they have discretion to quote a live rate to the branch. You have a few minutes to decide deal or no deal. The rate could be could be an improvement by a few “pips” or parts of a cent because of the wide margin in the branch rate.
If you are booking over a larger figure than typically 50K the branch desk in the forex centre will hit the main trader for a quote – again it could be better again than an indication rate from the 5000 band.
Over the course of the last 14 months we have at one time been able to get as much as 87.6 cents for your Sterling against CY£ and at another time as little as 81.8 cents. The average exchange rate throughout the whole of that period has been 84.5 cents.
This short introduction explains the basics of trading Forex , a brief explanation of the markets and the major benefits of trading Forex.
Overview
Foreign exchange , forex or just Forex are all terms used to describe the trading of the world’s many currencies. The forex market is the largest market in the world, with trades amounting to more than $1.5 trillion every day. This is more than one hundred times the daily trading on the NYSE (New York Stock Exchange) . Most forex trading is speculative , with only a few percent of market activity representing governments’ and companies’ fundamental currency conversion needs.
Unlike trading on the stock market, the forex market is not carried out by a central exchange, but on the “interbank” market , which is thought of as an OTC (over the counter ) market. Trading takes place directly between the two counterparts necessary to make a trade, whether over the telephone or on electronic networks all over the world. The main centres for trading are Sydney, Tokyo, London, Frankfurt and New York. This worldwide distribution of trading centres means that the forex market is a 24-hour market.
Trading Forex
A currency trade is the simultaneous buying of one currency and selling of another one. The currency combination used in the trade is called a cross (for example, the Euro/US Dollar, or the GB Pound/Japanese Yen.). The most commonly traded currencies are the so-called “majors” – EURUSD, USDJPY, USDCHF and GBPUSD.
The most important forex market is the spot market as it has the largest volume. The market is called the spot market because trades are settled “immediately” or on the spot. In practice this means within two banking days.
Trading on Margin
Trading on margin means that you can buy and sell assets that represent more value than the capital in your account. Forex trading is usually done with relatively little margin since currency exchange rate fluctuations tend to be less than one or two percent on any given day. To take an example, a margin of 2.0% means you can trade up to $500,000 even though you only have $10,000 in your account. In terms of leverage this corresponds to 50:1, because 50 times $10,000 is $500,000, or put another way, $10,000 is 2.0% of $500.000. Using this much leverage gives you the possibility to make profits very quickly, but there is also a greater risk of incurring large losses and even being completely wiped out. Therefore, it is inadvisable to maximise your leveraging as the risks can be very high. For more information on the trading conditions at Saxo Bank, go to the Account Summary on your Client Station and open the section entitled “Trading Conditions” found in the top right-hand corner of the Account Summary.
Why trade Forex?
24 hour trading
One of the major advantages of trading forex is the opportunity to trade 24 hours a day from Sunday evening (20:00 GMT) to Friday evening (22:00 GMT). This gives you a unique opportunity to react instantly to breaking news that is affecting the markets.
Superior liquidity
The forex market is so liquid that there are always buyers and sellers to trade with. The liquidity of this market, especially that of the major currencies, helps ensure price stability and low spreads . The liquidity comes mainly from large and smaller banks that provide liquidity to investors, companies, institutions and other currency market players.
No commissions
The fact that forex is often traded without commissions makes it very attractive as an investment opportunity for investors who want to deal on a frequent basis. Trading the “majors” is also cheaper than trading other crosss because of the high level of liquidity. For more information on the trading conditions at Saxo Bank, go to the Account Summary on your Client Station and open the section entitled “Trading Conditions” found in the top right-hand corner of the Account Summary.
50:1 Leverage
With a minimum account of USD 10,000, for example, you can trade up to USD 500,000. The USD 10,000 is posted on margin as a guarantee for the future performance of your position.
Profit potential in falling markets
Since the market is constantly moving, there are always trading opportunities, whether a currency is strengthening or weakening in relation to another currency. When you trade currencies, they literally work against each other. If the EURUSD declines, for example, it is because the U.S. dollar gets stronger against the Euro and vice versa. So, if you think the EURUSD will decline (that is, that the Euro will weaken versus the dollar), you would sell EUR now and then later you buy Euro back at a lower price and take your profits. The opposite trading scenario would occur if the EURUSD appreciates .
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