INTRODUCTION TO FOREX

In Forex, currencies are traded in pair; for example the US dollar and the Japanese Yen (USD/JPY). When you buy US dollar, means you are buying share in United States economy and you are thinking of potential rising of the current and future health of US economy. Overall, the exchange rate of Forex market is the ratio of one currency's value against another currency and it is alike the comparison between condition of two country's economy. The entire Forex market operates 24 hours a day, 5 days a week, in a network of banks. The cash markets are fully decentralized, so there are no official opening and closing hours for Forex trading.

The Forex operations do not refer to currencies by their full names because it is long and tiresome. Relatively, they use standardized codes, developed by International Standardization Organization (ISO) and known as ISO codes. As shown in table 1, ISO codes always contain three letters, which the first two letters identify the name of country while the last letter identify the name of that country's currency.

Among all the currencies, the US dollar is the most popular traded currency as shown in figure 1. The Euro is the second while the Japanese yen and the British pound are almost similar and are the third.

Since currencies are always quoted in pairs; for example: EUR/USD = 1.3075. The first currency left to the slash is called base currency while the currency right to the slash is called quote currency and the value shown is the exchange rate. The base currency is the basis for the buy or sells. If trader buy EUR/USD, means he/she are buying the base currency (in this case, the Euro) and at the same time selling the quote currency (in this case, the US dollar) and vice versa. In Forex market, buy is termed as "go long" or "long position" and sell is termed as "go short" or "short position". For this particular example, trader will need to pay 1.3075 US dollar to buy 1 Euro and can receive 1.3075 US dollar when sell 1 Euro (without considering the spreads). A trader is open position whenever he enters a trade and is close position when he exits from his trade.

The "bid" is the price which traders will sell and the "ask" is the price which traders will buy. The bid price will always lower than the ask price and the difference between the prices is known as "spread".

In Forex, there is a term called Swap Rate or Rollover Interest. Rollover interest is a type of interest rate that trader pays or earns depending on the pair of currencies traded. As every Forex trade involves borrowing one currency to buy for another, rollover interest is part of the Forex trading. Interest is paid on the currency that is borrowed and is earned on the currency that trader bought.

Forex is traded in lots. The standard size of a lot is $100,000 and a mini lot size is $10,000. Pip is the dimension of the smallest increment or decrement of currencies. A pip is the last decimal place of a quotation and use to measure trader's profit or loss. For instance, EUR/USD move from 1.3075 to 1.3076, there is a pip increase in the quotation. For quotation involving the Japanese yen, there will has only two decimal points such as 123.45, and 1 pip would be 0.01. In foreign exchange market, the value of a pip is all shown in the unit of US dollar. Sample of calculation for pip value is shown below. Profit or loss is thus calculated by just multiply the pip value with the amount of pips gain or loss.

Example:

USD/CAD at an exchange rate of 1.2345:
(0.0001/1.2345) × $ 100,000 = $ 8.10 per pip

If the base currency is not US dollar, the formula is slightly changed.

EUR/USD at an exchange rate of 1.3075:
(0.0001/1.3075) × EUR 100,000 = EUR 7.65 × 1.3075 = $ 10 per pip

Margin is the minimum account size require for a trader to trade. Unlike other markets, Forex allow trader to trade with leverage. Leverage is the ratio that trader can trade using a small account size. If $ 1,000 is deposit and trade in standard lot size, the trader is trading in a leverage of 100:1. At IKOfx, we offer leverage up to 500:1. A trader will experience a margin call if the equity (the value of account) fall below the margin requirements. In the event of margin call, the trading platform will automatically close some or all open positions to prevent trader's account fall to negative balance.
There are some basic types of order that use in Forex market.

1. Market Order
   To buy or sell a currency pair at the current price. Execution of this order results in opening of a trade position instantly.
2. Pending Order
   Pending order is the client's commitment to the IKOfx to buy or sell a currency pair at a pre-defined price in the future. This type of orders is used for opening of a trade position provided the future quotes reach the pre-defined level. There are four types of pending orders available in the terminal:
   • Buy Limit — buy provided the future "Ask" price is equal to the pre-defined value. The current price level is higher than the value of the placed order.
   • Buy Stop — buy provided the future "Ask" price is equal to the pre-defined value. The current price level is lower than the value of the placed order.
   • Sell Limit — sell provided the future "Bid" price is equal to the pre-defined value. The current price level is lower than the value of the placed order.
   • Sell Stop — sell provided the future "Bid" price is equal to the pre-defined value. The current price level is higher than the value of the placed order.
3. Stop Loss
   This type of order is used for minimizing of losses if the security price has started to move in an unprofitable direction. If the quote price reaches this level, the position will be closed automatically. Such orders are always connected to an open position or a pending order. Terminal checks long positions with Bid price for meeting of this order provisions, and it does with Ask price for short positions. To automate Stop Loss order following the price, one can use Trailing Stop.
4. Take Profit
   Take Profit order is intended for gaining the profit when the quote price has reached a certain level. Execution of this order results in closing of the position. It is always connected to an open position or a pending order. Terminal checks long positions with Bid price for meeting of this order provisions, and it does with Ask price for short positions.
5. Trailing Stop
   Trailing Stop is always attached to an open position and works in client terminal, not at the server like Stop Loss, for example. To set the trailing stop, the user has to execute the open position context menu command of the same name in the "Terminal" window. Then the user has to select the desirable value of distance between the Stop Loss level and the current price in the list opened. Only one trailing stop can be set for each open position. After the above actions have been performed, at incoming of new quotes, the terminal checks whether the open position is profitable. As soon as profit in points becomes equal to or higher than the specified level,
   command to place the Stop Loss order will be given automatically.The order level is set at the specified distance from the current price. Further, if price changes in the more profitable direction, trailing stop will make the Stop Loss level follow the price automatically, but if profitability of the position falls, the order will not be modified anymore. Thus, the profit of the trade position is fixed automatically. After each automatic Stop Loss order modification, a record will be made in the terminal journal.
   
   Attention: Trailing Stop works in the client terminal, not in the. This is why it will not work if the terminal is off. In this case, only the Stop Loss level will trigger that has been set by trailing stop.

There are many benefits and advantages to trading Forex with IKOfx. Here are just a few reasons why so many traders are choosing this market and partnership with IKOFX:

• Commissions free.
  No clearing fees, no exchange fees, no government fees, and no brokerage fees.
• No middlemen
  Spot currency trading eliminates the middlemen, and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
• No fixed lot size.
  In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5000 ounces. In Forex, you determine your own lot size. This allows traders to participate with accounts as small as $1 USD
• Low transaction costs.
  The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions. At IKOfx, the spread could be as low as 2 pips.
• A 24-hour market.
  From Sunday 2200 EST to Friday 2100 EST, the Forex market never sleeps. This is good for those who want to trade on a part-time basis, because you can choose when you want to trade--morning, noon or night.
• No market manipulation
  The foreign exchange market is so huge 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.
• Leverage.
  In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.
• High Liquidity.
  Because the Forex market is so enormous, it is also extremely liquid. Under normal market conditions, just a click you able to instantaneously buy and sell at will. You can even command the trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss order).
• Free "Demo" Accounts, News, Charts, and Analysis.
  IKOfx offer free 'demo' accounts to practice trading, along with breaking Forex news and charting services on the website for beginner traders who would like to hone their trading skills with virtue money before opening a live trading account and risking real money.
• "Mini Account" Trading:
  You would think that getting started as a currency trader would cost a ton of money. The fact is, compared to trading stocks, options or futures, it doesn't. IKOfx offer "mini" trading accounts with a minimum account deposit of $1 USD. It makes Forex much more accessible to the average individual who doesn't have a lot of start-up trading capital.

Comparison Between Forex, Stock and Future Market

Trading Conditions	Forex	Stock	Future
24-hour Trading	YES	NO	NO
Commission Free Trading	YES	NO	NO
Instant Execution of Market Orders	YES	NO	NO
Short-Selling without an Uptick	YES	NO	NO
Up to 400:1 Leverage	YES	NO	NO
Price Certainty	YES	NO	NO
Guaranteed Limited Risk	YES	NO	NO

The major players in the Forex market arena are commercial banks, investment banks, central banks, trading institutions, hedge funds, corporations, and individual investors.

Commercial and investment banks are the natural players in Forex. Currency trading started to be an additional service to commercial banking business, deposits and loans. The commercial and investment banks are in the market on behalf of both customers and themselves.

Central banks are different type of player. They are not in the market for money and they are in fact nonprofit organization. Their main purpose is to provide satisfactory trading condition and direct the domestic monetary policy and maintain the stability of the national currency of its country.

Hedge funds mainly research potential investments in the markets worldwide and focus the capital on one or few instruments only. The international investment opportunities increase when more funds are entering the currency markets.

The internationalization of business and increase in competition force corporations to keep an eye on at Forex. Corporations surpass their commercial needs and take speculative positions, as opportunities occur.

Individual investor access Forex hoping to make money by exploiting the movement of a currency pair.

A central bank's role is to direct the domestic monetary policy and maintain the stability of the national currency of its country. The central bank deals with the flow of money and credit that is provided to the economy under the monetary policy. Its responsibility includes controlling subsidized-loan interest rates and acting as a lender to the banking sector during times of financial crisis. It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently. Market interventions are a part of the total role that central banks exercise in affecting the Forex market.

The Federal Reserve was established at 1913, when Congress passed the Federal Reserve Act. The Act held that role of the Federal Reserve was to provide an elastic currency and establish an effective supervision of banking in the United States. In 1923 the Open Market Investment Committee (OMIC) was establish to coordinate the Reserve Bank operations. In 1930, the OMIC was replaced by the Open Market Policy Conference (OMPC) and it consists of 12 Federal Reserve Banks governors and the members of the Board.

The Banking Act of 1935 had reshaped the structure of the Federal Reserve System and the OMPC's name was switched to the Federal Open Market Committee (FOMC). The Banking Act held that the Board must generate a suitable environment for business stability. Like the other central banks, the Federal Reserve affects the Forex markets in three general ways:

1. The discount rate.
2. The money market instruments.
3. Foreign exchange operations.

The major central banks are involved in the Forex market operations in more ways than intervening in the open market. Their operations include payments between central banks. The major central banks do not engage in speculative trading. Intervention in the Forex markets is toward restoring orderly condition in the market or influencing the exchange rates. The actual intervention is executed by the Foreign Exchange Desk at the Federal Reserve Bank of New York. There are two types of Forex interventions:

1. Naked intervention
2. Sterilized intervention

Naked intervention refers to the sole Forex activity. To be brief, Federal Reserve either buys or sells US dollar against a foreign currency. Besides the impact in the Forex market, there is also a monetary effect on the money supply. If the money supply is impacted, then adjustments will be made in interest rates, prices and all levels of economy. Consequently, a naked intervention results a long term effect.

Sterilized intervention functions to neutralize the impact on the money supply for the reason that there are few central banks want the impact or the intervention in the Forex market to affect all corners of their economy. The impact of sterilized intervention will tend to have only a short to medium term effect.

Here is a case example of market intervention from the Bank of Japan. Japan's economy is mostly depending upon its exports. Thus, Japan's economy benefits from the weaker value of yen because low value yen provide an advantage in its export competitive. So, the yen value is preferred to be remained low relative to USD. When the yen value appreciates, Bank of Japan will try to control it by market intervention either selling trillions of yen to bring down the value or reduce the interest rates. In early 2004, the Bank of Japan intervened in the currency market to keep the exchange rate of USD/JPY above the level of 105.00. Figure 2 shows that this massive intervention pushed the USDJPY from just above 105.00 to above 112.00, a 700 pip gain in just a few weeks.

A hedge is an investment that carries out specifically to reduce the risk in another investment. Hedging is more like a strategy designed to minimize the exposure to unwanted business risk at the same time gain profits from an investment. In the other way, think of hedging as insurance. When hedge is done, people are ensuring themselves against negative event. The impact of the negative event is reduced if hedge properly. Hedging is not for making money but reduce the potential loss and hedging occurs everywhere.

Some types of risk are natural to any business activity such as oil price. Risk are not wanted but cannot be avoided without hedging. A hedge for this type of risk is called natural hedging. In natural hedging, undesired risk is reduced by matching cash flows.

Hedging is the favorite technique used by corporations. Income of company was often heard to be reduced by the falling of commodity prices. Reason why companies make an effort to hedge is because there are always risks to their central business. Companies enter a transaction whose sensitivity to movements in financial prices offsets the sensitivity of their core business to such changes. Corporations also hedge for eliminate and managing the types of exposure they facing.