of transactions in the global currency market is constantly growing,
which is due to development of international trade and abolition of
currency restrictions in many nations. Global daily conversion transactions
came to $1,982 billion in mid-1998 (the London market accounted for
some 32% of daily turnover; the New York market exchanged approx.
18%, and the German market, 10%). Not only the scope of transactions
but also the rates that mark the market development are impressive:
in 1977, the daily turnover stood at five billion U.S. dollars; it
grew to 600 billion U.S. dollars over ten years – to one trillion
in 1992. Speculative transactions intended to derive profit from jobbing
on the exchange rate differences make up nearly 80% of total transactions.
Jobbing attracts numerous participants – both financial institutions
and individual investors.
highest rates of information technology development in the last
two decades, the market itself changed beyond recognition. Once
surrounded with a halo of caste mystique, the foreign exchange dealer’s
profession became almost grasroots. Forex transactions that used
to be the privilege of the biggest monopolist banks not so long
ago are now publicly accessible thanks to e-commerce systems. And
the foremost banks themselves also often prefer trade in electronic
systems over individual bilateral transactions. E-brokers now account
for 11% of the forex market turnover. The daily scope of transactions
of the biggest banks (Deutsche Bank, Barclays Bank, Union Bank of
Switzerland, Citibank, Chase Manhattan Bank, Standard Chartered
Bank) reaches billions of dollars.
The FOREX market as a place where to apply
one’s personal financial, intellectual and psychic power is
not designed for attempts at catching a bluebird there. Sometimes
someone manages to do so but for a short time only. The key advantage
of a forex market is that one can succeed there just by the strength
of one’s intelligence.
Another essential feature of the FOREX market,
no matter how strange it might seem, is its stability. Everybody
knows that sudden falls are very typical of the financial market.
However, unlike the stock market, the FOREX market never falls.
If shares devalue it means a collapse. But if the dollar slumps,
that only means that another currency gets stronger. For instance,
the yen strengthened by a quarter against the dollar late in 1998.
On some days dollar fell by dozens percentage points. However, the
market did not collapse anywhere; trading continued in the usual
manner. It is here that the market and the related business stability
lie - currency is an absolutely liquid commodity and will be always
The FOREX market is a 24-hour market that
does not depend on certain business hours of foreign exchanges;
trade takes place among banks located in different corners of the
globe. Exchange rates àre so flexible that significant changes
happen quite frequently, which enables to make several transactions
every day. If we have an elaborate and reliable trade technology
we can make a business, which no other business can match by efficiency.
It is not without reason that the pivotal banks buy expensive electronic
equipment and maintain the staffs of hundreds of traders operating
in different sectors of the FOREX market.
The starting costs of joining this business
are very low now. Actually, it costs several thousands of dollars
to take a course of initial training, to buy a computer, to purchase
an information service and to create a deposit; no real business
can be established with this money. With excessive offers of services,
finding a reliable broker is also quite a real thing. The rest depends
on the trader himself or herself. Everything depends on you personally,
as in no other area of business now.
The main thing the market will require for successful operations
is not the quantity of money you will enter it with – the
main thing is the ability to constantly focus on studying the market,
understanding its mechanisms and participants’ interests;
this is constant improvement of one’s trade approaches and
their disciplined implementation. Nobody has achieved success in
that market by forcing one’s way with one’s capital
atilt. The market is stronger than anything else; it is even stronger
than central banks with their huge foreign exchange reserves. George
Soros, a national hero of the FOREX market, did not win the Bank
of England at all, as many of us believe – he made the right
guess that, with existing contradictions inherent in the European
financial system, there were plenty of problems and interests that
would not allow to hold the pound. That’s exactly what happened.
The Bank of England, having spent nearly $20 billion to maintain
the pound rate, jacked it up, by giving it in to the market. The
market settled this problem, and Soros got his billion.
The global monetary system has gone a long way during thousands
of years of the human history, but it is surely experiencing the
most exciting and earlier unthinkable changes. The two main changes
determine a new image of the global monetary system:
the money is fully separated from any tangible
powerful information and telecommunications technologies made it
possible to consolidate monetary systems of different nations into
the single global financial system that has no boundaries.
Typical attractive features of the market:
the market operates the enormous money supply and gives absolute
freedom in opening or closing a position in the current market quotation.
High liquidity is a powerful magnet for any investor, because it
gives him or her the freedom to open or to close a position of any
with a 24-hour work schedule, participants in the FOREX market need
not wait to respond to any given event, as is the case in many markets.
a possibility to trade round-the-clock; a market participant need
not wait to respond to any given event;
of the trade arrangement system: a position may be opened
for a pre-determined period of time in the FOREX market, at the
investor’s discretion, which enables to plan the timing of
one’s future activity in advance;
Forex market has traditionally incurred no service charges, except
for the natural bid/ask market spread between the supply and the
with high market liquidity, most sales may be carried out at the
uniform market price, thus enabling to avoid the instability problem
existing with futures and other forex investments where limited
quantities of currency only can be sold concurrently and at a specified
currency moves in a quite specific direction that can be tracked
for rather a long period of time. Each particular currency demonstrates
its own typical temporary changes, which presents investment managers
with the opportunities to manipulate in the FOREX market;
the credit “leverage” (margin) in the FOREX market is
only determined by an agreement between a customer and the bank
or the brokerage house that pushes it to the market and is normally
equal to 1:100. That means that, upon making a $1,000 pledge, a
customer can enter into transactions for an amount equivalent to
$100,000. It is such extensive credit “leverages”, in
conjunction with highly variable currency quotations, which makes
this market highly profitable but also highly risky.
Margin Trading System
A typical transaction amounts to $10 million
in inter-bank trade. However, it is quite clear that such transaction
values are not affordable for a private investor – well, at
least to the overwhelming majority of them.
Involvement of small and medium investors
in the Forex market was facilitated by intermediacy of dealing or
brokerage companies. Medium and small investors have access to the
global forex market in many nations, using the sums of money starting
from $2,000 in their transactions. A dealing company provides its
customers with a credit line – a so-called dealing leverage,
or a credit leverage, that is several times as big as the deposit.
Brokers providing margin trading services require that a pledge
deposit should be contributed, and provide a customer with an opportunity
of entering into forex sales and purchase transactions for amounts
that are 50, 100 and sometimes even 200 times as large as the deposit
made. The risk of losses is borne by the customer; the deposit serves
as security hedging a broker. The system of operations through a
dealing (brokerage) house, with a credit leverage, was called margin
To put it simply, the essence of margin
trading can be reduced to the following: by placing pledged capital,
an investor becomes able to manage target loans provided against
this pledge and to guarantee indemnification against any potential
losses on open forex positions with the deposit.
As mentioned above, unlike with forex transactions
with actual delivery or actual currency exchange, FOREX participants,
especially those with little funds, make use of trading with an
insurance deposit - margin trade, or leverage trade. In case of
marginal trade, each transaction must consist of the two stages
– purchase/sales of foreign exchange at one price, and then
its compulsory sales/purchase at another (or at the same) price.
The first action is called the opening of a position; the second
is the closing of a position. Opening of a position is not accompanied
with actual delivery of foreign exchange, and a participant that
opened the position contributes an insurance deposit that serves
as guarantee of indemnification against any possible losses. Upon
closing of a position, the insurance deposit is returned, and profit
or losses are calculated.
Any margin trading transaction must comprise
two parts: opening of a position and closing of a position. For
instance, when forecasting the euro goes up (looks up) vs the dollar,
we want to buy a cheaper euro with dollars now and to sell it back
when it rises in price. In this case, the transaction will look
as follows: opening of a position – euro purchase; closing
of a position – its sale. All the time until the position
has been closed we have an “open euro position.” Just
the same, when we believe that the euro will cheapen (look down)
vs the dollar, our transaction will consist of the following steps:
opening a position – sales of a more expensive euro; closing
a position – purchase of a cheapened euro. Therefore, we are
able to generate profit whether the exchange rate goes up or down.
You can enter FOREX through an intermediary
only. A dealing center may act as such intermediary. This agency
provides you with a (computer or telephone) communications channel
with a broker who makes available forex quotations to you and through
whom you can enter into transactions. You can also operate directly
from your home PC through the Internet. The last option has been
becoming increasingly more common recently. The prices you can see
on your computer’s screen are prices of actual transactions
A customer concludes a contract with the
company whereby the latter undertakes, at the customer’s order
and in its own name, to enter into transactions. In this case, the
company runs the risk of losses from entering into such transactions,
so the customer deposits a certain sum of money with the bank as
pledge. The amount of this deposit is determined based on the amount
of transactions entered into by the bank and on the credit lever
provided to the customer. If a dealing company makes losses from
a concluded transaction, the investor becomes liable to it in the
amount of this loss, and these liabilities are covered from the
pledge deposit; if the company generates profit from a concluded
transaction, it becomes liable to the investor in the amount of
this profit. Generated profit is remitted to the customer’s
pledge deposit. The customer’s order to the company to close
an open position is a must; yet the company jobs with its own money.
Otherwise the bank may close a long position with a short one, and
the customer may sustain losses. The situations when cross rates
change by more than two percentage points hardly ever happen in
the global market, and losing his or her pledge is next to impossible
if a customer jobs reasonably. If the bank’s dealer understands
that potential losses, if the rate changes for the worse, might
exceed the pledge deposit amount, the dealer can close a position
independently, without waiting for the customer’s instructions,
with losses not exceeding the pledge amount.
Margin trading appeals by its affordability.
Investing funds into securities of the most developed foreign countries
to generate any fixed income would hardly be interesting for our
compatriots. U.S. Treasury bonds are surely the most reliable and
stable, but, being very expensive, they have low yield (approx.
6% p.a.) and are the object of long-term investments. Shares generate
higher yield; however, dividend amount is directly dependent on
successful operations of any particular enterprise and its shareholders’
preferences. Share purchase for bull transactions seems more attractive
but requires greater investments. Margin trading is free from the
said limitations – you can sell and buy depending on your
expectations, and 1%-3% of a transaction value will do to enter
into the transaction.