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A true hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York.
Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night. The FX market is considered an Over-The-Counter OTC or 'inter-bank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network.
Trading is not centralized on an exchange, as with the stock and futures markets. In percentage terms, it is the same in India. Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In these three currency pairs, where the U. In other words, if a currency quote goes higher, that increases the value of the base currency.
A lower quote means the base currency is weakening. Currency pairs that do not involve the U. When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'ask': The 'bid' is the price at which you can sell the base currency at the same time buying the counter currency.
The 'ask' or 'offer' is the price at which you can buy the base currency at the same time selling the counter currency. In the Forex market, prices are quoted in pips. Among the major currencies, the only exception to that rule is the Japanese yen. Inter Bank Rates are essentially Spot Rates 48 hours maturity which are quoted by one bank to another in order to buy or sell a currency against another.
For all direct quotes, the first quote represent the Bid and the second one the offer and as such the bid will always be lower than the offer. Thus a bank can buy or sell a currency to another bank at a particular rate, which it does on behalf of its client and charges a margin above the transaction rate which essentially is the transaction cost of the bank.
However, the transactions are usually done by quoting the IB rate and then the margin is added or subtracted as the case may be. It is thus imperative for the client to know the current IB rate to get the best possible rate from its bank for conversion. These rates carry very thin spreads and are used as a benchmark to convert higher value transactions with a pre-fixed margin for all remittances in the form of bills of exporters and importers.
Currency rates tend to be even wider as these are mostly driven by demand and supply. In India, most forward swap markets are dealt on Month End basis as opposed to overseas markets which are on a Monthly Basis. By month end we mean the last working day of the month like 31st July, 31st Aug, 30th September etc. In a monthly format however the forward premiums are quoted in multiples of 30 days from the spot date from which it is calculated e.
In overseas markets, the forward premiums are quoted in their respective currencies Overseas premium and these have to be converted to the INR which are pre-calculated for the user in both Month End and Monthly format. Additionally, one can use the forward calculator which can calculate the finished forward rate for any date in the future, depending on inward or outward.
A support is the price level which, historically, a currency has had difficulty falling below. It is thought of as the level at which a lot of buyers tend to enter the stock. A resistance is the price level at which a currency or market can trade, but not exceed, for a certain period of time. Supports and resistances serve as effective points for entry and exit of a currency and to apply stop loss and take profit levels.
In practice, a breakout is most commonly used to refer to a situation where the price breaks above a level of resistance and heads higher, rather than breaking below a level of support and heading lower. Once a resistance level is broken, it is regarded as the next level of support when the asset experiences a pullback. A breakout is the bullish counterpart to a breakdown. A sideways trend is a horizontal price movement that occurs when the forces of supply and demand are nearly equal.
A sideways trend is often regarded as a period of consolidation before the price continues in the direction of the previous move. One would come across these terms when visiting the technical analysis section in EforexIndia where two levels of supports and resistances are mentioned for day trading and is an extremely useful tool for traders.
After determining the exposure, the company needs to know which way the currency is headed. The focus should primarily be on: The underlying assumption behind the forecasts. The Range of movement possible, i. Forecasting a currency is a complex process as they are a universal and cannot be influenced by isolated factors b moves as per interest rates c 24 hours market d immense volume.
This forecast can be done by Fundamental and Technical Analysis which our traders are trained in and requires considerable amount of technical and market knowledge. Fundamental Analysis refers to Policy related changes including interest rate decisions while technical analysis done from charting and statistical methods.
One of the first things to learn is that the market is supreme and thus at no point should one try to over-rule the underlying trend of a market. The Trend is the Biggest Friend and it is always wise to catch that signal. One should only enter the market after identifying the long term and them the intermediate and short-term trend of the market.
Support and Resistance are points where a chart experiences recurring upward or downward pressure. A Support level is the low point of a chart whereas the Resistance is the high point of the pattern.
The various tools of analysis used by us in this section and for forecasting various trends and cycles are briefly explained for our readers. Moving Averages tell the price in a given point of time over a defined period of time. They are so called because they reflect the latest average, while adhering to the same time measure. The problem with using moving averages is that they are lagging indicators, which means they change only after a trend has changed.
This can be overcome by using a shorter period or by combining two averages of distinct time frame. So if one use a combination of 40and day moving average, buy signals are detected when the shorter-term average crosses above the longer-term average and a sell signal in the reverse combination. Momentum Analysis measures the underlying strength of a price movement or the rate of change of price rather than plotting the actual price itself.
It is plotted around a zero line and results may be either negative or positive. It should be remembered that a Top in the momentum line does not mean that the price has reversed, only a move through a zero line signals a price reversal. Thus a momentum indicator signals acceleration or deceleration of a price and can be classified as a leading indicator.
RSI reflects the overbought or oversold position of a market. For this calculation, to compute support the RSI figure should be taken at 70 and for the purpose of Resistance, RSI should be taken at However, this method should ideally be used in a consolidating market and would best be avoided in a trending market. This tool carries the advantages of other tools and tried to nullify their disadvantages and is calculated at 1. The bands of this envelope act as support and resistance so it is easy to buy at the lower end of the band and sell at the upper end.
Entry and exit should best be done when a price has closed outside the band and is definitely a leading indicator. This is a very popular retracement series based on mathematical ratios arising from mostly natural phenomenon and is used to determine how far a price has rebounded or backtracked from its underlying trend.
Since the series is like 1, 1, 2, 3, 5, 8, 13, 21, 34…, the ratios we get are This is done by classifying prices into patterned waves that can indicate future targets and reversals. Waves moving with the trend are called impulse waves and waves moving against the trend are called corrective waves.
These Impulse and Corrective waves are broken down into five primary and three secondary movements respectively which forms a complete wave cycle and these can be further subdivided. These wave patterns needs to be identified so as to predict accurately and is best used in conjunction with the Fibonacci theory. A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.
It is an over-the-counter contract between parties which determines the rate of interest, or the currency exchange rate, to be paid or received on an obligation beginning at a future start date. The contract will determine the rates to be used along with the termination date and notional value. On this type of agreement, it is only the differential that is paid on the notional amount of the contract. It is also known as a "future rate agreement". The lower rate is the bid at which the bank is ready to pay fixed and the higher rate will be the offer rate at which the bank will be ready to receive fixed.
We take the case of a borrower who has obtained a one-year credit amounting to Rs. Now he is not confident about the second six months, as he is not confident about what he has to pay and apprehends rates to rise.
To protect himself he can buy an FRA for the next 6 months with a matching notional principal. Suppose a bank quotes him for 6X12 FRA 9. He can lock in at 9. Using the data in our example we get:. Thus the borrower would receive Rs. It is clear from the calculation that the net cost to the borrower will be the same as agreed under the FRA contract in both the cases. There are various Exposure and Capital Adequacy Norms that are laid down by the apex bank to whom all such deals have to be reported on a fortnightly basis.
However, the derivative markets are highly leverages and thus care should be taken in the initial stages by engaging professional consultants to avoid untoward losses by either not using the instrument available or using it in an erroneous manner. What is partially or fully- convertible currency? What is INR in this respect? Currency Convertibility is the ability to exchange money for gold or other currencies.
The word "margin" means something very different in forex than it does in stocks. This can be a costly move because the investor must pay interest to the brokerage firm on the amount borrowed. This is not the case in forex trading. The leverage available in forex trading is one of main attractions of this market for many traders.More...