WHAT IS FOREX?

Foreign exchange is the simultaneous buying of one currency and selling another. Currencies are traded through a broker or dealer and are executed currency pairs; for example, the Euro dollar and the US dollar (EUR/USD) the British pound and the US dollar (GBPUSD). The Foreign Exchange Market (FOREX) is the largest financial market in the world, with a volume of over $1.95 trillion daily. This is more than three times the total amount of the stocks and futures markets combined.

Unlike other financial markets, the FOREX spot market has neither a physical location nor a central exchange it operates through an electronic network of banks, corporations, and individuals trading one currency for another. The lack of a physical exchange enables the FOREX market to operate on a24-hour basis, spanning from one time zone to another across the major financial centers. This fact-that there is no centralized exchange-is important to keep in mind as it permeates all aspects of the FOREX experience.

WHAT IS A SPOT MARKET?

A spot market is any market that deals in the current price of a financial instrument. Futures markets, such as the Chicago Board of Trade, offer commodity contracts whose delivery date may span several months into the future.

WHICH CURRENCIES ARE TRADED?

Legion Trade Limited offers various currencies to trade via its online trading platform. The trading volume of the major currencies (along with their symbols) is given in descending order: the U.S. dollar (USD), the Euro dollar (EUR), the Japanese yen (JPY), the British pound sterling (GBP), the Swiss franc (CHF), the Canadian dollar (CAD), and the Australian dollar (AUD). All other currencies are referred to as minors.

FOREX currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of, that country currency. (The "CH" in the Swiss franc acronym stands for Confederation Helvetica).

WHO TRADES ON THE FOREIGN EXCHANGE?

There are two main groups that trade currencies. About five percent of daily volume is from companies and governments that buy or sell products and services in a foreign country and must subsequently convert profits made in foreign currencies into their own domestic currency in the course of doing business this is primarily hedging activity. The other 95 percent consists of investors trading for profit, or speculation. Speculators range from large banks trading 10,000,000 million currency units or more and the home-based operator trading perhaps 10,000 units or less.

Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders, and hedge funds all use the FOREX market to pay for goods and services, to transact in financial assets, or to reduce the risk of currency movements by hedging their exposure in other markets. For example, a producer of Widgets in the United Kingdom is intrinsically long the British pound (GBP). If they sign a long-term sales contract with a company in the united stares, they may wish to buy some quantity of the USD and sell an equal quantity of the GBP to hedge their margins from a fall in the GBP.

The speculator trades to make a profit by purchasing one currency and simultaneously selling another. The hedger trades to protect his or her margin on an international sale (for example) from adverse currency fluctuations. The hedger has an intrinsic interest in one side of the market or the other. The speculator does not.

HOW ARE CURRENCY PRICES DETERMINED?

Currency prices are affected by a variety of economic and political conditions, but probably the most important are interest rates, international trade, inflation, and political stability. Sometimes governments actually participate in the foreign exchange market to influence the value of their currencies. They do this either by flooding the market with their domestic currency in an attempt to lower the price or, conversely, buying in order to raise the price. This is known as central bank intervention. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and volume of the FOREX market make it impossible for any one entity to drive the market for any length of time.

WHY TRADE FOREIGN CURRENCIES?

In today's marketplace, the dollar constantly fluctuates against the other currencies of the world. Several factors, such as the decline of global equity markets and declining world interest rates, have forced investors to pursue new opportunities. The global increase in trade and foreign investments has led to many national economies becoming interconnected with one another. This interconnection, and the resulting fluctuations in exchange rates, has created a huge international market: FOREX.

For many investors, this has created exciting opportunities and new profit potentials. The FOREX market offers unmatched potential for profitable trading in any market condition or any stage of the business cycle. These factors equate to the following advantages:

• Low commissions. No clearing fees, no exchange fees, no government fees.
• No middlemen. Spot currency trading does away with the middlemen and allows clients to interact directly with the market maker responsible for the pricing on a particular currency pair.
• High liquidity. With an average trading volume of over $1.95 trillion per day, FOREX is the most liquid market in the world. It means that a trader can enter or exit the market at will in almost any market condition.
• Instantaneous transactions. This is a very advantageous byproduct of high liquidity.
• Low margin, high leverage. These factors increase the potential for higher profits
• A 20 hour market. A trader may take advantage of all profitable market conditions at any time. There is no waiting for the opening bell.
• Online access. A trader can place its own order directly via online trading platform without interference of broker or dealer.

FOREX VERSUS STOCKS

Historically, the securities markets have been considered at least by the majority of the public, as an investment vehicle. In the last few years, securities have taken on a more speculative nature. This was perhaps due to the downfall of the overall stock market as many security issues experienced extreme volatility because of the "irrational exuberance" displayed in the marketplace. The implied return associated with an investment was no longer true. Many traders engaged in the day trader rush of the late 1990s only to discover that from a leverages standpoint it took quite a bit of capital to day trade, and the return-while potentially higher than long-term investing-was not exponential, to say the least.

After the onset of the day trader rush, many traders moved into the futures stock index markets where they found they could better leverage their capital and not have their capital tied up when it could be earning interest or making money somewhere else. Like the futures markets, spot currency trading is an excellent vehicle for the pattern day trader that desires to leverage his or her current capital to trade.

Spot currency trading provides more options and greater volatility while at the same time stronger trends than are currently available in stock futures indexes. Former securities day traders have an excellent home in the FOREX market.

There are approximately 4,000 stocks listed on the New York Stock Exchange. Another 2,800 are listed on the NASDAQ. Which one will you trade? Trading just the seven major USD currency pairs instead of 7,800 stocks simplifies matters significantly for the FOREX trader. Fewer decisions, fewer headaches.

FOREX VERSUS FUTURES

The futures contract is precisely that-a legally binding agreement to deliver or accept delivery of a specified grade and quantity of a given commodity in a distant month. FOREX, however, is a spot (cash) market in which trades executed within same business day. Many Forex brokers allow their investors to "roll over" open trades to next business days.

In addition to the advantages listed, FOREX trades is executed at the time and price asked by the traders. There are numerous horror stories about futures traders being locked into open position even after placing the liquidation order.

The high liquidity of the foreign exchange market (roughly three times the trading Volume of all the futures market combined) ensure the prompt execution of all orders (entry, exit, limit etc) at the desired price and time.

The Authority governing futures exchange authorized the exchange to placed daily limit on contract that significantly hamper the ability to enter and exit the market at the selected time and price. No such limit exists in FOREX market.