Direct dealing is based on trading reciprocity. A market maker—the bank making or quoting a price — expects the bank that is calling to reciprocate with respect to making a price when called upon. Direct dealing provides more trading discretion, as compared to dealing in the brokers’ market. Sometimes traders take advantage of this characteristic.

Direct dealing used to be conducted mostly on the phone. Phone dealing was error-prone and slow. Dealing errors were difficult to prove and even more difficult to settle. Direct dealing was forever changed in the mid-1980s, by the introduction of dealing systems.

Dealing systems are on-line computers that link the contributing banks around the world on a one-on-one basis. The performance of dealing systems is characterized by speed, reliability, and safety. Dealing systems are continuously being improved in order to offer maximum support to the dealer’s main function: trading. The software is very reliable in picking up the big figure of the exchange rates and the standard value dates. In addition, it is extremely precise and fast in contacting other parties, switching among conversations, and accessing the database. The trader is in continuous visual contact with the information exchanged on the monitor. It is easier to see than hear this information, especially when switching among conversations.

Most banks use a combination of brokers and direct dealing systems. Both approaches reach the same banks, but not the same parties, because corporations, for instance, cannot deal in the brokers’ market. Traders develop personal relationships with both brokers and traders in the markets, but select their trading medium based on price quality, not on personal feelings. The market share between dealing systems and brokers fluctuates based on market conditions. Fast market conditions are beneficial to dealing systems, whereas regular market conditions are more beneficial to brokers.

Foreign exchange brokers, unlike equity brokers, do not take positions for themselves; they only service institutional banks. The role of the broker is to bring together the buyer and seller; to optimize the price – and quickly, accurately, and faithfully execute the traders’ orders.

The majority of the foreign exchange brokers execute business is via phone using an open box system — a microphone in front of the broker that continuously transmits everything he or she says on the direct phone lines to the speaker boxes in the banks. This way, all banks can hear all the deals being executed.

With the open box system, a trader is able to hear all quoted prices; whether the bid was hit or the offer taken; and the following price quote.

What the trader is not able to hear is the amount of particular bid and counter offer, or the name of the bank that is doing the trading. Prices are anonymous. The anonymity of the banks that are trading in the market ensures the market’s efficiency, ensuring that all banks have a fair chance to trade.

Sometimes brokers charge a commission that is paid equally by the buyer and the seller. The fees are negotiated on an individual basis by the bank and the brokerage firm.

Brokers show their customers the “bid” and “offer” prices made by other customers. There is either a two-way (bid and offer) or a one way (bid or offer).

Traders show different prices because they “read” the market differently; they have different expectations and different interests. A broker who has more than one price on one or both sides will automatically optimize the price. In other words, the broker will always show the highest bid and the lowest offer. The FX market through this process has access to an optimal spread.

Fundamental and technical analyses are used for forecasting the fu­ture direction of the currency. A trader might test the market by hitting a bid for a small amount to see if there is any reaction.

Another advantage of the brokers’ market is that brokers might provide a broader selection of banks to their customers. Some European and Asian banks have overnight desks so their orders are usually placed with brokers who can deal with the American banks, adding to the liquidity of the market.

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Currency futures are another type of “forward outright” deals. Due to the fact that currency futures are derived from the spot price, they are derivative in­struments. They are specific with regard to the expiration date and the size of the trade amount. Generally, forward outright deals—those that mature past the spot delivery date—will mature on any valid date in the two countries whose currencies are being traded. Currency futures mature only on the third Wednesday of March, June, September, and December.

There are many characteristics of currency futures that make trading them attractive. First of all, currency futures are open to all market participants, individuals included. The currency future market is a centralized market, whereas the cash market is a very decentralized market. Futures trading takes place under one roof. It eliminates the credit risk because the Chicago Mercantile Exchange Clearinghouse acts as the buyer for every seller, and vice versa.

In turn, the Clearinghouse minimizes its own exposure by requiring traders who maintain a non profitable position to post margins equal in size to their losses.

Although the futures and spot markets trade closely together, cer­tain divergences between the two occur, generating arbitraging opportunities. Gaps, volume, and open interest are significant technical analysis tools that are only available in the futures market.

Due to these characteristics, currency futures trading volume has steadily attracted a large variety of traders.

Note: futures are forward outright contracts and forward prices are generally slow moving. The elimination of the forward spread will transform the futures contract into spot contract.

For traders outside the exchange, the prices are available from on-line service providers that provide real time price quotes. The most popular service providers are Bridge, Telerate, Reuters, and Bloomberg. Telerate presents the currency futures on composite pages, while Reuters and Bloomberg display currency futures on individual pages that show the convergence between the futures and spot prices.

A Spot deal consists of a bilateral contract whereby a party delivers a specified amount of a given currency against receipt of a specified amount of another currency from a counter-party, based on an agreed upon exchange rate, within two business days of the deal date.

The exception is the Canadian dollar, in which the spot delivery is executed next business day. The two-day spot delivery for currencies was developed long before technological breakthroughs in information processing. This time period was the minimum time frame necessary to check out all transactions’ details among counter-parties.

Although technologically feasible, the contemporary marketplace does not find it necessary to reduce the time to make payments. Human error still may occur and the extra day provides for this potential scenario.

By the entering into a contract on the spot market, a trading bank serving the trader tells the latter the “quota” – an evaluation of the currency traded against the U.S. dollar or some other currency.

A quota consists of two figures (for example, USD/JPY = 33.27/133.32 or, which is the same, USD/JPY = 133.27/32). The first from these figures (the left part) is called the “bid” – price (that is a price at which the trader sells), the second (the right part) is called the “ask” – price (the price at which the trader buys the currency).

The difference between the “ask and bid price” is called the “spread”. The spread is measured in points or what is referred to as “pips”.

In terms of volume, currencies around the world are traded mostly against the U.S. dollar, because the U.S. dollar is the currency of reference. The other major currencies are the euro, followed by the Japanese yen, the British pound, and the Swiss franc. Other currencies with significant spot market shares are the Canadian dollar and the Australian dollar. In addition, a significant share of trading takes place in the currencies crosses, a non-dollar instrument whereby foreign currencies are quoted against other foreign currencies, such as euro against Japanese yen.

Protecting Yourself from the Wolves “Online Forex Trading Strategies Reviled”

When deciding to look into online forex trading you will be faced with countless websites offering to make you a successful and wealthy online forex trader. Many will offer you a seven day free trial so you can learn while you earn. It takes more than seven days and some special software to create success in the forex trade market. Just like any other highly profitable situation, it takes knowledge and practice and skills that develop over time. You simply can not rush out there into the forex world and quit your job in a week to lounge around in your underwear while mastering online forex investing.

Be exceedingly cautious of any website promising you wealth beyond your wildest dreams if you simple buy their software and become a member of their trading club. Unless Publisher’s Clearing House is on your doorstep handing you one of those big fake cardboard checks, success simply doesn’t come that easily. Otherwise we would have done away with our welfare system years ago because everyone would be wealthy.

As profitable as online forex trading can be, approach it just as you would any other investment venture. Using caution and a bit of skepticism may very well save you some heartache and loss as you enter this exciting world of finance.

Knowing the rules that govern how trades and investments are made is advisable before you begin trading in the Forex. Some of this rules and strategy tactics can be a bit overwhelming to a beginner trader.

Some can be learnt along the way, such as price limits but the most basic ones required of a new trader are outlined below. They should help you maneouver successfully in the Forex.
Don’t Over Leverage Your Portfolio.

One good thing about leverage is that it can generate good profits for you even if you don’t invest as much as the “big boys”. Keeping your leverage low is the way to go as it lowers potential losses. Over leveraging your portfolio is a risky move and may leave you with a lot of debt. Your leverage should always be within your portfolio, especially if you are a beginner trader.

Know when to quit

Probably the most important rule of them all. What many traders fail to do is recognize that bad trades are exactly that-bad trades. They hang on to them hoping for an upward turn and in the process incur even more losses. Knowing when to quit also means knowing when to hold on to your trades. Remember that even the most successful of traders also occassionaly lose money off of the Forex. The trick is to minimize your losses, and maximize your winnings.

Knowing when to fold on a deal can be the difference between minimal loss or massive loss. Keep close watch on your trades so you can get out when you should. If you have researched the trade before, you will know what the breaking points likely are and be able to make this decision easily.

Research trades

As they say, knowledge is power. Knowing every thing about a trade prepares you for what might happen in the future. The whole process of researching a trade might seem very boring, but is worth the time.

Simply beginning to trade with no idea on the issues that influence a trade is asking for trouble. Such an approach guarantees that you will lose money. o, take the time to do a little research before you begin.

Place Stop Loss Orders

The stop loss order is something that should be placed right along with your entry order. This type of order protects you from a potential loss getting out of hand. If the market takes a dive, you will be protected with the stop loss order. You must figure out however, before placing the order, at what point you would want to cut your losses.

These basic rules should guide you if you intend to begin trading on the Forex market. Follow them to the letter to ensure that you profit off of the Market.

We recommend that before you start trading to “Get the Facts” from the CFTC or visit the National Futures Association web site for additional information.

Forex, Futures and Options Contracts

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency’s exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

Courtesy of wikipedia.org

Courtesy by wikipedia.org