An Introduction

Forex Or Foreign Exchange Is The Trading Of Currencies Quoted As Pairs , For Example GBP/USD. As An Investor You Able To Speculate On The Movement Of One Currency Versus The Other. If One Currency Strengthens Or Weakens Against The Other, That Movement Will Produce A Profit Or Loss On The Position. Currencies Trade 24 Hours A Day From 9pm On A Sunday Evening To 10pm On A Friday Evening. The Forex Market Is The Largest And Most Liquid Of The World’s Financial Markets.

What is Forex (FX) Trading?

When trading currency, the first currency is called the base currency, for example if you were trading GBP/USD you would be buying or selling GBP against the Dollar and the second is referred to as the quote currency. The price quote shows you how much you would receive of the quote currency for one unit of the base currency.

What factors affect the Forex markets?

Like most financial trading products the price is affected by simple supply and demand. A few factors that affect the forex market are listed below;

Economic Growth

Countries with strong economic growth are looked on in a more favourable light and attract new capital from overseas investments. There are a number of economic indicators to gauge how strong the economy of a country is such as GDP, unemployment rates, retail sales, consumer confidence and other economic data.

Inflation

It is a well-known fact that inflation devalues a currency. Areas with high inflation tend to be less attractive to investors and this leads to the value of the currency falling in these areas. Inflation can be measured by looking at key economic data such as consumer price indices (CPI) and producer price indices (PPI). Central banks such as the Bank of England use core inflation rates when setting policy as they exclude more volatile prices such as energy and food. Rising inflation pressures tend to accompany strong economies (e.g. too much money chasing too few goods and services) and tend to put pressure on central banks to tighten monetary supply through increasing the price of money (interest rates) or reducing the supply of money.

Financial Risk

Investors prefer investing in strong economies whereas weaker economies are viewed less favourably and tend to have weaker currencies as a result of high debt, high unemployment rates or low GDP. Recently we have seen the Euro drop dramatically due to these factors. The economic strength of a country is rated on a sliding scale by one or more of the major rating agencies, for example S&P and Moody’s. If the rating of a country slides up or down this scale it will have a positive or negative impact on the currency.

Interest Rates

Interest rates can have a huge impact on the demand for a currency. This is because Investors will try to borrow from a country with a low interest rate and invest in a country with a high interest rate. Anticipating interest rate changes and trends can influence FX pricing. Currency markets experience high volatility around Central Bank rate decisions and traders often speculate about these events. Minutes from these bank meetings will also be widely read by traders looking for hints of changes in policy or voting trends which can cause a change in sentiment.

Benefits of Forex trading

Leverage

Forex is a leveraged product meaning currency pairs are traded “on margin” with the profit/loss being set by the difference between the price the Forex pair is opened and the price at which it is closed. It is possible to create significant opportunities through “margin” as a Forex investor only has to use a deposit to hold a position, meaning only a small proportion of the total value of a position is needed to trade allowing the client to magnify market exposure. Trading “on margin” increases risk significantly by magnifying the extent of potential losses and potential losses can exceed the initial investment. It is important that an investor understands the risks associated with the underlying market and the relationship between margin and leverage. If a position requires a smaller margin deposit, it in-turns means that your exposure to the underlying market can be much larger and you are responsible for the full position size. If a position moves against you and you wish to keep that position open you may have to make further deposits in order to cover the margin deposit required to keep the position open. At MB Capital we would never recommend for anyone to fully margin their account i.e use their account as a full deposit to open the maximum amount of positions and it is something we monitor as adverse movements can also effect this. Forex trading is designed for short term trading and it is important that you monitor positions and understand the strategy and overall exposure before entering the market.

24-hour market

Forex does not trade on a centralised exchange and is an over the counter market that is traded globally. This means investors have the ability to trade the Forex market 24 hours a day from 9pm Sunday to 10pm Friday. Unlike conventional equities, forex allows investors to respond to currency fluctuations caused by economic, political and social events as they occur in real time, without having to wait for a domestic market to open or trade on another market with a different time zone.

Liquidity

As the forex market is the largest tradable financial market in the world there is always the opportunity and liquidity to act quickly and execute your positions.

LIMIT ORDERS

A “Limit Order” is an instrument that is used to execute a trade at a pre-set price. For example a position can be set to open at a certain level when the market hits your price target. You can open both long and short positions through using a limit order. A limit order can also be used to take a profit and close a position once it hits a pre-determined level without you having to oversee the execution of the position.

STOP LOSS ORDER

Stop loss orders can be used as an effective loss management tool to help cut losses early and ensure you do not run a loss that requires you to add further funds in order to keep your positions open. A stop loss is essentially an automatic order placed in the market that if the price hits it, it will automatically close the position at that price or worse to ensure no further losses. With a standard stop loss there is a risk of slippage, what this means is if you enter a trade at a level of 100 and had a stop loss at 98 but the market price opened at 96, you would get closed at 96 as the price didn’t trade at 98. The risk of slippage is reduced by trading larger more liquid stocks but there is always a risk should an event happen that causes the share price to gap. For example if you were shorting a stock and a bid was announced the price may jump much further than the stop loss price resulting in much larger losses. There is the opportunity to trade with guaranteed stop losses which come as a small charge which is much like an insurance premium, if the price you get is worse than your stop loss you will still be guaranteed the stop loss price.

Physical Delivery Foreign Exchange

If you need to send money in a certain currency as a one-off payment or on a regular basis for any reason, for example, buying property abroad, investing in overseas stocks, moving overseas or changing currencies for your business, we can help.
As experts in the financial markets we are able to save you both time and importantly money on your Forex transactions.
Clients will have their own dedicated Forex broker who will be able to obtain the best exchange rate possible. Generally we are around 3-4% better than the banks, which equates to £3000-£4000 on a £100,000 transaction.
To buy or sell currency clients need to open an account. This only takes a few minutes and payments can then be arranged in seconds. Your advisor will be on hand to ensure you achieve the rate that you are seeking.
We also provide a service that allows clients to make regular payments at the same competitive rate.
If you would like more information about Forex Trading please fill in your details below and one of our specialists will be in touch with you soon.

If you would like more information about Forex Trading please fill in your details below and one of our specialists will be in touch with you soon.

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Risk Warning Notice

Forex trading may be subject to rapid and unexpected price movements and past performance is not necessarily a guide to future performance. Trading in these markets is generally considered to be suitable only for the more experienced investor as it poses a risk of loss to your capital. An investor may not receive back the amount of their original investment and in certain circumstances may be liable for a sum that is greater than their original investment. Tax treatment depends on your individual circumstances and may be subject to change in the future. If in any doubt please seek further independent advice.