Understanding Forex basic terms

Floating rates and fixed rates

It is important to distinguish between so-called floating currencies and so-called fixed currencies. The rate of a fixed currency is arbitrarily defined by a State (indexed to a major currency in general, such as the euro or the US dollar) and can only be changed by a decision of that State.

To maintain this rate, the central bank of the State concerned buys or sells its own currency on the foreign exchange market against the currency against which the value of its currency is fixed in order to maintain a stable level of supply and demand . The rate of a floating currency depends, in turn, only on market fluctuations, it is simply under the influence of supply and demand without the permanent intervention of its central bank.

The Pacific franc, the Danish krone, the Hong Kong dollar and the United Arab Emirates dirham are examples of fixed currencies4. The US dollar, the euro, the yen, the Swiss franc, the Chinese yuan, and bitcoin are examples of floating rate currencies.

The Swiss franc is a special case, it is a floating currency that the Swiss National Bank has decided to cap at parity 1 € = 1.20 CHF (that is to say that € 1 could not be worth less than 1.20 CHF), not by decree but by displaying a strong will and by simply carrying out operations on the market. This ceiling was in place between 6 September 2011 and 15 January 2015, when it was abolished5 by the Swiss National Bank.

Quote

In Forex, we always express the rate of one currency against another. Take the example of the EUR / USD quotation as of May 13, 2019: "EUR / USD = 1.1281". This quotation must be translated as "1 euro equals 1.1231 US dollars". The euro is the listed currency (since it is still worth ONE), while the dollar is the currency listed at the uncertain (since we do not know its value without having previously seen a listing page).

The left currency is called the base currency (here EUR), the right currency is called the counterpart currency or the countervalue currency (here USD). And the quote always reads in the same order (one expresses the base currency according to the counterpart currency).

The smallest difference in quotation is pip, or percentage in point. For the vast majority of currencies, this is the fourth decimal place of the quotation. For example, if the price goes from 1.131 to 1.1233, then the price is 2 pips. The yen is an exception with respect to the value of the pip: in this particular case, the pip is the second decimal of the quotation.

Rating schedules

The Forex market is open 24 hours a day. Indeed, the main stock exchanges in the world take turns (London, then New York, then Sydney, then Tokyo) thus causing no interruption for traders, with the exception of weekends. In practice, Forex quotes start on Sunday evening with the opening of the Sydney Stock Exchange (22 GMT to about one hour as well) and stop on Friday night after the closing of the New York Stock Exchange ( 22 h GMT to plus or minus one hour depending on the time difference in summer time). But in reality, there is no fixed opening or closing schedule for quotations, since Forex is an over-the-counter market and not a stock market. So in theory, there can be quotes anytime, on Saturdays, holidays or even New Year's Day.

Although open 24 hours on weekdays, the bulk of the activity takes place when the London Stock Exchange is open. The market is traditionally quieter on Mondays (because there is no significant economic figure) and more and more volatile on weekends, with often a maximum on Friday (the day of the release of the most important economic figures).

Leverage

One of the key features of Forex trading is the significant leverage offered by brokers (up to 1000 in some retail brokers for individuals, compared to 5 on the SRD for the stock market). The leverage effect makes it possible to put on the market a sum up to 1000 times higher than that which the customer possesses, with a risk taking just as high. Too much leverage, coupled with a lack of knowledge of the market, is also the cause of ruin of many individuals while the Forex market is 2 to 3 times less volatile than the stock market.

The different types of orders

There are several types of orders on the Forex: simple orders, ie market orders, limit orders and stop orders and finally combined orders, namely orders OCO or If Done6.

Forex for individuals

Forex trading is not done on an organized market but on an interbank market, the only way for individuals before the 2000s to invest on exchange rates was to go through a banking institution. However with minimum transaction amounts around one million euro, few investors had access to this market. Since the 2000s and the implementation of the MiFID Directive, all investors, individuals and professionals, can then trade on the foreign exchange market for smaller amounts through brokers. This market has grown strongly in recent years thanks to the Internet.

In France, the AMF issues regular press releases on the high risk of loss associated with Forex (up to 400 times the committed capital), regularly publishes the list of unauthorized sites7,8 and warns even for sites with the growing number of abuses found9. In October 2014, the AMF published a "Study of the results of individual investors on CFD and Forex trading in France", based on a sample of 14799 individual investors for more than 4 years, which shows that 9 out of 10 are losing in these markets10.

On January 10, 2017, in the context of its mobilization for several years to denounce the danger to individuals of speculative trading products such as forex, the AMF has defined the terms of the mechanism to ban advertising to individuals for the most risky financial products, this under the so-called Sapin 211 law.

Most common abuse

  • The impossibility to withdraw money: the broker prevents any withdrawal, or accepts withdrawals only once a minimum threshold on the account reached.

  • Credit card fraud: once the bank details have been provided (by phone or after a first deposit), withdrawals are made to the clients' account without their consent.

  • A "bonus" offer is offered to customers, with the company pledging to credit the customer's account for the same amount as it deposits. The client then learns that the bonus is only granted subject to having bet at least x times its amount (from 20 to 30 times in the cases mentioned).

  • Managed Account Fraud: Training offers are offered, and a "coach" is assigned to the client. Very often, it is proposed to the beginners to be advised telephonically in their paris by the coach. During the first losses, the coaches advise the client to put additional funds to "rebuild". When the losing bets accumulate, "the coach becomes unreachable or brings for only explanation that a bad trade is at the origin of the losses".

The trading robots fraud is very present in the Forex market. It is about proposing robots that have supposedly exceptional performances but whose results are actually falsified or biased.


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