BEARISH Medium-term trend: BEARISH Short-term trend: BEARISH With inflation rising in both the UK & Poland this market has been fairly
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BEARISH Medium-term trend: BEARISH Short-term trend: BEARISH With inflation rising in both the UK & Poland this market has been fairly
BULLISH Medium-term trend: BULLISH Short-term trend: BULLISH Industry: NA Sector: NA Market Cap: NA EPS Actual vs EPS Forecast: NA Revenue Actual
So we’re going to start off by looking at the foreign exchange (Forex) market and we’re going to first of all have a brief overview of what the foreign exchange (Forex) market is we are then going to have a look at who are the main participants in the foreign exchange (Forex) market and third we’re going to look at why they participate why they transact the reasons why they transact in the foreign exchange (Forex) market as i’m sure you’re aware by now the foreign exchange (Forex) market is a global marketplace for world currency so people who are participating in the foreign exchange (Forex) market can buy and sell and exchange these global currencies and today people actually have access to these exchanges from the comfort of their own home which is why we’ve seen a massive surge in retail investing over the last decade or so.
It is in fact the largest financial market in the world and it comprises of a global network of financial centres and they transact 24 hours a day five days a week excluding weekends now in this section we’re going to look at forex markets participants so who are the people or the entities or the organizations who are transacting in the forex market and why are they transacting the forex markets as well so each trading day is divided into three overlapping major global sessions and these sessions are comprising of key financial centres which are opening at different times so when you hear about forex trading sessions it is literally the different financial centers around the world which are opening and closing at different times and they create these trading sessions during the day so the key financial exchanges which are operating in the sessions are as follows you have wellington in New Zealand you have Sydney in Australia, Tokyo in Japan, Hong Kong, Shanghai China, Singapore which of course Singapore you have Gujarat in India, Moscow in Russia, Johannesburg in South Africa, Frankfurt in Germany you have Zurich in Switzerland, Paris France, London Great Britain, New York in the US and of course London and New York are the top two financial districts in the world and you also have Toronto in Canada and then Chicago in the US and that actually finishes off the trading day and what will actually happen during the trading day each one of these exchanges will open one after another after another and this is actually what drives the forex markets 24 hours a day throughout the week so as we’ve just seen each forex trading day kicks off in New Zealand that starts the Asian session all the way through to the us session and right at the end of the US session of course that Chicago exchange.
Now the four major exchanges out of the ones that we’ve just listed are the London exchange the New York exchange the Sydney exchange and the Tokyo exchange these are the four major exchanges out of that list and as you’ll see forex markets tend to be the most volatile during times when these sessions are overlapping because there’s more liquidity in the markets and there’s much more active market participants trading much more volume during those hours so if you click to download the spreadsheet which is attached of key financial centers with times and sessions we’re going to just jump over to this spreadsheet now and have a look at the different financial centers the times that they open and the sessions that they actually create with their consecutive openings so we’re going to look at the sessions and trading our spreadsheet and you can see this is a very simple spreadsheet on the left hand side we have different forex centers and the times in UTC so universal time which they open you can also see the sessions which the different centers create and on the right hand side we have the sessions in the time of GMT and also in the time of est so you can see here on the left hand side that we get wellington starting off the week at eight o’clock the forex market’s actually open at ten o’clock in Sydney this is when you see forex markets coming online we have the Tokyo session starting at midnight GMT at seven o’clock in the morning seven am GMT we have Frankfurt Zurich and Paris and an hour later we get London opening at eight am in the morning that session goes all the way through to the afternoon and New York opens at one o’clock GMT which is eight o’clock in the morning New York time and you can see if you look over to the right hand side you can see eight am is the New York open in EST and if we go all the way back we have Wellington at three o’clock in the afternoon Sydney at five o’clock this is when the real trading begins at the beginning of the week we have Tokyo coming online at 7 p.m EST we have Frankfurt Zurich and Paris opening up at 2 a.m in the morning EST London opens at 3 a.m est and as i said we go through all the way to the morning 8 a.m New York time when we get that New York open so a very simple spreadsheet here just something to orientate yourself with the different sessions and the different trading times and just bear in mind that you will also see clocks going backwards and forwards in these different countries so you will get an hour or so variation on these times as these countries go through the year and their clocks go backwards and forwards so just bear that in mind these times do change by an hour or so throughout the year there are over 100 different official currencies in the world however most of the transactions made globally are made using the us dollar the British Pound the Japanese Yen and the Euro.
In any given forex trading day it’s estimated that around 5 trillion in volume is traded globally and if we compare this to for example the equity market which is only 84 billion we can see that actually it is by far and away the biggest market in the world now all of that volume is traded in the foreign exchange (Forex) market for different reasons and they could be hedging risk it could be to enact monetary policy it could be just purely for financial speculation so now we’re going to look at who the major market participants are who are the people or the entities or the organizations creating most of this five trillion in volume every single day and why are they creating this volume what are their reasons for transacting in the foreign exchange markets because when we understand that we will get a good understanding of why the foreign exchange (Forex) markets move and also we will actually be able to get a good handle on when and in which direction the foreign exchange markets are going to move as well which of course if we’re trading for ourselves is the key so the main participants in the forex market are as follows so first and foremost we have central banks now central banks are extremely important in the forex market because they hold significant influence over currency rates via what’s known as open market operations and they also control interest rates through monetary policy so central banks will seek to appreciate or depreciate the value of their domestic currency as part of what’s known as their dual mandate and their dual mandate is fostering maximum employment and price stability now this is extremely important to understand because one of the major reasons of creating a macro outlook is to preempt and predict what action central banks will take their reaction to incoming economic data and this is exactly what we’ll be looking at later on in the course how to do that.
Central banks conduct their domestic currency operations in the open markets within a framework known as a regime and exchange rate regimes are usually either fixed floating or they are pegged.
So after central banks the next biggest market participants are investment banks investment banks deal on the interbank market so interbank meaning between banks and the interbank market is a global electronic network used by financial institutions to trade currencies between themselves or on behalf of larger clients.
The minimum size of an interbank transaction is five million dollars and transactions on the interbank market are often much much higher than five million this is a flaw investment banks do not deal with retail clients so you cannot just walk in off the street and ask to use the services of an investment bank they will reject you however they do deal with large corporations they deal with pension funds and hedge funds and they also deal with governments now there are also some investment banks not all of them but some of them which are chosen to deal directly with central banks and we’ll be talking about how they do that later on in the course investment banks which are chosen to deal with central banks are known as primary dealers interbank market volume represents the largest volume of currency traded in the foreign exchange market so most of that 5 trillion is actually made up by transactions on the interbank market so investment banks are very important to the foreign exchange market after central banks were ranking central banks first because of the power that they have and investment banks as i said before conduct these transactions on behalf of large clients but they also trade themselves they also conduct speculative trades and transactions for themselves so the next participants we’re going to look at are hedge funds.
Now investment managers and hedge funds are the third of the biggest three participants in the forex market after central banks and investment banks an investment manager or a hedge fund is considered to be a person or an organization that conducts transactions in the forex market on behalf of large clients under predefined investment parameters.
So more specifically hedge funds are professionally managed pooled funds where aggregated capital from multiple investors creates a much larger portfolio then the investors could actually trade with themselves investors therefore benefit from economies of scale when they’re using hedge funds and they gain increased leverage by using a pooled fund.
Different hedge funds are obviously going to employ different market strategies however they’re almost always leveraged and they are almost always seeking to operate within domestic and international markets with the aim of generating what’s known as alpha for their investors now alpha simply means above benchmark returns so for example if you were going to trade stocks in the s p 500 the aim of course would be to pick a stock which is going to outperform the s p 500 in itself so the s p 500 becomes the benchmark the index and the stocks within it some will actually perform better than the average and others will perform worse than the average so the objective of hedge funds therefore becomes to select stocks which are going to outperform the index itself therefore generating alpha are generating those above benchmark returns hedge funds tend to be less regulated than other funds and investors are usually required to lock up their funds for a predetermined period of time and this is due to the longer term time horizon that hedge funds tend to trade over so hedge funds do not really want people putting their money into hedge funds and taking them out every single week because this would disrupt the positions that they are looking to take so because of this withdrawals are usually only allowed at a minimum on a quarterly basis.
So risk is actively sought out by hedge funds as they generally seek to employ long short portfolio strategies taking a top-down macroeconomic approach long short portfolios in which both long and short positions are taken allow for increased diversification over long only strategies and as a result of this long short portfolios have actually become the strategy of choice for hedge funds these days.
Most hedge funds operate a 2 and 20 fee system taking a 2 flat fee for assets under management so AUM as you may have heard it referred to and 20 of the overall profits that are generated unless of course you’re Jim Simons then you charge a lot more so the next market participants we’re going to look at are multinational corporations now large multinational corporations are engaged in regular imports and export operations as well as large transactions to pay for goods and services so for example paying for wages of staff in another country as a result of these large transactions multinationals will seek to hedge their risk against fluctuations in the forex market and they do this by buying or selling currencies on the foreign exchange they may use currency swaps for example so let’s think of an example here so if an american company and let’s for argument say call it company USA produces a widget in america and it exports it for sale in Europe it’s going to have costs in u.s dollars and it’s going to have a revenue in euros now since gross profit equals revenue minus costs you can see we’re going to have a bit of a problem here because the revenue and the cost the value of each of those are in different currencies and therefore will go up and down independently of each other.
So what this means is company USA’s gross profits will actually fluctuate as the exchange rate between euro dollar fluctuates so if company USA has a profit margin of eight percent and the euro depreciates against the dollar by eight percent so the revenue currency depreciates against the cost currency by eight percent they will actually not make any profits at all and if the revenue currency depreciates against the cost currency by more than the profit margin so let’s say you have a profit margin of eight percent and the euro in this case depreciates against the dollar by 10 percent that company will actually end up making a loss so because of this company USA will therefore seek to hedge out this risk by transacting in the foreign exchange market and the final market participants we’re going to be looking at is of course the retail investors the individuals.
Now despite the growth of retail investment into the global financial markets and it really has exploded over the last couple of decades the overall volume traded by retail investors is actually very low compared to that traded by institutional investors so your investment banks your hedge funds etc many retail investors operate in the markets without any real knowledge or sophistication and as a result of this they often struggle to become profitable and even in some cases unfortunately incur large losses retail investors will also generally tend to invest much smaller amounts of capital and they will allocate this capital without any systematic process and usually with complete disregard to risk management processes these are some of the widespread issues that we are looking to address by releasing this course to you for free and we hope that this course will actually help you to avoid these issues in your own trading and when you start to transact in the markets for yourselves.