The International Foreign Exchange Market FOREX enables its participants to exchange one currency into another one. Exchange rates determine the relative amount of each currency in the exchange process.

Today the Foreign Exchange Market FOREX has a turnover of more than three trillion dollars a day, which is by order of magnitude greater than turnovers of other world markets. The amount of transactions in this market can be optional, so can settling-days, there are no standard-sized contracts or setting-days there.

The market participants use FOREX to achieve one or several goals, such as:

Provision of trade and investment
Importing firms purchase a foreign currency to buy goods abroad and realize them in their home country. Exporting firms receive earnings in a foreign currency, which they need to exchange into the national one to cover their expenditures, etc.

Hedging
Export trading companies constantly run the risk of changes in their national currency exchange rate and in the currency rate of the country, where they realize their products. Unfavorable fluctuations of the exchange rate can result in serious losses. The Foreign Exchange Market FOREX enables companies to insure against exchange rate fluctuations and, thus, reduce the risk of possible losses.

Speculative Transactions
The exchange rate changes depending on correlation of demand and supply for each currency. Traders can gain profit by purchasing the currency at a lower rate and selling it at a higher rate, or adversely – selling at a higher rate and purchasing at a lower rate. Most transactions in the FOREX market are speculative.

The Foreign Exchange Market FOREX is an over-the-counter market and operates twenty-four hours a day in various financial centers all over the world. Nevertheless, trading of a range of derived financial tools - derivatives – takes place at stock exchanges.

Early in the morning the commerce starts in Asia, then as far as finance centers open it moves to Europe and at last - to America.

The main volume of currency transactions does not have direct connection with international commerce or investment. Many of these transactions are executed by banks for the sake of benefit. Being over-the-counter foreign exchange markets operate in various parts of the world. Their business hours overlap- that is why the exchange market operates day and night.

Every second of the FOREX work thousands of currency purchase and sale transactions are made. Currencies that participate in a transaction are usually identified by a three-letter code, which is used in S.W.I.F.T payment system, for example:

• USD – American Dollar
• JPY – Japanese Yen
• GBP - Pound Sterling
• EUR - Euro
• CHF – Swiss Franc
• CAD – Canadian Dollar
• AUD – Australian Dollar

Exchange rate

Exchange rate is a quantitative correlation in form of proportion, in which one nation’s currency is exchanged into another nation’s currency. There are many exchange rates of an American Dollar. In the spot market there is an exchange rate for every other national currency, the commerce of which is made in the market, and for various combined currencies or artificial monetary units.

Every quotation includes two currencies – base and quotation currency. Base currency is usually indicated in the first place in the structure of the currency tool, and quotation currency goes in the second place.

For example: in USD/CHF currency pair the American dollar is a base currency, and the Swiss franc is a quotation currency.

Quotations can be direct and reverse:

Direct (European) quotation is when the fixed amount of the foreign currency is quoted against the variable amount of the national currency. Examples: USD/CHF, USD/JPY, USD/CAD.

Reverse (American) quotation is when the fixed amount of the national currency is quoted against the variable amount of the foreign currency. Examples: AUD/USD, GBP/USD, EUR/USD.

The market price is determined in the result of interaction between the seller and the customer, and the market exchange rate from one currency into another one is determined by the interaction between public and private participants of the exchange market.

The participants in the foreign exchange market are a heterogeneous group. Some buyers or sellers can be participants of the “commodity” market effecting international purchase and sell transactions. Some participants can make ‘direct’ investments in plants and equipment or ‘portfolio’ investments by trading shares, bonds and other financial assets with international contractors, other work in the ‘money’ market doing international commerce by means of short-term loan tools.

In the modern economical science there are two main methods of forecasts building. These are fundamental analysis and technical analysis. In brief these two methods can be described in the following way. Fundamentalists study factors, which move prices. Technicians study price movements, disengaging themselves from the factors, which generated them.

1) Fundamental approach to forecasting

Factors, which influence exchange rates:

When forecasting the behavior of exchange rates one need to take into account many factors, which can be grouped according to the following characteristics.

Economic Factors:

Relative interest rates
Interest rates serve as indexes for assessment of investment in different currencies. If loans in foreign currencies are granted at a higher interest rate than loans in a national currency, there is sense to give money in foreign currencies. Thus, investors make comparisons of different interest rates to identify the most profitable for them site of their capital placement. In practice currencies with higher interest rates usually grow in price with regard to other currencies as a result of the increased demand on investors’ part.

Purchasing Power Parity (PPP)
This index shows the relative purchasing power of different currencies. It is determined by comparison of prices for the same range of goods in different countries in conversion for a ‘base currency’, which is usually an American dollar.

Economic conditions
Economic conditions are considered to be the main factor influencing the exchange rate in the long-term outlook. One should take into account, that here the most important factor is a change tendency of such determinants as:

• Balance of payment
• Economic growth
• Inflation rate
• Money supply
• Unemployment
• Tax rates

Capital demand and supply
Sudden changes in demand and supply in the capital market influence the interbank market’s interest rates that in its turn influence exchange rates.

Political factors
The following political factors can influence the foreign exchange market both in long-term and short-term outlooks:

• Economic policy
• Level of political situation instability in a country
• Policy of finance authorities, in particular the Central Bank’s
• The Central Bank participation in the foreign exchange market activities with aim to strengthen or weaken the national currency (currency interventions)

Market tones
This factor influences the short-term behavior of the interest rate and is determined by the market participants opinions about the perspectives of the interest rate movement. Traders react on news about the economical condition of a particular country. Often they foresee changes or important government statements and start purchasing or selling the currency before these circumstances come into force. When such news become public, the market tones determine the direction of the exchange rate movement at the moment of their publication. News influence the market against the background of existing market tones.

2) Technical analysis

Followers of the technical analysis make their forecasts on basis of their studies of market movement graphs during previous periods. Under the market movement we understand three main types of information: the exchange rate dynamics, total amount of transactions for definite time periods and the amount of positions not closed during the trading session.

The technical analysis is built on the following three main principles:

The market movements take account of everything
The essence of such statement lies in the fact that any factor influencing the exchange rate (economical, political, psychological) has been included in the chart beforehand. Thus, studying price charts is compulsory for forecasting.

Prices move directionally
A trend is a definite direction of the exchange rate. The main task of the technical analysis is identification of trends for their usage in commerce.

There are three types of trends:

1. Bullish trend – upward price movement
2. Bearish trend – downward price movement
3. Sideways, flat trend – the price is at one level with slight fluctuations up- and downward.

All theories and methodologies of analysis are based on the fact that the trend moves in the same direction unless it shows special turn signals.

The history repeats
The technical analysts explain this phenomenon by the fact that from century to century the human psychology remains invariable. In essence the technical analysis studies the very history of definite events, connected with the market, thus, studying the human psychology. In other words the comprehension of the future lies in studying of the past.