Since last 50 years, Europe and USA are exploiting unimaginably almost all the poor countries of the world by forcibly devaluating their currencies. They are used to make conspiracy in every country under the excuse of development by providing them complete package of economic model in which all the countries are forced to accept big amount of high interest loans connected with conditions of slavery such as devaluation of currency, opening of their market for multinational companies, easy terms to take away profits earned by them, and many such facilities to MNCs which ultimately results in the ruin of the country and mass scale unemployment. This complete package comes under the name of development. But in fact, it results into heavy price rise in the country, heavy unemployment in the country, scattering of economy of the country, more and more devaluation of the currency of the country and thereby heavy spurt in the foreign debt, more and more imports of foreign goods in the country and thereby, heavy foreign exchange drain from the country, heavy interest payment liabilities arise and ultimately country is trapped into foreign debt which can never be paid and consequently that country becomes slave of World Bank, IMF and WTO. European countries and USA heavily take advantage of this situation. Once their currency become valueless, gang of European countries and USA take away in the name of export, the best quality food, agricultural produce, minerals and special varieties of that country at throw away price. On the other hand, they sell their equipments, machinery, computers etc. at very heavy price in such poor countries. So they exploit heavily both the ways. The devaluation of the currency of any particular country is the biggest and strongest tool to implement this conspiracy package. To implement and accomplish this conspiracy, this gang of European countries and USA have evolved various types of hypocritical economic theories which are explained to the so called economists and selfish and foolish politicians of that country. The so called economists and politicians impressed by the western influence can not see the reality before their own eyes and they accept this conspiracy package of devaluation by which entire real wealth is drained into European countries and their own countrymen are completely ruined. Consequently mass scale unemployment is spread throughout the country and 90% people are thrown away on the streets and they become the victims of starvation. All this activity goes on in the name of development. In spite of such ruin and economic disaster of the country, many foolish economists and selfish politicians go on making the fool to the people of the country that whatever path they are going is the path of development. In fact it is a path of ruin. Many African countries had their currency far bigger than US dollar. They all have become the victims of this conspiracy of devaluation and now the situation is that all these African countries are virtually finished. Let us take some concrete examples. Sudan's currency is Sudanese Pound which was three times stronger than US dollar i.e. 3 US dollar was equivalent to one Sudanese Pound. Now one American dollar is equal to 3000 Sudanese Pound. Sudan's economy is totally finished and it has become the slave of Trinity of World Bank, IMF and WTO. Zambia has currency named Kwacha which was stronger than US dollar. At present one US dollar is more than 2500 Kwacha. Uganda's currency is Shiling which was higher than our Rupee. At present US dollar is more than 1000 Uganda Shiling. Similar is the case with Tanzania. Ghana's currency is called Ceddy which was far bigger than US dollar. At present one US dollar is more than 2000 Ceddy. Indonesian Rupaiya was similar to Indian Rupee. At present one US dollar is more than 10000 Rupaiya. Similar situation has happened in Mexico, Brazil and in many other countries. These are a few examples.
Foreign Exchange 
The foreign exchange (currency or forex or FX) market exchanging world's many currencies. The Forex Market is the largest one in the world in terms of cash value traded and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. Very small part of Retail traders (small speculators) & they may only participate indirectly through brokers or banks. Most Forex trading is speculative.
free-floating currency system began in the early 1970's and was officially ratified in 1978 Online trading began in the mid to late 1990's
The trade happening in the forex markets across the globe currently exceeds 3 trillion $/day (on average).
That is:
- More than ten-fold the average daily turnover of global equity market
- More than thirty five-fold the average daily turnover of the NYSE(New York Stock Exchange)
- Nearly $500 a day for every man, woman, and child on earth
- An annual turnover more than 10 times world GDP
- GDP The spot market account for just under one-third of daily turnover
1. About $280 billion - World Federation of Exchanges aggregate 2006
2. About $87 billion - World Federation of Exchanges 2006
3. Based on world population of 6.6 billion - US Census Bureau
4. About $48 trillion - World Bank 2006.
Overview
According to the Bank for International Settlements, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion/day(on average) .
Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:
$1.005 trillion in spot transactions
$362 billion in outright forwards
$129 billion estimated gaps in reporting
Unlike the stock market trading, the forex market is not conducted by a central exchange, but dealt in the Interbank Market, which is thought of as an OTC (over the counter) market.
Trading takes place directly between the two counterparts necessary to make a trade, whether over the telephone or on electronic networks all over the world. The main exchanges for trading are located in Sydney, Tokyo, London, Frankfurt and New York. This worldwide distribution of trading centers, falling under different time zones makes the international forex market a 24 hours market.
Forex Trading
A currency trade is the simultaneous buying of one currency and selling of another one. The currency combination used in the trade is called a cross (for example, the euro/US dollar, or the GB pound/Japanese yen.). The most commonly traded currencies are the so-called “majors” – EURUSD, USDJPY, USDCHF and GBPUSD.
Major Markets
- The US & UK markets account for just over 50% of turnover.
- Major markets: London, New York, Tokyo Trading activity is heaviest when major markets overlap
- Nearly two-thirds of NY activity occurs in the morning hours while European markets are open
Average Daily Turnover by Geographic Location
| Rank | Country | Share | |
|---|---|---|---|
| 1 | UK | 34.1 % | |
| 2 | US | 16.6 | |
| 3 | Switzerland | 6.1% | |
| 4 | Japan | 6.0% | |
| 5 | Hong Kong | 4.4% | |
| 6 | Australia | 4.3% | |
| 7 | France | 3.0 | |
| 8 | Germany | 2.5% | |
| 9 | Denmark | 2.2% | |
| Other | 15.0% | ||
| Total | 100% | ||
Source: BIS Triennial Survey 2007
Concentration in the Banking Industry
- 12 banks account for 75% of turnover in the U.K.
- 10 banks account for 75% of turnover in the U.S.
- 3 banks account for 75% of turnover in Switzerland
- 9 banks account for 75% of turnover in Japan
Source: BIS Triennial Survey 2007
Technical Analysis
Commonly used technical indicators:
- Moving averages
- RSI
- Fibonacci retracements
- Stochastics
- MACD
- Momentum
- Bollinger bands
- Pivot point
- Elliott Wave
Currencies
- The US dollar is involved in over 80% of all foreign exchange transactions, equivalent to over US$2.7 trillion per day
Currency Codes
USD = US Dollar/USD ($)
EUR = Euro /EUR (€) 
JPY = Japanese Yen /JPY (¥)
GBP = British Pound /GBP (£)
CHF = Swiss Franc /CHF (Fr)
CAD = Canadian Dollar /CAD ($)
AUD = Australian Dollar /AUD ($)- NZD = New Zealand Dollar /NZD ($)
SEK= Swedish krona /SEK ($)
HKD=Hong Kong dollar /HKD ($)
NOK=krone /NOK (kr)
| Rank | Currency | ISO 4217 code (Symbol) | % daily share (April 2004) |
|---|---|---|---|
| 1 | United States dollar | USD ($) | 86.3% |
| 2 | Euro | EUR (€) | 37.0% |
| 3 | Japanese yen | JPY (¥) | 16.5% |
| 4 | British pound sterling | GBP (£) | 15.0% |
| 5 | Swiss franc | CHF (Fr) | 6.8% |
| 6 | dollar | AUD ($) | 6.7% |
| 7 | Canadian dollar | CAD ($) | 4.2% |
| 8 | Swedish krona | SEK (kr) | 2.8% |
| 9 | Hong Kong dollar | HKD ($) | 2.8% |
| 10 | krone | NOK (kr) | 2.2% |
| Other | 19.7% | ||
| Total | 200% | ||
N.B. Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%.
Source: BIS Triennial Survey 2007
Currency Pairs
- Majors: EUR/USD, USD/JPY, GBP/USD, USD/CHF
- Dollar bloc: USD/CAD, AUD/USD, NZD/USD
- Major crosses: EUR/JPY, EUR/GBP, EUR/CHF
| Rank | Pair | % daily share (April 2004) | |
|---|---|---|---|
| 1 | EUR/USD | 27% | |
| 2 | USD/JPY | 13% | |
| 3 | GBP/USD | 12% | |
| 4 | AUD/USD | 6% | |
| 5 | USD/CHF | 5% | |
| 6 | USD/CAD | 4% | |
| 7 | EUR/JPY | 2% | |
| 8 | EUR/GBP | 2% | |
| 9 | EUR/CHF | 2% | |
| Other | 27% | ||
| Total | 100% | ||
| Rank | Name | Volume | |
|---|---|---|---|
| 1 | Deutsche Bank | 19.30% | |
| 2 | UBS AG | 14.85% | |
| 3 | Citi | 9.00% | |
| 4 | Royal Bank of Scotland | 8.90% | |
| 5 | Barclays Capital | 6.8% | |
| 6 | Bank of America | 5.29% | |
| 7 | HSBC | 4.36% | |
| 8 | Goldman Sachs | 4.14% | |
| 9 | JPMorgan | 3.33% | |
| 10 | Morgan Stanley | 2.86% | |
Source: BIS Triennial Survey 2007
Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.
Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
Commercial companies
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.
Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.
Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximization.
Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.
Hedge funds
Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.
Retail forex brokers
There are two types of retail broker: brokers offering speculative trading and brokers offering physical delivery i.e. the bought currency is delivered to a bank account.
Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $25–50 billion daily, which is about 2% of the whole market. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks, and might be subject to forex scams.
Most traded currencies
Currency distribution of reported FX market turnover
| Rank | Currency | ISO 4217 code (Symbol) | % daily share (April 2004) |
|---|---|---|---|
| 1 | United States dollar | USD ($) | 86.3% |
| 2 | Euro | EUR (€) | 37.0% |
| 3 | Japanese yen | JPY (¥) | 16.5% |
| 4 | British pound sterling | GBP (£) | 15.0% |
| 5 | Swiss franc | CHF (Fr) | 6.8% |
| 6 | dollar | AUD ($) | 6.7% |
| 7 | Canadian dollar | CAD ($) | 4.2% |
| 8 | Swedish krona | SEK (kr) | 2.8% |
| 9 | Hong Kong dollar | HKD ($) | 2.8% |
| 10 | krone | NOK (kr) | 2.2% |
| Other | 19.7% | ||
| Total | 200% | ||
There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is not a single dollar rate but rather a number of different rates (prices), depending on what bank or market maker is trading. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. A joint venture of the Chicago Mercantile Exchange and Reuters, called FxMarketSpace opened in 2007 and aspires to the role of a central market clearing mechanism.
The main trading centers are in London, New York, Tokyo, Hong Kong and Singapore, but banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.3045 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.
The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.
On the spot market, according to the BIS study, the most heavily traded products were:
- EUR/USD: 27 %
- USD/JPY: 13 %
- GBP/USD (also called sterling or cable): 12 %
and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (16.5%), and the sterling (15.0%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers.
Although trading in the euro has grown considerably since the currency's creation in January 1999, the foreign exchange market is thus far still largely dollar-centered. For instance, trading the euro versus a non-European currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market.
Factors affecting currency trading
Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
Economic factors
These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
Economic conditions include:
Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.
Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets.
For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.
Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:
Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts.
Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.
"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought". To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.
Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.
Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.
Algorithmic trading in forex
Electronic trading is growing in the FX market, and algorithmic trading is becoming much more common. According to financial consultancy Celent estimates, by 2008 up to 25% of all trades by volume will be executed using algorithm, up from about 18% in 2005.
Financial instruments
Spot
A spot transaction is a two-day delivery transaction, as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. The data for this study come from the spot market. Spot has the largest share by volume in FX transactions among all instruments.
Forward
One way to deal with the Forex risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a few days, months or years.
Future
Foreign currency futures are forward transactions with standard contract sizes and maturity dates — for example, 500,000 British pounds for next November at an agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.
Swap
The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange.
Option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.
Exchange Traded Fund
Exchange-traded funds (or ETFs) are Open Ended investment companies that can be traded at any time throughout the course of the day. Typically, ETFs try to replicate a stock market index such as the S&P 500 (e.g. SPY), but recently they are now replicating investments in the currency markets with the ETF increasing in value when the US Dollar weakness versus a specific currency, such as the Euro. Certain of these funds track the price movements of world currencies versus the US Dollar, and increase in value directly counter to the US Dollar, allowing for speculation in the US Dollar for US and US Dollar denominated investors and speculators.
Speculation
Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, many economists (e.g. Milton Friedman) have argued that speculators perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do. Other economists (e.g. Joseph Stiglitz) however, may consider this argument to be based more on politics and a free market philosophy than on economics.
Large hedge funds and other well capitalized "position traders" are the main professional speculators.
Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 150% per annum, and later to devalue the krona. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.
In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and forex speculators allegedly made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions. Given that Malaysia recovered quickly after imposing currency controls directly against IMF advice, this view is open to doubt.
Benefits Of Forex Trading
- Round the clock- One of the major benefits of forex trading is the opportunity to trade 24 hours a day from Sunday evening to Friday evening.This gives an ivestor/speculator an unique opportunity to take instant steps in reaction to breaking news that is affecting the markets.
- Liquidity - The forex market is so liquid that there are always buyers and sellers to trade with. The liquidity of this market, especially that of the major currencies, helps ensure price stability and narrow spreads. The liquidity is provided by the banks to the investors, companies, institutions, etc.
- No Commissions - The fact that forex is often traded without commissions makes it very attractive as an investment opportunity for investors who want to deal on a frequent basis.
- 100: 1 Leverage - Leverage (gearing) enables the speculator to hold a position worth up to 100 times more than his margin deposit. For example, a US$10,000 deposit can command positions of up to US$ 1,000,000 through leverage. The first margin deposit of US$ 25,000 of the investment can be leveraged up to 100 times and additional collateral up to 50 times.
- Profit potential In all market situations Since the market is constantly changing its moods, there are always trading opportunities, whether a currency is strengthening or weakening in relation to another currency. When speculators trade currencies, they literally work against each other. If the EURO/US$ declines, for example, it is because the US$ gets stronger against the Euro and vice versa. So, if one thinks that the EURO/US$ will decline (that is, that the Euro will weaken versus the dollar), he would sell Euro now and then later he buy Euro back at a lower price and take the resultant profits. The opposite trading scenario would occur if the EURO/US$ appreciates.
Glossary Of Forex Terms
- Spread - It is the difference between the price that you can sell currency at ( Bid) and the price you can buy currency at ( Ask).
- Pips - A pip is the smallest unit by which a Forex cross price quote changes. So if EURO/US$ bid is now quoted at 0.9767 and it moves up 2 pips, it will be quoted at 0.9769.
- Appreciation -An increase in the value of a currency.
- Ask -The price requested by the trader. This usually indicates the lowest price a seller will accept.
- Base currency -The currency that the investor buys or sells (i.e. EUR in EURUSD).
- Bear -Someone who believes prices are going southwards. A bear market is one in which there is a sustained fall in prices and which does not warrant a quick recovery.
- Bid/Ask -The Bid rate is the rate at which one can sell. The Ask/offer rate is the rate at which one can buy.
- Bull -Someone who is optimistic about the market. A bull market has the characteristics of enthusiastic and sustained buying.
- trading with currencies, the investor buys one currency with another. These two currencies form the cross: for example, EURUSD.
- Rate -An exchange rate that is calculated from two other exchange rates.
From Wikipedia, the free encyclopedia, BIS Triennial Survey 2007
Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.India... where are you now....?
1. After 60 years of Independence where are we?
After 60 years of Independence, if we bench mark India against other countries of the world, especially with those in Asia, we note that though a lot has been achieved by us, a lot more needs to be done.
We need to learn from our past and move boldly into the future. India has achieved many milestones, but not enough to eradicate poverty, illiteracy and other vital issues, for the 1090 million people of India.
In spite of India's glorious past history and present outstanding and World Class quality of our human capital, which not only is responsible for running many organizations, in manufacturing, trading and services sectors, around the world, but also responsible for advising many countries on this planet, we have not been able to put our own ‘house in order’ to world class standards.
We are not able to always use the best effective human capital for running the country, both for the public as well as the private sectors! This needs to be suitably amended. In the first instance, we need to start taking some simple and effective measures which are for the good of the majority of the people of India.
We should plan to become a resource base for world markets, since 98.28% of the world’s buying power and 99.2% of the world’s trade is not with India!
2. India should learn from the best!
We should either try to teach the world, if we are better than them, or be humble enough, to learn from the best around us, other options are irrelevant!
W. Edwards Deming, one of the world’s greatest management & quality Guru’s, when asked, what was his, one point recipe for nations and organizations, said, “People are Important”.
3. Experience of other countries!
Alan Greenspan, the Ex Chairman of the Federal Reserve Bank of USA, remarked that “lack of labor rigidity is key to US success”.
The US has benefited much more than Europe and Japan because American businesses enjoy the freedom to hire and fire and keep the best human resource.
S E Asia & China have greatly benefited due to flexible and fair [for the masses], human resource policies.
4. Good Governance is the ‘Golden Key’
Good governance can unlock India's latent potential!
We have been analyzing India's problems based on years of research, analysis and personal interviews with thousands of citizens in India as well as NRI's and PIO’s.
India needs to improve its governance & administration to world class standards, as soon as possible. We firmly believe that India would be rated as the No.1 country in the world, as far as potential vs performance is concerned!
Let us unleash this latent power and energy for the benefit of the 1090 million Indians, and for the benefit of mankind on our planet.
5. India needs a new and innovative paradigm shift in thought process & planning for achieveing a 10% to 14% GDP growth rate per year
Example No. 1
Why can we not have 100 zones, on our coastline, each one equivalent to a Dubai, Singapore or a Hong Kong? These 100 zones will in effect increase the GDP of India by 300% in 15 to 20 years! China has more than 500 Special Economic Zones (SEZ’s)!
Example No. 2
Our suggested ‘Relevant Manufacturing Policy’ for India can also enhance the GDP to double digit growth.We can achieve high growth rates of the Asian Tigers, including China, provided we follow such policies!
Example No. 3
The existing educational policy, on human development, caters mostly for higher education. About 24 million people of different age groups, enter the system every year. About 1.60 million make it in higher education, the balance 22.40 million ‘drop off’ at various stages. We need to change the policy to benefit these 22.40 million
Example No. 4
Make ‘some part or parts’ of coastal India as ‘tax free zones’, Use the best examples of Mauritus, Isle of Man, Sychelles, UAE, Bermuda, Luxumberg, Monaco & Lichtchenstien.
Tourism, exports, FDI, investment, employment generation, education, vocational training, infrastructure, law & order, reduction of corruption, improvement of health services and GDP can improve at a faster rate with good governance and effective administration
Why are oil price tumbling down?
We all know that oil prices are lower than they were in the recent past because supply is greater than demand. In fact, OPEC oil ministers are meeting this week to try to fix supply, so it will be more in line with demand.
All of this seems a little strange, though. We are going into the winter months, when demand for oil normally rises because many people around the world heat their homes with oil. We are using somewhat less gasoline in the United States, but apart from the hurricane disruptions, not very much less than earlier this year. While we are going into a recession, it doesn't seem to have hit with full force yet. What other factors may be involved in the current lower prices? In this post, I will discuss factors besides those we usually think of as supply and demand that may be involved.
1. Credit problems of oil intermediaries
The oil industry has many more players than most of us are aware of. The International Oil Companies use contractors to do many functions that we think of as oil company operations. Oil is shipped by oceangoing vessels and by pipeline. Refiners are often separate from the oil company that produced the oil. Gas stations are often independently owned.
One of the issues is that sellers want to be sure that they are going to be paid for their product. They are unwilling to sell to buyers with poor credit. This is removing some players--and some demand--from the system.
2. Liquidation of positions by hedge funds and other speculators
Hedge funds have been under pressure from several directions to liquidate their positions in oil:
• Investors in the hedge funds have been disappointed in their performance, and are liquidating their positions. Oil futures are easy to sell, so the may be sold first.
• Hedge funds are highly leveraged. In the past month, many of them have received margin calls because of declining values of the securities they held (oil futures, stocks, bonds). Again, oil futures are easy to sell quickly.
• Banks are under pressure to reduce their lending because of their low reserve margins, and because of concern that hedge funds may not be good risks. They have been putting pressure on hedge funds to reduce their leverage.
Since hedge funds and speculators realized early this year that the price of oil was rising, most of them had net long positions. When there was a need to
sell these futures contracts (because of margin calls or for other reasons), the sales of these contracts tended to bring down the price of oil.
3. Hedging of future oil prices by oil companies
Once oil prices reached high prices (say, > $120), even for long-dated futures, it made economic sense for oil companies to lock in future sales at those high prices. To the extent that oil companies locked in future sales using long-dated future contracts, this would add sellers to the long futures market, changing the balance in the fut
ures market. The addition of sellers to the market would tend to bring down futures' prices.
I understand that long-dated futures contracts are quite illiquid, and that oil companies may not, in fact, be using them for these purposes. Does anyone have any real-life experience with oil companies using futures contracts to lock-in long term prices? It would seem strange to have contracts whose benefit is primarily for speculat
ors.
2. Liquidation of positions by hedge funds and other speculators
Hedge funds have been under pressure from several directions to liquidate their positions in oil:
• Investors in the hedge funds have been disappointed in their performance, and are liquidating their positions. Oil futures are easy to sell, so the may be sold first.
• Hedge funds are highly leveraged. In the past month, many of them have received margin calls because of declining values of the securities they he
ld (oil futures, stocks, bonds). Again, oil futures are easy to sell quickly.
• Banks are under pressure to reduce their lending because of their low reserve margins, and because of concern that hedge funds may not be good risks. They have been putting pressure on hedge funds to reduce their leverage.
Since hedge funds and speculators realized early this
year that the price of oil was rising, most of them had net long positions. When there was a need to sell these futures contracts (because of margin calls or for other reasons), the sales of these contracts tended to bring down the price of oil.
3. Hedging of future oil prices by oil companies
Once oil prices reached high prices (say, > $120), e
ven for long-dated futures, it made economic sense for oil companies to lock in future sales at those high prices. To the extent that oil companies locked in future sales using long-dated future contracts, this would add sellers to the long futures market, changing the balance in the futures market. The addition of sellers to the market would tend to bring down futures' prices.
I understand that long-dated futures contracts are quite illiquid, and that oil companies may not, in fact, be using them for these purposes. Does anyone have any real-life experience with oil companies using futures contracts to lock-in long t
erm prices? It would seem strange to have contracts whose benefit is primarily for speculators.
4. Rise in the value of the dollar
5. Trend Trading or Systematic Trading
Many investors use computerized programs that attempt to analyze an investment's momentum, either up or down. These programs are designed to buy more of an investment, when the price of the investment seems to be heading upward, and to sell the investment short, when it is heading downward. If a large number of hedge funds, pension funds, and other investors have computer models that do the same
thing, the simultaneous buy and sell orders will tend to reinforce the upward or downward trend in prices. These programs may have contributed to the unusually high oil prices seen earlier this year, and the big drop in the past month.
6. Drop in Asian growth
One of the reasons for the run-up in prices earlier this year was the concern that Asian demand was growing rapidly, and that world oil supplies could not keep up. There may have also been some stockpiling of oil prior to the Olympics. Now the
re are indications that growth in Asia is starting to cool, and we read articles such as this one:
Asian meltdown may force oil to tank
The fact is, unlike many other commodities, “Asia is important for crude oil because its marginal demand is entirely coming from Asia,” said Michael Lewis, global head of commodities research at Deutsche Bank. The bank estimates that in 2009 as much as 360,000 barrels per day of oil will be required by China, which is lower than the 450,000 bpd for the current year. At that rate, “China will be responsible for 80 percent of global crude oil consumptio
n growth,” said Lewis.
Similarly, industry estimates put India’s oil demand at 100,000 bpd in 2008 and predict it to remain unchanged for 2009, even if the country’s gross domestic product were to slip marginally from its current 7.5 percent.
Hoping that Asia and particularly China and India will not falter due to the global meltdown may be optimistic under the curren
t conditions.
7. Small size of the oil (and other commodities) market, relative to the rest of the market
The amount of commodities for sale is tiny in comparison to the dollar value of stocks, bonds, derivatives, and other investments. If investors get the impression that commodities are a good source of diversification, or are likely to rise more than other investments, it doesn't take very many of these investors to raise (or lower) prices in oil markets. Investors tend to read the same investment advice, and hear the same forecasts, so
may tend to make similar decisions.
Research by Morgan Stanley indicates that commodity markets tend to move together. In the past, commodities have tended to follow long cycles, but "peak everything" may change this pattern.
8. Increased volatility when supplies are very tight
When supplies are very tight because of peak oil, both the supply curve and the demand curve are nearly vertical. A small change in demand (or supply) can result in a huge difference in price.
Many years ago, whale oil was used for lamps until it became depleted. Historical graphs show that its price was very volatile, once production passed its peak value. The price of petroleum is likely to be very volatile post-peak also.
Figure 3. Price and Production of Whale OilWhat's Ahead?
Certainly, we can expect more volatility.
There is room for a difference of opinion on the course of the dollar near term. On one hand, the United States is doing less badly than some other countries in the current financial crisis. If this trend continues, the dollar could rise even higher than it is currently, as investors look for safely.
On the other head, we have been reading speculation about alternative currencies, such as this one, regarding a tri-polar currency. It seems likely to me that eventually some change will occur that will make the value of the dollar drop substantially, and raise the price of oil.
In the not too distant future, we can expect a fair amount of "shake out" among smaller companies in the oil business, with many of the less well capitalized being acquired by others or going out of business, as indicated by this article:Falling Prices, Credit Woes Threaten Small Oil Firms:
Between problems with credit, and the cutbacks from OPEC, the supply from oil is likely to drop significantly in the next few months. This drop in supply should put upward pressure on the price of oil.Most at risk are small outfits focused on exploration and production that urgently need cash to keep drilling. Even a few months ago, these companies had no trouble borrowing money and selling stock to finance operations, based solely on the value of their reserves. But with access to capital drying up, their funding opportunities are dwindling rapidly.
All of the cutbacks related to credit are hard to follow through the system. There is a possibility that some of them will show up in unexpected places, leading to shortfalls and/or price spikes.
I do not expect the problem with long-term credit to ever really go away. (This is the subject for another post.) Because of this, long-term supply is likely to drop even faster than previous analyses have suggested. Assuming no major changes in the monetary system, this would seem to imply higher prices, long-term.
- Commodities market, commodities trading, commodity futures. . . These terms are not very commonly understood by many. However, commodity markets offer as much an opportunity to investors as does the stock market.
- Here is an FAQ on what is the commodity futures market all about.
- What is the commodity market?
- Commodity market is a place where trading in commodities takes place. It is similar to an equity market, but instead of buying or selling shares one buys or sells commodities.
- How old are the commodities market?
- The commodities markets are one of the oldest prevailing markets in the human history. In fact, derivatives trading started off in commodities with the earliest records being traced back to the 17th century when rice futures were traded in Japan.
- What are the different types of commodities that are traded in these markets?
- World-over one will find that a market exists for almost all the commodities known to us. These commodities can be broadly classified into the following:
- Precious Metals: Gold, Silver, Platinum, etc.
- Other Metals: Nickel, Aluminum, Copper, etc.
- Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds, etc.
- Soft Commodities: Coffee, Cocoa, Sugar, etc.
- Live-Stock: Live Cattle, Pork Bellies, etc.
- Energy: Crude Oil, Natural Gas, Gasoline, etc.
- What are the different segments in the commodities market?
- The commodities market exists in two distinct forms, namely, the Over the Counter (OTC) market and the exchange-based market.
- Also, as in equities, there exists the spot and the derivatives segment. The spot markets are essentially over-the-counter markets and the participation is restricted to people who are involved with that commodity, say, the farmer, processor, wholesaler, etc. A majority of the derivative trading takes place through exchange-based markets with standardised contracts, settlements, etc.
- What are the characteristics of Over The Counter (OTC) commodity markets?
- The OTC markets are essentially spot markets and are localised for specific commodities. Almost all the trading that takes place in these markets is delivery based.
- The buyers as well as the sellers have their set of brokers who negotiate the prices for them. This can be illustrated with the help of the following example:
- A farmer, who produces castor, wishing to sell his produce would go to the local 'mandi.' There he would contact his broker who would in turn contact the brokers representing the buyers. The buyers in this case would be wholesalers or refiners.
- In event of a deal taking place, the goods and the money would be exchanged directly between the buyer and the seller. Thus, it can be seen that this market is restricted to only those people who are directly involved with the commodity.
- In addition to the spot transactions, forward deals also take place in these markets. However, they too happen on a delivery basis and hence are restricted to the participants in the spot markets.
- What are the characteristics of the Exchange Traded markets?
- The exchange-traded markets are essentially only derivative markets and are similar to equity derivatives in their working. That is, everything is standardised and a person can purchase a contract by paying only a percentage of the contract value. A person can also go short on these exchanges.
- Also, even though there is a provision for delivery most of the contracts are squared-off before expiry and are settled in cash. As a result, one can see an active participation by people who are not associated with the commodity.
- Do the commodity exchanges facilitate delivery?
- The commodity exchanges do facilitate delivery, although it has been observed world-over that only 2 per cent of all the trades result in actual delivery.
- Why is the percentage of delivery ratio very low in the exchange-based commodity derivatives?
- Many people who participate in the exchanges are those who are not involved with the physical trading of the commodity. Thus they would not like receiving delivery and would not be in a position to give delivery.
- Standardised contracts make an unfeasible proposition for any trader to give or take delivery. E.g. if the size of 1 soya contract is 10 MT, a trader cannot buy / sell 15 MT of soya through the exchange. Also one cannot avail a credit facility in the exchanges that may be available in the local market. These and other factors deter a person from giving / receiving delivery through the exchanges.
- What is the size of the commodities market as compared to the equity market?
- In the developed markets the volumes on the exchange-based commodity derivates markets are about five times more than that of the equity markets.
- What is the history of commodities markets in India?
- India, being an agro-based economy, has markets for most of the agro-based commodities. India is the largest consumer of gold in the world, which implies a huge market for the yellow metal. India has huge spot markets for all these commodities. For instance,. Indore has a huge market for soya, Ahmedabad for castor seeds and Surendranagar for cotton, etc.
- During the pre-Independence era, India also had a thriving futures market for commodities such as gold, silver, cotton, edible oils, etc. In mid-1960s, due to wars, natural calamities and the consequent shortages, futures trading in most commodities was banned.
- Currently, the futures markets that exist in India are localised for specific commodities. For example, Kerala has an exchange for pepper; Ahmedabad for castor seeds, and Mumbai is the major center for gold, etc. These exchanges, however, have only a regional presence and are dominated by people who are involved with the physical trade of that commodity.
- What are the current developments in this market?
- The government has now allowed national commodity exchanges, similar to the Bombay Stock Exchange and the National Stock Exchange, to come up and let them deal in commodity derivatives in an electronic trading environment. These exchanges are expected to offer a nation-wide anonymous, order-driven, screen-based trading system for trading. The Forward Markets Commission (FMC) will regulate these exchanges.
- Consequently four commodity exchanges have been approved to commence business in this regard. They are:
- Multi Commodity Exchange of India Ltd (MCX), located at Mumbai
- National Commodity and Derivatives Exchange Ltd (NCDEX), located at Mumbai
- National Board of Trade (NBOT), located at Indore
- National Multi Commodity Exchange (NMCE), located at Ahmedabad.
- What is the need for the exchange-traded commodity derivatives market?
- The biggest advantage of having an exchange-based platform is reach. A wider reach ensures greater participation, which results into a more efficient price discovery mechanism. In fact, it comes to a stage where the derivative market guides the spot market in terms of pricing.
- This can be well understood by looking at the following example:
- Imagine a soy wholesaler in Madhya Pradesh, who -- having bought the crop from the farmer -- wishes to sell it to the oil refiners. To sell his crop he has to go to the local market at Indore.
- The price that he will get for his crop would be solely dependent upon the demand supply condition prevailing at that point of time at that market place. Also as the number of players is less there are chances of the prices being biased. In contrast the prices in the futures market are determined not only by the local demand supply conditions but also by the global scenario.
- Add to that the view taken on a commodity by various sets of people depending upon different parameters such as technical analysis, political news, exchange rates, etc. The price that is thus quoted can be safely regarded as the most efficient price.
- Thus, looking at the futures price the trader can price his crop appropriately.
- What opportunities do the commodity derivatives provide for investors?
- Futures contract in the commodities market, similar to equity derivatives segment, will facilitate the activities of speculation, hedging and arbitrage to all class of investors.
- Speculation:
- It facilitates speculation by providing opportunity to people, although not involved with the commodity, to trade on the views in the movement of commodity prices. The speculative position is taken with a small margin amount that is paid to the exchange, and the contract can be squared-off anytime during the trading hours.
- Hedging:
- For the people associated with the commodities the futures market can provide an effective hedging mechanism against price movements.
- For example an oil-seed farmer may go short in oil-seed futures, thus 'locking' his sale price and in the process hedging against any adverse price movements.
- On the other hand a processor of oil seeds may buy oil-seed futures and thus assure him a supply of oil-seeds at a pre-determined price. Similarly the oil-seed processor may go short in oil futures, which may be bought by a wholesaler of oil.
- Also, there is a saying that 'gold shines when everything fails.' Thus, gold can be used as a hedging tool against other investments.
- Arbitrage:
- Traders may exploit arbitrage opportunities that arise on account of different prices between the two exchanges or between different maturities in the same underlying.
You may have your debt and equity funds in place, but investing in commodities could just be the one element to improve your portfolio. Commodity trading provides an ideal asset allocation, also helps you hedge against inflation and buy a piece of global demand growth.
In 2003, the ban on commodity trading was lifted after 40 years in India. Now, more and more people are interested in investing in this new asset class. While price fluctuations in the sector could get rather volatile depending on the category, returns are relatively higher.
However, as this is not a primary area of investment for most, there is a lot of apprehension about when and how to invest. Outlook Money seeks to answer some of these questions and help you assess a whole new turf for making money.
Why invest in commodities?
Commodities allow a portfolio to improve overall return at the same level of risk. Ibbotson Associates, a leading US-based authority on asset allocation estimates that commodities increased returns between 133 and 188 basis points, at no extra risk.
Who should invest?
Any investor who wants to take advantage of price movements and wishes to diversify his portfolio can invest in commodities. However, retail and small investors should be careful while investing in commodities as the swings are volatile and lack of knowledge may result in loss of wealth.
Investors must understand the demand cycles that commodities go through and should have a view on what factors may affect this. Ideally, you should invest in select commodities that you can analyse rather than speculate across products you have no idea about.
Investing in commodities should be undertaken as a kicker in your portfolio and not as the first destination for your money.
What is commodity trading?
It's an age-old phenomenon. Modern markets came up in the late 18th century, when farming began to be modernised. Though the trade's mechanisms have changed, the basics are still the same.
In common parlance, commodities means all types of products. However, the Foreign Currency Regulation Act (FCRA) defines them as 'every kind of movable property other than actionable claims, money and securities.'
Commodity trading is nothing but trading in commodity spot and derivatives (futures). If you are keen on taking a buy or sell position based on the future performance of agricultural commodities or commodities like gold, silver, metals, or crude, then you could do so by trading in commodity derivatives.
Commodity derivatives are traded on the National Commodity and Derivative Exchange (NCDEX) and the Multi-Commodity Exchange (MCX). Gold, silver, agri-commodities including grains, pulses, spices, oils and oilseeds, mentha oil, metals and crude are some of the commodities that these exchanges deal in.
Trading in commodities futures is quite similar to equity futures trading. You could take a long position (where you buy a contract) or a short position (where you sell it). Simply speaking, like in equity and other markets, if you think prices are on their way up, you take a long position and when prices are headed south you opt for a short position.
How big is the Indian commodity trading market as compared to other Asian markets?
The commodity market in India clocks a daily average turnover of Rs 12,000-15,000 crore (Rs 120-150 billion). The accumulative commodities derivatives trade value is estimated to have reached the equivalent of 66 per cent of the gross domestic product and the future will only see the percentage rising, says ICICI direct.com vice-president Kedar Deshpande.
What do you need to start trading?
Like equity markets, you have to fulfil the 'know your customer' norms with a commodity broker. A photo identification, PAN and proof of address are essential for registration. You will also have to sign the necessary agreements with the broker.
Is there a regulator for the commodity trading market?
The Forward Markets Commission is the regulatory body for the commodity market in India. It is the equivalent of the Securities and Exchange Board of India (Sebi), which protects the interests of investors in securities.
What kind of products can be listed on the commodity market?
All commodities produced in the agriculture, mineral and fossil sectors have been sanctioned for futures trading. These include cereals, pulses, ginned cotton, un-ginned
cotton, oilseeds, oils, jute, jute products, sugar, gur, potatoes, onions, coffee, tea, petrochemicals, and bullion, among others.
What are the risk factors?
Commodity trading is done in the form of futures and that throws up a huge potential for profit and loss as it involves predictions of the future and hence uncertainty and risk. Risk factors in commodity trading are similar to futures trading in equity markets.
A major difference is that the information availability on supply and demand cycles in commodity markets is not as robust and controlled as the equity market.
What are the factors that influence the commodity prices in the market?
The commodity market is driven by demand and supply factors and inventory, when it comes to perishable commodities such as agricultural products and high demand products such as crude oil. Like any market, the demand-supply equation influences the prices.
Variables like weather, social changes, government policies and global factors influence the balance.
What is the difference between directional trading and day trading?
The key difference between commodity markets and stock markets is the nature of products traded. Agricultural produce is unpredictable and seasonal. During harvesting season, the prices of these commodities is low as supply goes up. There are traders who use these patterns to trade in the commodity market, and this is termed directional trading.
Day trading in commodity markets is no different from day trading in the equity market, where positions are bought in the morning and squared off by the end of the day.
Does commodity speculation affect agricultural income in India?
The vision for the commodity market in India is to reduce information asymmetry and make a robust market available to the end producer or farmer. It is also expected to balance out price information and give the producer a better price and a platform to hedge.
The futures market will allow the farmer to see the upside of the price over two to three months and help him decide where to sell.
How to keep updated?
Most commodity trading firms have a research team in place that prepares commodity charts and conducts detailed study on the trends of the commodity in question.
Investing strategies based on this research are usually provided to clients.
They usually provide daily market reports before the market opens and intra-day calls during trading hours, along with monthly and weekly research reports.
If you're new to the world of commodity trading, fear not, because using the platform in India is not beyond anyone's grasp or capability -- it's only a matter of making a beginning somewhere.
If you want to clarify some basic doubts but were afraid to ask, here's your chance to catch up on lost time. Below are some answers to some frequently popped questions.
The basic difference between the commodity exchange and stock exchange is that in a commodity exchange, actual physical products that are non-financial in nature are traded.
These include agricultural products such as wheat, castor, groundnut or sesame and industrial products such as aluminum, zinc, nickel and also precious metals like gold and silver.
In comparison, a stock exchange offers all financial products such as stocks, indexes, interest rate, and government securities.
- Trading in any contract month will open on the 21st day of the month, 3 months prior to the contract month. For example, the December 2004 contract opens on 21st September 2004.
- In commodities, the 20th day of the delivery month would be the due date. If the 20th happens to be a holiday then the due date would be the previous working day.
- Typically, the margins for trading vary from commodity to commodity. For a more liquid commodity like gold or silver the initial margin and the exposure margin would be typically 4 per cent each. However, in other commodities the margins could vary depending on volatility of the commodity prices.
- The pay-in (T+1) will be on or before 11.00 a.m., payout on or after 12.00 noon.
- All contracts settling in cash would be settled on the following day after the contract expiry date.
- Deliveries are not compulsory. The buyer and the seller would have to express their intentions while to give or take delivery entering the contract. The exchange would match the deliveries at the client level. Contracts that are not assigned delivery are settled in cash.
- In case of physical delivery, a receipt from the warehouse where the goods are stored is issued in favour of the buyer, which is transferable. On producing this receipt the buyer can take the commodity from the warehouse.
- Where settlements go, for open positions at the beginning of the tendering period of the contract the buyer and the seller can give intentions for delivery.
Intentions for delivery could be given right until the final day on which that the contract expires. Delivery would take place in electronic form (in the national level exchanges). All other positions would be settled in cash.
- Any buyer would have to put in a request to take physical delivery to its depository participant, who would pass on the same to the warehouse manager. On a specified date, the buyer would have to go to the warehouse and pick up the physical delivery.
- The seller intending to make delivery would have to take the commodity to the designated warehouse. These commodities would have to be certified by an exchange-specified assayer.
The commodity that is meant for delivery would have to meet the contract specifications with a certain allowance for variances. If the commodity meets the specifications, the warehouse would accept it.
Warehouses would further ensure that the receipt is updated in the depository system, giving the due credit in the electronic account.
Also, every client who would want to give or take delivery would have to get registered as per the prevalent sales tax rates in his or her state.
Armed with the basic information, any trader should be ready to take the leap!