The mechanics of the forex market

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 1 The mechanics of the forex market Russ Mould, Editor, Shares Magazine 1

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 2 The mechanics of the forex market Show me the money The forex market The mechanics The key issues 2

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 3 1. Show me the money 3

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 4 Money Money is - A medium of exchange more efficient than bartering - A unit of account used for calculating the value of assets - A store of value to facilitate transactions over distance and time It therefore has to be available (but not excessively so), affordable, durable, fungible, portable, reliable. Without these confidence is lost, and so is value. 4

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 5 A History (part 1) METAL First clay tokens Mesopotamia c 1600BC First coins Ephesus, 600BC First paper money China, 600AD Giovanni de Medici handles papacy s forex transactions, 1390s Amsterdam Exchange Bank ( Wisselbank ) founded 1609: handled coins from 14 mints 5

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 6 A History (part 2) PAPER & THE RISE OF BANKING 18th century saw the rise of paper money as silver drained away (wars, Chinese trade) The judicious operation of banking, by substituting paper in the room of a great part of gold and silver provides a sort of waggon through the air - Adam Smith 1857 US stops paying for its debts in silver creating first (central) banking crisis 6

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 7 A History (part 3) PAPER BACKED BY METAL UK turns to the gold standard 1717 Currencies pegged to gold/silver 1870-1914 System suspended 1914, collapses 1931 Bretton Woods 1945: gold =$35 an ounce 7

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 8 A History (part 4) RICHARD M. NIXON JOHN B. CONNALLY 8

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 9 A History (part 5) ELECTRONIC MONEY No gold standard Floating currencies Fractional reserve banking system The cashless society Money is no longer tangible Money is a matter of faith and confidence 9

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 10 A History (part 6) There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency V.I. LENIN 10

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 11 2. The forex market 11

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 12 The forex market $4 trillion a day, 24-hour, 5-day-a-week arena - $1.5 trillion spot - $2.5 trillion via forwards, derivatives and swaps - More than 75% of volume is purely speculative - At least 10% of volume is retail 12

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 13 The forex market Liquid Low spreads trading in pips Excellent trading tools and platforms Ideal for use of leveraged instruments Plentiful information but no inside information Well set calendar of events for trade catalysts 13

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 14 3. The mechanics 14

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 15 The mechanics Buying one currency (going long ) means you are automatically selling another (going short ) in a pairs trade In a pair, the first listed currency is the base and the second the counter Most popular pairs are EUR/USD, USD/JPY and GBP/USD. 15

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 16 4. The key issues 16

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 17 The key issues (1) Monetary policy - interest rates Fiscal policy - government borrowing needs Trade flows - a currency s competitiveness Economic data - jobs, inflation, business and consumer sentiment indicators 17

The mechanics of the Forex market_layout 1 20/04/2012 16:59 Page 18 The key issues (2) A $10 bill bears the legend In God We Trust BEN S BERNANKE MERVYN KING 18 MARIO DRAGHI MASAAKI SHIRAKAWA

The mechanics of the Forex market_layout 1 20/04/2012 17:01 Page 19 Thank you EXPL Vol 14. Issue BOOM ORATION 12 / 22 Marc h 2012 / 4.10 - How to gear up on oil rig sto cks - see page 28 DITIES rs to buck COMMO food retaile FOREX DS - Three FUN THEDSPOUN PILE ON SIPPS ETFS ISAS MORE... + MUCH Vol 14. Issue 13 / 29 Marc h 2012 / blues austerity 40 see page e8 y - see pag set to fl BETTING an miner SPREAD ED - Peruvi DITIES COMMO BOTTOM COEXPPER FOR FUNDS SIPPS ISAS MORE... + MUCH 4.10 Vol 14. Issue 14 / 05 April ys ctronics pla DITIES prime ele COMMO into three FOREX SPARK - Plug OF TY DS PLENBON SIPPS CFDS ISAS MORE... + MUCH 2012 / 4.10 Vol 14. Issue 15 / 12 April see page 40 DITIES fast track COMMO gineer on FOREX PECTS - En DS PROS ING BON BELT FUNDS SIPPS ISAS MORE... + MUCH 2012 / 4.10 Vol 14. Issue 16 / 19 April to succes s - see pag e8 BETTING SPREAD DITIES COMMO FOREX FUNDS ETFS CFDS MORE... CH MU + 2012 / 4.10 23% SMALL CAPS Smar t BIG Income RS How to GAINSBOOSTE NVEST hs' mont Threet from our profi p picks to p34 S TO» TE N WAYS TO MA KE TEN PICK GR OW RING IN YO UR MO NE Y PUT A SP O LI FO T R YOUR PO 12 9 771468 9 771468 110136 13 I Ten easy steps toe beat th market to beat Ten picks blues et the budg 14 9 771468 110136 16 15 9 771468 110136 9 771468 110136 110136 Shares staff may hold shares in some of the securities written about in this magazine. All shareholdings will be disclosed where it may represent a potential conflict of interest. Information and tips included in Shares magazine are general information only and are not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision. Shares magazine, its staff and MSM Magazines Ltd do not accept any liability for any loss suffered by any reader as a result of any such decision. 19