Budget line definition investopedia forex

When credits exceed debits, the country enjoys a current account surplus, meaning that the rest of the world is in effect borrowing from it. A current account surplus increases a nation's net assets by the amount of the surplus. Because the trade balance generally has the largest impact on the current account balance, nations with large and consistent current account surpluses tend to be exporters of manufactured products or energy.

Manufactured product exporters generally follow a policy of mass-market production—like China—or have a reputation for top quality, like Germany, Japan, and Switzerland. These current account surpluses finance current account deficits in other nations. Note The U. A nation with consistent current account surpluses may face upward pressure on its currency.

Such nations may take steps to stem the appreciation of their currencies in order to maintain their export competitiveness. Japan, for instance, has frequently intervened in the foreign exchange market when the yen rises by buying large amounts of dollars in exchange for yen. Current Account Surplus as a Negative Indicator Current account surpluses are generally considered a positive sign in an economy.

However, in some cases, they are also negative indicators. Japan's current account surplus, for example, is as much due to low domestic demand as it is to its competitiveness in exports. The low domestic demand has translated to stagflation in its economy and low wage growth. Current account surpluses can also be the effect of a recession, when domestic demand dips and imports are curbed if a currency is depreciated. A current account surplus means that a country has more exports and incoming payments than imports and outgoing payments to other countries.

It is generally deemed a positive because the current account surplus adds to a country's reserves. Exports, earnings on investments abroad, and incoming transfer payments aid and remittances increase a country's current account surplus. Imports, foreign investors' earnings on investments in the country, and outgoing transfer payments lower a country's current account surplus. Beyond that, each type of LOC has its own characteristics. Personal Line of Credit This provides access to unsecured funds that can be borrowed, repaid, and borrowed again.

Opening a personal LOC usually requires a credit history of no defaults, a credit score of or higher, and reliable income. Having savings helps, as does collateral in the form of stocks or certificates of deposit CDs , though collateral is not required for a personal LOC. Personal LOCs are used for emergencies, weddings and other events, overdraft protection, travel and entertainment, and to help smooth out bumps for those with irregular income.

HELOCs often come with a draw period usually 10 years during which the borrower can access available funds, repay them, and borrow again. After the draw period, the balance is due, or a loan is extended to pay off the balance over time. HELOCs typically have closing costs, including the cost of an appraisal on the property used as collateral. Business Line of Credit Businesses use these to borrow on an as-needed basis instead of taking out a fixed loan.

The financial institution extending the LOC evaluates the market value, profitability, and risk taken on by the business and extends an LOC based on that evaluation. As with almost all LOCs, the interest rate is variable. Demand Line of Credit This type can be either secured or unsecured but is rarely used.

With a demand LOC, the lender can call the amount borrowed due at any time. Payback until the loan is called can be interest only or interest plus principal , depending on the terms of the LOC. The borrower can spend up to the credit limit at any time. SBLOCs are non-purpose loans, meaning that the borrower may not use the money to buy or trade securities. Almost any other type of expenditure is allowed. Limitations of Lines of Credit The main advantage of an LOC is the ability to borrow only the amount needed and avoid paying interest on a large loan.

That said, borrowers need to be aware of potential problems when taking out an LOC. Unsecured LOCs have higher interest rates and credit requirements than those secured by collateral. Interest rates for LOCs are almost always variable and vary widely from one lender to another. LOCs do not provide the same regulatory protection as credit cards.

Penalties for late payments and going over the LOC limit can be severe. An open LOC can invite overspending, leading to an inability to make payments. Depending on the severity, the services of a top credit repair company might be worth considering. What are common types of lines of credit LOCs? HELOCs are secured and backed by the market value of your home. How can I use an LOC? You can use an LOC for many purposes. Examples include paying for a wedding, a vacation, or an unexpected financial emergency.

How does an LOC affect my credit score? Lenders conduct a credit check when you apply for an LOC. This results in a hard inquiry on your credit report, which lowers your credit score in the short term. Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.

You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

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In this case, trader may choose enter a long position near the trendline and then extend it into the future. If the price action breaches the trendline on the downside, the trader can use that as a signal to close the position.

This allows the trader to exit when the trend they are following starts to weaken. Trendlines are, of course, a product of the time period. In the example above, a trader doesn't need to redraw the trendline very often. On a time scale of minutes, however, trendlines and trades may need to be readjusted frequently.

Traders often use a trendline connecting highs for a period as well as another to connect lows in order to create channels. A channel adds a visual representation of both support and resistance for the time period being analyzed. Similar to a single trendline, traders are looking for a spike or a breakout to take the price action out of the channel. They may use that breach as an exit point or an entry point depending on how they are setting up their trade.

Limitations of a Trendline Trendlines have limitations shared by all charting tools in that they have to be readjusted as more price data comes in. A trendline will sometimes last for a long time, but eventually the price action will deviate enough that it needs to be updated. Moreover, traders often choose different data points to connect. For example, some traders will use the lowest lows, while others may only use the lowest closing prices for a period.

Last, trendlines applied on smaller timeframes can be volume sensitive. A trendline formed on low volume may easily be broken as volume picks up throughout a session. What Are Stock Trendlines Used for? Trendlines are used by technical analysts to predict the direction of a stock or other financial security.

Armed with a clearer sense of potential direction, analysts can then make better decisions about stock trades. Who Uses Trendlines? Trendlines are typically associated with technical financial analysts. However, trendlines can be used by any investor looking to gain more insight into the direction of a stock, commodity, currency, or other investment. What Are the Different Kinds of Trendlines? There are a number of different kinds of trendlines. The most common are characterized as linear, logarithmic, polynomial, power, exponential, and moving average.

This compensation may impact how and where listings appear. She has published personal finance articles and product reviews covering mortgages, home buying, and foreclosure. Learn about our editorial policies Forex FX is a portmanteau of foreign currency and exchange. Foreign exchange is the process of changing one currency into another for a variety of reasons, usually for commerce, trading, or tourism.

Trading currencies can be risky and complex. Because there are such large trade flows within the system, it is difficult for rogue traders to influence the price of a currency. This system helps create transparency in the market for investors with access to interbank dealing. Retail investors should spend time learning about the forex market and then researching which forex broker to sign up with, and find out whether it is regulated in the United States or the United Kingdom U.

It is also a good idea to find out what kind of account protections are available in case of a market crisis, or if a dealer becomes insolvent. Read on to learn about the forex markets, what it's used for, and how you can get started trading. Key Takeaways The foreign exchange also known as forex or FX market is a global marketplace for exchanging national currencies.

Because of the worldwide reach of trade, commerce, and finance, forex markets tend to be the largest and most liquid asset markets in the world. Currencies trade against each other as exchange rate pairs. Forex markets exist as spot cash markets as well as derivatives markets, offering forwards, futures, options, and currency swaps. Market participants use forex to hedge against international currency and interest rate risk, to speculate on geopolitical events, and to diversify portfolios, among other reasons.

The foreign exchange market is where currencies are traded. Currencies are important because they allow us to purchase goods and services locally and across borders. International currencies need to be exchanged to conduct foreign trade and business. If you are living in the United States and want to buy cheese from France, then either you or the company from which you buy the cheese has to pay the French for the cheese in euros EUR. This means that the U. The same goes for traveling.

The tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate. One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over the counter OTC , which means that all transactions occur via computer networks among traders around the world, rather than on one centralized exchange.

The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich—across almost every time zone. This means that when the U. As such, the forex market can be extremely active anytime, with price quotes changing constantly. These terms are synonymous and all refer to the forex market. A Brief History of Forex In its most basic sense, the forex market has been around for centuries.

People have always exchanged or bartered goods and currencies to purchase goods and services. However, the forex market, as we understand it today, is a relatively modern invention. After the Bretton Woods accord began to collapse in , more currencies were allowed to float freely against one another. The values of individual currencies vary based on demand and circulation and are monitored by foreign exchange trading services.

Commercial and investment banks conduct most of the trading in forex markets on behalf of their clients, but there are also speculative opportunities for trading one currency against another for professional and individual investors. There are two distinct features of currencies as an asset class : You can earn the interest rate differential between two currencies.

You can profit from changes in the exchange rate. An investor can profit from the difference between two interest rates in two different economies by buying the currency with the higher interest rate and shorting the currency with the lower interest rate. Prior to the financial crisis, it was very common to short the Japanese yen JPY and buy British pounds GBP because the interest rate differential was very large. This strategy is sometimes referred to as a carry trade.

Currency trading was very difficult for individual investors prior to the Internet. Most currency traders were large multinational corporations , hedge funds , or high-net-worth individuals HNWIs because forex trading required a lot of capital. With help from the Internet, a retail market aimed at individual traders has emerged, providing easy access to the foreign exchange markets through either the banks themselves or brokers making a secondary market.

Most online brokers or dealers offer very high leverage to individual traders who can control a large trade with a small account balance. It is the only truly continuous and nonstop trading market in the world. In the past, the forex market was dominated by institutional firms and large banks, which acted on behalf of clients.

But it has become more retail-oriented in recent years, and traders and investors of many holding sizes have begun participating in it. An interesting aspect of world forex markets is that there are no physical buildings that function as trading venues for the markets. Instead, it is a series of connections made through trading terminals and computer networks.

Participants in this market are institutions, investment banks, commercial banks, and retail investors. The foreign exchange market is considered more opaque than other financial markets. Currencies are traded in OTC markets, where disclosures are not mandatory. Large liquidity pools from institutional firms are a prevalent feature of the market.

A survey found that the motives of large financial institutions played the most important role in determining currency prices. Forex is traded primarily via three venues: spot markets, forwards markets, and futures markets. When people refer to the forex market, they are thus usually referring to the spot market. The forwards and futures markets tend to be more popular with companies or financial firms that need to hedge their foreign exchange risks out to a specific date in the future.

Spot Market Forex trading in the spot market has always been the largest because it trades in the biggest underlying real asset for the forwards and futures markets. Previously, volumes in the forwards and futures markets surpassed those of the spot markets. However, the trading volumes for forex spot markets received a boost with the advent of electronic trading and the proliferation of forex brokers.

The spot market is where currencies are bought and sold based on their trading price. That price is determined by supply and demand and is calculated based on several factors, including current interest rates, economic performance, sentiment toward ongoing political situations both locally and internationally , and the perception of the future performance of one currency against another.

A finalized deal is known as a spot deal. It is a bilateral transaction in which one party delivers an agreed-upon currency amount to the counterparty and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present rather than in the future , these trades actually take two days for settlement.

Forwards and Futures Markets A forward contract is a private agreement between two parties to buy a currency at a future date and at a predetermined price in the OTC markets. A futures contract is a standardized agreement between two parties to take delivery of a currency at a future date and at a predetermined price.

Futures trade on exchanges and not OTC. In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves. In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange CME. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized.

The exchange acts as a counterparty to the trader, providing clearance and settlement services. Both types of contracts are binding and are typically settled for cash at the exchange in question upon expiry, although contracts can also be bought and sold before they expire.

The currency forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets to hedge against future exchange rate fluctuations, but speculators take part in these markets as well.

In addition to forwards and futures, options contracts are also traded on certain currency pairs. Forex options give holders the right, but not the obligation, to enter into a forex trade at a future date and for a pre-set exchange rate, before the option expires. Unlike the spot market, the forwards, futures, and options markets do not trade actual currencies. Instead, they deal in contracts that represent claims to a certain currency type, a specific price per unit, and a future date for settlement.

This is why they are known as derivatives markets. Uses of the Forex Markets Forex for Hedging Companies doing business in foreign countries are at risk due to fluctuations in currency values when they buy or sell goods and services outside of their domestic market.

Foreign exchange markets provide a way to hedge currency risk by fixing a rate at which the transaction will be completed. To accomplish this, a trader can buy or sell currencies in the forward or swap markets in advance, which locks in an exchange rate. For example, imagine that a company plans to sell U. Unfortunately, the U. A stronger dollar resulted in a much smaller profit than expected.

The blender company could have reduced this risk by short selling the euro and buying the U. That way, if the U. If the U. Hedging of this kind can be done in the currency futures market. The advantage for the trader is that futures contracts are standardized and cleared by a central authority. However, currency futures may be less liquid than the forwards markets, which are decentralized and exist within the interbank system throughout the world.

Forex for Speculation Factors like interest rates , trade flows, tourism, economic strength, and geopolitical risk affect the supply and demand for currencies, creating daily volatility in the forex markets. A forecast that one currency will weaken is essentially the same as assuming that the other currency in the pair will strengthen because currencies are traded as pairs. The trader believes higher U.

How to Start Trading Forex Trading forex is similar to equity trading. Here are some steps to get yourself started on the forex trading journey. Learn about forex: While it is not complicated, forex trading is a project of its own and requires specialized knowledge. For example, the leverage ratio for forex trades is higher than for equities, and the drivers for currency price movement are different from those for equity markets.

There are several online courses available for beginners that teach the ins and outs of forex trading. Set up a brokerage account: You will need a forex trading account at a brokerage to get started with forex trading. Forex brokers do not charge commissions. Instead, they make money through spreads also known as pips between the buying and selling prices. For beginner traders, it is a good idea to set up a micro forex trading account with low capital requirements. Such accounts have variable trading limits and allow brokers to limit their trades to amounts as low as 1, units of a currency.

For context, a standard account lot is equal to , currency units. A micro forex account will help you become more comfortable with forex trading and determine your trading style. Develop a trading strategy: While it is not always possible to predict and time market movement, having a trading strategy will help you set broad guidelines and a road map for trading. A good trading strategy is based on the reality of your situation and finances.

It takes into account the amount of cash that you are willing to put up for trading and, correspondingly, the amount of risk that you can tolerate without getting burned out of your position. Remember, forex trading is mostly a high-leverage environment. But it also offers more rewards to those who are willing to take the risk. Always be on top of your numbers: Once you begin trading, always check your positions at the end of the day.

Most trading software already provides a daily accounting of trades. Make sure that you do not have any pending positions to be filled out and that you have sufficient cash in your account to make future trades. Cultivate emotional equilibrium: Beginner forex trading is fraught with emotional roller coasters and unanswered questions. Should you have held onto your position a bit longer for more profits? How did you miss that report about low gross domestic product GDP numbers that led to a decline in overall value of your portfolio?

Obsessing over such unanswered questions can lead you down a path of confusion. That is why it is important to not get carried away by your trading positions and cultivate emotional equilibrium across profits and losses. Be disciplined about closing out your positions when necessary. Forex Terminology The best way to get started on the forex journey is to learn its language.

Here are a few terms to get you started: Forex account: A forex account is used to make currency trades.