What Is Forex?
Introduction
Foreign Exchange
trading (also called Forex, FX, or currency
trading) describes trading in the many
currencies of the world. It is the largest and least regulated
market that provides the greatest liquidity to investors.
Daily volume in the currency markets is over
$3 trillion already. By comparison,
the NYSE daily volume averages $25 billion a day.
The spot Forex
market is the most liquid. Spot, meaning that trades are
settled within two banking days. There is no central
exchange of physical
location. Trading takes place over-the-counter, 24-hours
a day directly between the two parties of a trade over
the telephone
and electronically.
Participants in Forex include central banks, corporations, individual investors
and speculators, and hedge funds. With the advent of electronic trading platforms,
self-directed investors and smaller financial firms now have access to the same
liquidity as larger market participants.
Trading, or speculation, makes up to 95% of the daily volume. The other 5%
of daily volume consists of governments and commercial companies converting
one currency
into another from buying and selling goods and services.
Forex Trading
When trading currencies, the trade is always
done in pairs. One currency is bought and the other sold. For
example, you buy Euros with Dollars, anticipating the Euro to increase in
value relative to the Dollar. If the Euro rises relative to the Dollar, you
sell the
position and have made profit.
Most Commonly Traded Currencies (the Majors):
US Dollar (USD)
Japanese Yen (JPY)
Euro (EUR)
British Pound (GBP)
Canadian Dollar (CAD)
Australian Dollar (AUD)
Swiss Franc (CHF)
Commonly Traded Currency Pairs:
US Dollar and the Japanese Yen (USD/JPY)
Euro and US Dollar (EUR/USD)
US Dollar and Swiss franc (USD/CHF)
British Pound and US Dollar (GBP/USD)
When quoting currency pairs, the first currency
is referred to as the base currency and the second, the counter or quote currency.
The base currency is always equal to 1 monetary unit of exchange, for example,
1 Dollar, 1 Pound, 1 Euro. The dominant base currencies are, in order of frequency,
the EUR, GBP, and USD. When a currency is quoted against the US Dollar it is
called a direct rate. Any currency not against the US Dollar is referred to as
a cross rate.
 USD
vs JPY chart
The quote currency is translated into a certain number of
units of the base currency. For example, a quote of USD/JPY
at 120.00, says that for every 1 US Dollar, you get 120
Japanese Yen, while a quote for AUD/JPY of 67.73 says that
for every
1 Australian Dollar, you get 67.73 Yen.
Currency pairs are generally traded as 100,000 units of the base currency.
For example, if you were buying EUR/USD at .97 you would be paying Dollars
for Euros as follows:
100,000 x .97 = $97,000 for 100,000 Euros
Dominant Base Currencies
Euro - EUR/USD, EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD
British Pound - GBP/USD, GBP/CHF, GBP/JPY, GBP/CAD
US Dollar - USD/CAD, USD/JPY, USD/CHF
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