Forex or Foreign Exchange is the simultaneous buying of one currency and the selling of another. Currency are traded in pairs. The Forex Market has more buyers and sellers and daily volume than any other market in the world and takes place in major financial institutions across the globe. The forex market is open 24 hours a day five days a week.
forex reference by dummies
Buying and Selling
In the forex market, currencies are always priced in pairs and all trades result in the simultaneous buying of one currency and the selling of another. The objective of currency trading is to buy the currency that increases in value relative to the one you sold. If you have bought a currency and the price appreciates in values, then you must sell the currency back in order to lock in the profit.
Quoting Conventions
Currencies are quoted in pairs. The first listed currency is known as the base currency and the second is called the counter or quote currency. Currencies are quoted using five significant numbers, with the last placeholder called a point or a pip
For example a EUR/USD quote 1.3277/1.3282
Like all financial products, forex quotes include a "bid" and "ask" or a "sell" and a "buy" price.
By quoting both the bid and ask in real time, brokers ensure that traders always receive a fair price on all transactions. As in any traded instrument, there is and immediate cost in establishing a position. This cost will vary between the different brokers and is sometimes called "spread".
For example, USD/JPY may bid at 117.99 and ask at 118.04, this five-pip spread defines the trader's cost, which can be recovered with a favourable currency move in the market.
For example a EUR/USD quote 1.3277/1.3282
Like all financial products, forex quotes include a "bid" and "ask" or a "sell" and a "buy" price.
By quoting both the bid and ask in real time, brokers ensure that traders always receive a fair price on all transactions. As in any traded instrument, there is and immediate cost in establishing a position. This cost will vary between the different brokers and is sometimes called "spread".
For example, USD/JPY may bid at 117.99 and ask at 118.04, this five-pip spread defines the trader's cost, which can be recovered with a favourable currency move in the market.
Margin
The margins is a performance bond, or good faith deposit, to ensure against the total loss of your account.
Trade stations have margin management capabilities. In the event that funds in the account fall below margin requirements, the broker's dealing desk will close all open positions. This prevents client's accounts from falling into a negative balance, even in a highly volatile, fast moving market.
Trade stations have margin management capabilities. In the event that funds in the account fall below margin requirements, the broker's dealing desk will close all open positions. This prevents client's accounts from falling into a negative balance, even in a highly volatile, fast moving market.
Forex Market and Locations
The forex market is a seamless 24 hour market and is open 5 days a week. At 5 pm Sunday, New York time, trading begins as markets open in Sydney and Singapore. At 7 pm the Tokyo market opens, followed by London at 2 am, and finally New York at 8 am (Time is based on New York time).
As a trader, this allows you to react to favourable/unfavourable news by trading immediately.
The trading of forex takes place all over the world and is not located in any one central location. Deals are done between a variety of traders, from banks to managed funds to individual traders.
As a trader, this allows you to react to favourable/unfavourable news by trading immediately.
The trading of forex takes place all over the world and is not located in any one central location. Deals are done between a variety of traders, from banks to managed funds to individual traders.
Size of the Forex Market
Forex trades approximately exceeds US$ 1.9 trillion a day across the globe (source Wikipedia) and is by far the most liquid market in the world.
It takes the NY Stock Exchange THREE MONTHS to trade the same USD values as the forex trades each and every day making it the largest and most liquid market in the world.
This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. Even as Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume (source wikipedia), it becomes clear that the futures markets provide only limited liquidity. The forex market is always liquid, meaning positions can be liquidated and stop orders executed without slippage.
It takes the NY Stock Exchange THREE MONTHS to trade the same USD values as the forex trades each and every day making it the largest and most liquid market in the world.
This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. Even as Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume (source wikipedia), it becomes clear that the futures markets provide only limited liquidity. The forex market is always liquid, meaning positions can be liquidated and stop orders executed without slippage.
Brokers and Market Makers
Market Maker - One that consistently makes two way prices, providing both a bid and an offer.Unlike brokers, market makers trade their capital.
Currency Pairs
Traders can trade a variety of currency pairs, limited only by which pairs each broker provides. Major currency pairs are typically the USD pairs for example:
- EUR/USD
- GBP/USD
- AUD/USD
- USD/JPY
- USD/CHF
- EUR/GBP
- EUR/JPY
- GBP/JPY
- EUR/CHF
Pips
A Pip is the smallest number in a quotation of a currency. For example if the quotation of EUR/USD is 1.2025, a pip is represented by EUR 0.0001. EUR/GBP has half pips, in that it is quoted to a fifth decimal place which can only be 0 or 5. This is because one pip in EUR/GBP is equal to four pips in its predecessor, GBP/DEM, and one pip in EUR/GBP would be too large an increment.
Spread
The quotation of a currency pair usually consists of two prices. The lower price (bid) is the price at which a market maker is willing to buy the first currency of a pair. The higher price (offer) is the price at which a market maker is willing to sell the first currency of a pair. The spread is the difference between the two prices. For example if the quotation of EUR/USD is 1.2025/1.2028, then the spread is EUR 0.0003 (or 3 pips).
Major Market Participants
Traders include:
- Governments,
- Reserver Banks,
- Large Mutual Funds,
- Banks,
- Companies,
- Hedge Funds,
- Retail Forex Traders,
- Individual Traders.
Fundamental or Technical
The two basic approaches to analysing the currency market are Fundamental Analysis and Technical Analysis. The fundamental analyst concentrates on the underlying causes of price movements, while the technical anlyst studies the prices movements themselves.
Fundamental Analysis
Fundamental Analysis focuses on the :
Fundamental analysts look at various macroeconomic indicators such as:
Technical Analysis
Technical Analysis focuses on the study of price movements. Historical currency data is used to forecast the direction of future prices. The premise of technical analysis is that all current market information is already reflected in the price of that currency, therefore, studying price action is all that is required to make informed trading decisions.
Fundamental Analysis
Fundamental Analysis focuses on the :
- economic
- social
- political
- geopolitical forces
- economic growth rates
- interest rates
- inflation
- unemployment, etc.
Technical Analysis
Technical Analysis focuses on the study of price movements. Historical currency data is used to forecast the direction of future prices. The premise of technical analysis is that all current market information is already reflected in the price of that currency, therefore, studying price action is all that is required to make informed trading decisions.
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