The Foreign Exchange market, also referred to as the "Forex" is the
biggest and largest financial market in the world. It has a daily
average turnover of US$1.9 trillion- just imagine that amount of money!
Don't you want to join this trillion-dollar industry?
Forex is the simultaneous buying of one currency and selling of
another. Currencies are traded in pairs, for example Euro/US Dollar
(EUR/USD) or US Dollar/Japanese Yen (USD/JPY). So basically, Forex is
trading.
There are two reasons to buy and sell currencies. About 5% of daily
turnover is from companies and governments that buy or sell products
and services in a foreign country or must convert profits made in
foreign currencies into their domestic currency.
The other 95% is trading for profit, or what you call speculation.
Investors frequently trade on information they believe to be superior
and relevant, when in fact it is not and is fully discounted by the
market.
On one side of each speculative stock trade is a participant who
believes he has superior information and on the other side is another
participant who believes his information is superior.
For speculators, the best trading opportunities are with the most
commonly traded (and therefore most liquid- meaning its in cash or
convertible to cash) currencies, called "the Majors." Today, more than
85% of all daily transactions involve trading of the Majors.
A true 24-hour market, Forex trading begins each day in Sydney, and
moves around the globe as the business day begins in each financial
center, first to Tokyo, London, and New York. Unlike any other financial
market, investors can respond to currency fluctuations caused by
economic, social and political events at the time they occur — real
time- day or night.
The Forex market is considered an Over The Counter (OTC) or 'interbank'
market. This is because the transactions are conducted between two
counterparts over the telephone or via an electronic network. Trading
is not centralized on an exchange compared to stocks and futures
markets.
Understanding Forex quotes
Reading a Forex quote may seem a bit confusing at first. However, it's
really quite simple if you remember two things: 1) The first currency
listed first is the base currency and 2) the value of the base currency
is always 1.
The US dollar is the centerpiece of the Forex market and is normally
considered the 'base' currency for quotes. In the "Majors", this
includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many
others, quotes are expressed as a unit of $1 USD per the second
currency quoted in the pair. For example, a quote of USD/JPY 110.01
means that one U.S. dollar is equal to 110.01 Japanese yen.
When the U.S. dollar is the base unit and a currency quote goes up, it
means the dollar has appreciated in value and the other currency has
weakened. If the USD/JPY quote we previously mentioned increases to
113.01, the dollar is stronger because it will now buy more yen than
before.
The three exceptions to this rule are the British pound (GBP), the
Australian dollar (AUD) and the Euro (EUR). In these cases, you might
see a quote such as GBP/USD 1.7366, meaning that one British pound
equals 1.7366 U.S. dollars.
In these three currency pairs, where the U.S. dollar is not the base
rate, a rising quote means a weakening dollar, as it now takes more
U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the
value of the base currency. A lower quote means the base currency is
weakening.
Currency pairs that do not involve the U.S. dollar are called cross
currencies, but the premise is the same. For example, a quote of
EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
When trading Forex you will often see a two-sided quote, consisting of a
'bid' and 'offer'. The 'bid' is the price at which you can sell the
base currency (at the same time buying the counter currency). The 'ask'
is the price at which you can buy the base currency (at the same time
selling the counter currency).
