About Forex

Forex Overview

The Currency Market/Foreign Exchange Market is affectionately called the Forex or FX market. Forex trading is the simultaneous buying of one currency and selling of another with the purpose of receiving profits from the difference in rates. It is where one country’s currency is exchanged for that of another through a floating-exchange-rate-system. The forex market is the largest and most liquid financial market in the world with an average daily turnover of US$1.9 trillion. Trading occurs between major banks, central banks, government, multinational corporations, individual investors (us) and other financial institutions. It is almost impossible for any one group to influence exchange rates, due to the enormity of the FX market. The most traded currencies (the majors) in order are – United States Dollar, Euro zone Euro, Japanese Yen, British Pound Sterling, Swiss Franc, Australian Dollar and Canadian Dollar.

The FX market is an inter-dealer market based on the vast network of hundreds of major banks across the globe. It is also an Over-The-Counter market (OTC), meaning that transactions are conducted between an electronic network of banks, corporations and individual traders. It has no physical location and operates 24 hours a day, everyday except Saturday’s. Foreign exchange trading takes place in financial trading centres worldwide. Trading begins each day in Sydney, and moves around the globe as the business day begins in the major financial centres of Tokyo, Singapore, London and New York.

The major dealing centres today are: London (33%), New York (17%), Tokyo (10%), Singapore (7%), Frankfurt (6%), Zurich (5%), Hong Kong (5%), Sydney (4%) and Paris (3%).

Based on the volumes seen it is clear that to receive maximum benefits from trades, serious traders must be on the market during the Tokyo, London and New York times of operations. Even more importantly, the times of overlap between the Tokyo/London and the London/New York market provides the most favourable trading opportunities.

Forex Basics

Currencies are traded in pairs. Currency pairs represent the exchange rate between the two currencies. e.g. the rate at which the EUR/USD is trading at represents the number of US dollars one EURO can purchase. The first currency is called the base currency and the second currency, the counter currency. e.g. EUR/USD, USD/JPY, GBP/USD.
Currencies are usually quoted to four decimal places, with the last decimal place called a ‘pip’. "PIP" stands for "price interest point" and it is the smallest increment that a currency pair can move. A pip in most currencies is one /10,000th of an exchange rate (in USD/JPY, it is one /100th).
Trading objective is to exchange one currency for another with the expectation that the price will change so that the currency you bought will increase its value relative to the one you sold (& vice versa). The trader will either buy or sell the currency pair and try to make a profit from market movement.
The quoted price is the amount a trader is willing to buy/sell the currency pair.
Forex quotes include a "Bid" and "Ask" price.

Bid – Price at which dealer is willing to buy and traders can sell currency
Ask – Price at which dealer will sell and traders can buy currency
The difference between the bid and ask is called the "spread", which is the trader’s cost of the transaction. This is where the broker gets paid.