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).
