What is Forex?
"Forex" stands for foreign exchange; it's also known as FX. In a forex trade, you buy one currency while simultaneously selling another.
Currencies trade in pairs, like the Euro-US Dollar (EUR/USD) or US Dollar / Japanese Yen (USD/JPY).
Forex trading is used to speculate on the relative strength of one currency against another. The foreign exchange market is anover-the-counter market, which means that it is a decentralised market with no central exchange.
Who trades currencies, and why?
Daily turnover in the world's currencies comes from two sources:
* Foreign trade (5%). Companies buy and sell products in foreign countries, plus convert profits from foreign sales into domestic currency.
* Speculation for profit (95%).
Most traders focus onthe biggest, most liquid currency pairs, known as "The Majors". These include US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. In fact, more than 85% of daily forex trading happens in the major currency pairs.
The world's most traded market, open 24 hours a day
With average daily turnover of US$3.2 trillion, forex is the most traded marketin the world.
A true 24-hour market from Sunday 5 PM ET to Friday 5 PM ET, forex trading begins in Sydney, and moves around the globe as the business day begins, first to Tokyo, London, and New York.
Unlike other financial markets, investors can respond immediately to currency fluctuations, whenever they occur - day or night.
FOREIGN EXCHANGE COMMITTEE SEMI-ANNUAL FOREIGN EXCHANGE VOLUMESURVEY OCTOBER 2009
All data reported in millions of U.S. Dollars |
Average Daily Volume |
Instrument | Current Amount Reported | Dollar Change over Previous Year | Percent Change over Previous Year |
Spot Transactions | 387,961 | -82,423 | -17.5 |
Forward Transactions | 85,471 | -14,196 | -14.2 |
Foreign Exchange Swaps Transactions | 176,284 | 16,311 | 10.2 |
Over the Counter Options| 25,086 | -6,547 | -20.7 |
GRAND TOTAL | 674,802 | -86,855 | -11.4 |
Total Monthly Volume |
Instrument | Current Amount Reported | Dollar change over Previous Year | Percent Change over Previous Year |
Spot Transactions | 8,535,078 | -2,283,769 | -21.1 |
Forward Transactions | 1,880,335 | -412,059 | -18.0 |
Foreign Exchange Swaps Transactions | 3,878,283 | 198,938 | 5.4 |
Over theCounter Options | 551,822 | -175,708 | -24.2 |
GRAND TOTAL | 14,845,518 | -2,672,598 | -15.3 |
Understanding Forex Quotes
Reading a foreign exchange quote is simple if you remember two things:
1. The first currency listed is the base currency
2. The value of the base currency is always 1.
The US dollar is usually considered the base currency for quotes. When the base currencyis USD, think of the quote as telling you what a US dollar is worth in that other currency.
When USD is the base currency and the quote goes up, that means USD has strengthened in value and the other currency has weakened. In other words, a rising quote means that the US dollar can buy more of the other currency than before.
Majors not based on the US dollar
There are three exceptionswhen the US Dollar is not the base currency of a pair - these exceptions are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR).
For these pairs, the quote is based on the other currency, and a rising quote means that the other currency is strengthening, and the US dollar is weakening.
Currency pairs that don't involve USD at all are called crosscurrencies.
BID, ASK and the Spread
Just like other markets, forex quotes consist of two sides, the BID and the ASK:
The BID is the price at which you can SELL base currency.
The ASK is the price at which you can BUY base currency.
The spread is the difference between the BID and the ASK, and represents the cost of trading. In forex, spreads are tighter than many other markets,...
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