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Introduction to Forex History The purpose of this e-book is to introduce the forex market to you. As with many markets, there are many derivatives of the central market such as futures, options and forwards. For the purpose of this book we will only be discussing the main market sometimes referred to as the Spot or Cash market. The word FOREX is derived from Foreign Exchange and is the largestfinancial market in the world. Unlike many markets, the FX market is open 24 hours per day and has an estimated $1.5 Trillion in turnover every day. This tremendous turnover is more than the combination of all the worlds' stock markets on any given day. This tends to lead to a very liquid market and thus a desirable market to trade. Unlike many other securities (any financial instrument that can betraded) the FX market does not have a fixed exchange. It is primarily traded through banks, brokers, dealers, financial institutions and private individuals. Trades are executed through phone and increasingly through the Internet. It is only in the last few years that the smaller investor has been able to gain access to this market. Previously, the large amounts of deposits required precluded thesmaller investors. With the advent of the Internet and growing competition it is now easily in the reach of most investors. You will often hear the term INTERBANK discussed in FX terminology. This originally, as the name implies, was simply banks and large institutions exchanging information about the current rate at which their clients or themselves were prepared to buy or sell a currency. INTERmeaning between and Bank meaning deposit taking institutions normally made up of banks, large financial institutions, brokers or even the government. The market has progressed to such a degree that the term interbank now means anybody who is prepared to buy or sell a currency. It could be two individuals or your local travel agent offering to exchange Euros for US Dollars. You will, however, findthat most of the brokers and banks use centralized feeds to insure reliability of quote. The quotes for Bid (buy) and Offer (sell) will all be from reliable sources. These quotes are normally made up of the top 300 or so large institutions. This insures that if they place an order on your behalf that the institutions they have placed the order with is capable of fulfilling the order. Now althoughwe have spoken about orders being fulfilled, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words, the person or institution that bought or sold the currency has no intention of actually taking delivery of the currency. Instead, they were solely speculating on the movement of that particular currency.

Source: Bank For International Settlementshttp://www.bis.org. Extract From The Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity. Currency US Dollar Euro Japanese Yen Pound Sterling Swiss Franc 27 15 10 23.4 13.6 8.4 24.1 9.4 7.3 20.2 11.0 7.1 1989 90 1992 82.0 1995 83.3 1998 87.3 2001 90.4 37.6 22.7 13.2 6.1

As you can see from the above table over 90% of all currencies are traded against the US Dollar. The fournext most traded currencies are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc(CHF). As currencies are traded in pairs and exchanged one for the other when traded, the rate at which they are exchanged is called the exchange rate. These four currencies traded against the US Dollar make up the majority of the market and are called major currencies or the majors. MarketMechanics So now we know that the FX market is the largest in the world and that your broker or institution that you are trading with is collecting quotes from a centralized feed or individual quotes comprising of interbank rates. So how are these quotes made up. Well, as we previously mentioned currencies are traded in pairs and are each assigned a symbol. For the Japanese Yen it is JPY, for the...
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