Forex

Trading Forex: Introduction

Before, I just want to remind you the volume involved in the Forex market.

The Foreign Exchange market, also referred to as the “FOREX” or “Forex” or “Retail forex” or “FX” or “Spot FX” or just “Spot” is the largest financial market in the world, with a volume of about USD 3,210 billion a day.

The amount is so big that it is not easy to figure out how really big it is.

If you compare that to the US dollar 113 billion a day volume that the New York Stock Exchange trades, it is more than 28 times!

If you compare this figure to the roughly 3.5 billion US dollars daily turnover for the Taiwan Stock Market, you will see it is more than 900 times!

You can easily see how enormous the Foreign Exchange really is.

It is more than 9 times than all the stock markets combined compare to the stock data published by the World Federation of Exchanges.

What is traded on the Foreign Exchange?

The simple answer is money.

Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the Euro dollar and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY).

Because you’re not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.

In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country’s economy, compared to the other countries’ economies.

Unlike other financial markets like the New York Stock Exchange, the Forex spot market has neither a physical location nor a central exchange. The Forex market is considered an Over-the-Counter (OTC) or ‘Interbank’ market, due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.

Which Currencies Are Traded?

The most popular currencies along with their symbols are shown below:

Symbol	Country	Currency	Nickname
USD	United States	Dollar	Buck
EUR	Euro members	Euro	Fiber
JPY	Japan	Yen	Yen
GBP	Great Britain	Pound	Cable
CHF	Switzerland	Franc	Swissy
CAD	Canada	Dollar	Loonie
AUD	Australia	Dollar	Aussie
NZD	New Zealand	Dollar	Kiwi

Forex currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency.

Here is the currency distribution of the daily Forex market turnover:

Source: 2007 Triennial Central Bank Survey by BIS - Arranged by F. VARGA

So you can notice that the first four currencies traded are respectively the USD, Euro, Yen and Pound (Sterling).

What are Currency Pairs?

A currency pair represents the exchange rate between the two currencies.

For example, the rate at which the EUR/USD is trading that represents the number of US Dollars one Euro can purchase.

The first currency is called the base currency and the second currency is called the counter currency or the unit.

A quote is always a two ways one, as for example:

EUR/USD = 1.5366/1.5369 or more usually expressed as 1.5366/69.

The first price 1.5366 is the “bid price“.

The second price 1.5369 is the “offer price” or “ask price“.

In other words, the bid price is the price the market (the other side) buys the base. Here in the example, it is the Euro.

And same, the offer price (ask price) is the price the market will sell the base. Here in the example, it is the Euro.

So, you as a trader, you will buy the Euro against US dollar (buy Euro using US dollar) at 1.5369.

And you, as a trader, you will sell the Euro against US dollar (sell Euro to get US dollar) at 1.5366.

What is the significance of currency pairs?

An example of how currency pairs trade is if a trader believes the Bank of Japan will intervene to cause a decrease in the Yen against the US Dollar, then the trader would buy USD/JPY (buy the US Dollar/sell the Yen).

However, if the trader believes that Japanese investors are losing faith in the United States’ economy and are pulling money out of the US into Japan, then the trader would sell USD/JPY (sell the US Dollar/buy the Yen).

This is an example of how currency pairs are listed on trading stations.

The currency pairs are listed on the left side of the column.

The second column provides the bid/ask price and the last column, the change in percentage (the outlook could varies according the deal station (software) you are using and its available options.

The difference between the bid and ask price is called the spread, representing the fee the market will get if you trade the pair.

In the above example for the EUR/USD, the spread is:

1.5369 - 1.5366 = 0.0003 or 3 PIPs (Price Interest Point).

The spread changes according the market (and of course according the broker you are using - some brokers are more or less “expensive”) but also according the following variables:

* Quantity of the deal

* Volatility of the pair

* Liquidity of the pair

A pip is the smallest increment a currency pair can move.

When Can Currencies Be Traded?

The spot FX market is unique within the world markets. It’s like a Super Wal-Mart where the market is open 24-hours a day.

At any time, somewhere around the world a financial center is open for business, and banks and other institutions exchange currencies every hour of the day and night with generally only minor gaps on the weekend.

The foreign exchange markets follow the sun around the world, so you can trade late at night (if you’re a vampire) or in the morning (if you’re an early bird).

Keep in mind though, the early bird doesn’t necessarily get the worm in this market - you might get the worm but a bigger, nastier bird of prey can sneak up and eat you too…

Time Zone	New York	GMT
Tokyo Open	7:00 pm	0:00
Tokyo Close	4:00 am	9:00
London Open	3:00 am	8:00
London Close	12:00 pm	17:00
New York Open	8:00 am	13:00
New York Close	5:00 pm	22:00

That’s all for this lesson.

During the next one, we will see how forex are traded and what you need to start trading.

For now, just get relax and be familiar with the above information.

See you