Forex Currency Trading Explained
Forex Currency Trading Explained
Forex Currency Trading Explained
CURRENCY PAIRS............................................................................................................................. 3
Spread ......................................................................................................................................... 7
Conclusion ....................................................................................................................................... 8
At 7:00 pm Sunday, New York time, trading begins as markets open in Tokyo,
Japan. Next, Singapore and Hong Kong open at 9:00 pm EST, followed by the
European markets in Frankfurt (2:00 am), and then London (3:00 am). By 4:00 am,
the European markets are in full swing, and Asia has concluded their trading day.
The U.S. markets open first in New York around 8:00 am Monday, as Europe
winds down. Australia will take over around 5:00 pm, and by 7:00 pm Tokyo is
ready to re-open.
All times are quoted in Eastern Standard Time (New York).
What is Forex?
FX or Forex, currency trading is the trading of one currency against another. In
terms of trading volume, the currency exchange market is the world's largest
market, with daily trading volumes in excess of $1.5 trillion US dollars. This is orders
of magnitude larger than the bond or stock markets. The New York Stock Exchange,
for example, has a daily trading volume of approximately $50 billion.
Currencies are traded for hedging and speculative purposes. Various market
participants such as individuals, corporations, and institutions trade forex for one
or both reasons.
Currency markets are ideally suited for speculative trading. The foreign exchange
market has a daily volume in excess of 1.5 trillion USD, which is 50 times the size of
the transaction volume of all the equity markets taken together. This makes the
foreign exchange market, by far, the most liquid and efficient financial market of
the world. Thanks to its efficiency, there is little or no slippage of market price for
the execution of even large buy and sell orders. Traders are able to take advantage
of intra-day volatility thanks to the low spreads and enter positions for short time
periods, such as minutes and hours. Unlike equity trading, where restrictions limit
a trader's ability to profit from a market down turn, there are no such constraints
on currency trading. Currency traders can take advantage of both up and down
trends thus increasing their profit potential.
The most commonly traded currencies are: USD, EUR, JPY, GBP, CHF, CAD and AUD.
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The most commonly traded currency pair is EUR/USD.
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CURRENCY PAIRS
SPOT FOREX
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CURRENCY TRADING: BUYING AND SELLING
CURRENCIES
All Forex trades result in the buying of one currency and the selling of another
(currency trading), simultaneously.
Buying ("going long") the currency pair implies buying the first, base currency and
selling an equivalent amount of the second, quote currency (to pay for the base
currency). It is not necessary to own the quote currency prior to selling, as it is sold
short. A trader buys a currency pair if he/she believes the base currency will go up
relative to the quote currency, or equivalently that the corresponding exchange
rate will go up.
Selling ("going short") the currency pair implies selling the first, base currency, and
buying the second, quote currency. A trader sells a currency pair if he/she believes
the base currency will go down relative to the quote currency, or equivalently, that
the quote currency will go up relative to the base currency.
An open trade or position is one in which a trader has either bought or sold one
currency pair and has not sold or bought back an adequate amount of that currency
pair to effectively close the trade. When a trader has an open trade or position,
he/she stands to profit or lose from fluctuations in the price of that currency pair.
Forex is the backbone of all international capital transactions. Compared to the slim
profit margins rendered in other areas of commercial banking, huge profits are
generally produced in a matter of minutes form minor currency market
movements. Some banks generate 60% of their profits from trading currency
aggressively.
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Trading volume has been growing at a rate of 25% per year since the mid-1980s
and therefore it is not difficult to accept the notion that the currency market is one
of the world fastest growing industries. What used to require days to accomplish in
Europe or Asia now oly takes a few minutes. Needless to say, technology has
changed everything and millions of Dollars are moved from one currency into
another every second of every day by major banks through computers and for the
average investor, with the touch of a computer key.
Trading volume has been growing at a rate of 25% per year since the mid-1980s
and therefore it is not difficult to accept the notion that the currency options is the
world\'s fastest growing industry. What used to require days to accomplish in
Europe or Asia now only takes a few minutes. Needless to say, technology has
changed everything and millions of Dollars are moved from one currency into
another every second of every day by major banks through computers and for the
average investor, with the touch of a phone.
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FOREX BASICS - What's a PIP
(one pip, with proper decimal placement / currency exchange rate) x (Notional
Amount)
Using USD/JPY as an example, this yields:
(.01/130.46) x USD 10,000 = $0.77 or 77 cents per pip
Using EUR/USD as an example, we have:
(.0001/.8942) x EUR 10,000 = EUR 1.1183
But we want the pip value in USD, so we then must multiply EUR 1.1183 x (EUR/USD
exchange rate): EUR 1.1183 x .8942 = $1.00
This is in fact a phenomenon you will see with any currency in which the currency
is quoted first (such as EUR/USD or GBP/USD): the pip value is always $1.00 per
10,000 currency units. This is why pip (or "tick") values in currency futures, where
the currency is quoted first, are always fixed.
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Approximate pip values for the major currencies are as follows, per 10,000 units
of the base currency:
USD/JPY: 1 pip = $.77 (i.e. a change from 130.45 to 130.46 is worth about
$.77 per $10,000)
EUR/USD: 1 pip = $1.00 (.8941 to .8942 is worth $1.00 per 10,000 Euros)
GBP/USD: 1 pip = $1.00 (1.4765 to 1.4766 is worth $1.00 per 10,000
Pounds)
USD/CHF: 1 pip = $.59 (1.6855 to 1.6866 is worth $.59 per $10,000)
Spread
The spread is the difference between the price that you can sell currency at ( Bid)
and the price you can buy currency at ( Ask). The spread on majors is usually 3 pips
under normal market conditions.
Market Hours
The spot Forex market is unique to any other market in the world; trading 24-hours
a day. 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,
only stopping briefly on the weekend. Foreign exchange markets follow the sun
around the world, giving traders the flexibility of determining their trading day and
the ability to take advantage of global economic events.
FOREX or The Foreign exchange rate market is an international market where
various currency exchange transactions take place; this is in the shape of
simultaneously buying one currency and selling another. The most commonly
traded currencies are referred to as “Majors”; over 85% of daily transactions on
Forex trading involve the Majors. These seven currencies are the US Currency
(Dollar, USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss Franc
(CHF), Canadian Dollar (CAD) and Australian Dollar (AUD). The Forex system in
operation today was established in the 1970s when free currency exchange rates
were introduced, this period also saw the US Dollar overtake the British Pound as
the benchmark currency. Prior to this and in particular during World War II,
exchange rate remained more stable.
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Conclusion
Forex trading in simplest terms is the buying of one currency and the selling of
another. Forex trading, also referred to, as “FX” is open to corporations, small
businesses, commercial banks, investment funds and private individuals, it is the
largest financial market in the world averaging a daily turnover of over $1 trillion
dollars, making it a diverse and exciting market. It is a 24-hour market enabling it
to accommodate constant changing world currency exchange rates . According to
New York time, trading begins at 2.15pm on Sunday in Sydney and Singapore and
progresses through to Tokyo at 7pm, London at 2am and reaches New York at 8am.
This leaves investors free to respond to global political, economic and social events
when they take place, day or night.
Unlike trading on the stock market, the forex market is not conducted by a central
exchange, but on the “interbank” market, which is thought of as an OTC (over the
counter) market. Trading takes place directly between the two counterparts
necessary to make a trade, whether over the telephone or on electronic networks
all over the world. The main centres for trading are Sydney, Tokyo, London,
Frankfurt and New York. This worldwide distribution of trading centres means that
the forex market is a 24-hour market.
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