Forex is short for the foreign exchange market. Also known as FX, the Forex market is the largest market in the world. In 1998, a study on the Forex market by the International Bank of Settlements (IBS) showed daily global turnover of $1.4 trillion. That represents an increase of 80 percent over daily global turnover in 1992.
A $1.4 trillion market is obviously dominated by large financial institutions. Money centers, commercial banks, investment banks, and central banks all play a role in the Forex market. Single transactions of $200 to $500 million are not uncommon in the FX marketplace. Though the Forex market is a global marketplace, Great Britain is the epicenter for currency exchange. Britain's prime location allows its markets to open when both Asian and American markets are open. A reported 213 foreign exchange institutions reported activity to the Bank of England in 1998. Great Britain alone accounts for roughly 30 percent of the daily activity in the Forex market. The United States, with 93 foreign exchange dealers, accounts for 18 percent of the daily activity, a distant second compared to Great Britain. The Forex market is where currencies are exchanged. Currencies are always traded in pairs. The first currency in a quote is called the base currency. The U.S. dollar acts as the base currency to all currencies except the Australian Dollar, Euro, and British Pound. Only those three currencies are based against the dollar. When a quote for a currency moves higher it means the base currency has moved up in value. As the quote moves lower, the base currency loses value. The first currency in a pair is the base currency. The second currency in a pair is the quoted currency; the base currency is always one. It is the quoted currency's value that fluctuates. A quote for the Euro against the U.S. dollar would look like this: EUR/USD 1.3915. This means one Euro is worth 1.3915 dollars. The Forex market is an over the counter market. There is no central exchange floor like with stocks, bonds, futures and options. Instead, trades occur directly between market makers and those placing the order. Trades are processed through an electronic network or over the telephone. The market is open 24 hours a day and starts in Sydney. As the business day begins across the globe, the session follows. Major financial centers are located in Sydney, Hong Kong, London, and New York.Understanding Currency Trading
When you trade currencies you actually exchange one currency for another. But to make things simple, it is best to think of a currency pair as something that can be bought and sold. You want to buy if you think the base currency will rise in value. You want to sell if you think the base currency will fall in value. There are two parts to a currency quote: the bid price and ask price. The bid price is the price that the market maker is willing to pay. The ask price is the price that the market maker is willing to sell. A quote for the EUR/USD pair of 1.3159/62 indicates you can buy one Euro for 1.3162 dollars and sell one Euro for 1.3159 dollars. The difference between the two prices is the spread. The spread is how market makers make money and is the only cost involved with placing a trade. The spread is given in the number of pips between the two prices. A pip is the smallest increment a currency can change. In most cases a pip is .0001, the exception is the yen where a pip is .01.In order to make currency trading profitable you must trade large amounts of cash. For most individual investors this requires the use of leverage. The most common amount of leverage available is 100:1. This means you can control $100 for every $1 available for investment. Though leverage increases your potential for profit, it equally increases your potential for loss. Currency trading is not without risk. Make sure you fully understand the risks involved with currency trading before risking your hard earned capital.
