The foreign exchange market is the largest market in the world. With global daily turnover over $1 trillion it easily trumps the daily turnover of the U.S. securities markets. The foreign exchange market is also known as the FX market or Forex market. In the FX market currencies are traded in pairs as you exchange one currency for another. To make things simple, however, it is best to think of each currency pair as an instrument that can be bought and sold.
There are two parts to each currency pair: the base currency and the quoted currency. The first currency in the pair is the base currency. The second currency in the pair is the quoted currency. The base currency is always one. It is the quoted currency whose price fluctuates. The US dollar (USD) is the base currency to an overwhelming majority of currencies. The only exceptions to this are the: Euro (EUR), British pound (GBP), and Australian dollar (AUD), which are based against the dollar. Currencies are quoted in five digits and contain two parts: the bid price and ask price. The first portion of the quote is the bid and the second portion is the ask. A quote for the GBP/USD of 1.9175/78 indicates a market maker is willing to sell one pound for 1.9178 dollars. It also indicates he is willing to pay 1.9175 dollars for one pound. The difference between the two prices is known as the spread and is the cost of placing a trade. The Forex market is a true 24 hour market. As the business day ends at one financial center, it begins at another financial center on across the globe. It has been said the currency market follows the sun around the world. The international dateline is located in the Pacific and each business day begins in the Asia-Pacific financial centers. Trading starts in Sydney and travels across the globe through Asia, the Middle East, Europe and finally the Americas. This 24 hour market means currencies can respond to events anyplace at anytime. Traders must recognize that a sharp price movement may occur during off hours. For the most part, however, the trading session has periods high and low activity. Trading peaks as the European markets open and drop off during the London lunch hour. As the American markets open, activity picks back up and gradually declines as the day progresses.
