The FOREIGN EXCHANGE MARKET (also call “FOREX” or “FX”) includes financial institutions, corporations, central banks, hedge funds and extremely rich individuals. Today thanks to the internet all of investors can buy and sell currencies easily with the click of a mouse through online broker accounts.
Positions (“Long” stands for “Buy”, “Short” stands for “Sell”) can be opened and closed within minutes or can be held for months.
Currency prices are based on supply and demand of the global market and it is impossible to manipulate the market price due to the huge market size which does not allow any key players adjust the price at will.
The foreign exchange market is the place where currencies are traded, currencies need to be exchanged in order to conduct foreign trade and business. That is the reason why the forex market is the largest and the most liquid financial market in the world (with an average traded value of around U.S. $2,000 billion per day). The market is open 24 hours a day, five and a half days a week, currencies are traded worldwide in the global financial centers (London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney) for almost time zone.
There are three forex markets, the SPOT MARKET is the largest market because it is the real asset that the FORWARDS MARKET and FUTURES MARKETS are based on. The SPOT MARKET is mainly for individual investors and speculators, the FORWARDS and FUTURES MARKETS are mainly for companies which need to hedge their exchange risks.
The SPOT MARKET is a place where currencies are bought and sold according to the current price which is determined by supply and demand.
The FORWARDS and FUTURES MARKETS do not trade actual currencies, the deal is base on a certain currency type, a specific price per unit and a future date for settlement. The FORWARDS MARKET buy and sell currencies by contracts between two parties. The FUTURES MARKET buy and sell currencies by contract with a standard size and settlement date on public commodities markets (Chicago Mercantile Exchange, National Futures Association,…). The contracts of the above markets are binding and typically settled for cash for the exchange, contracts can be bought and sold before its expiry.
READING A QUOTE When a currency is quoted, it is done in relation to another currency, for example: EUR/USD = 1.3766 in which EUR is the base currency, USD is counter currency (the quote). That means EUR 1 = USD 1.3766.
A DIRECT CURRENCY QUOTE is simply a currency pair in which the DOMESTIC CURRENCY is the BASE CURRENCY.
An INDIRECT QUOTE is a currency pair where the DOMESTIC CURRENCY is the QUOTED CURRENCY.
For example: New Zealand Dollar (NZD) as the domestic currency, U.S. dollar (USD) as the foreign currency. A direct quote is NZD/USD, an indirect quote is USD/NZD.
Most currency exchange rates are quoted in four digits after the decimal place, excluding the Japanese yen (JPY) which is quoted in two decimal places.
CROSS CURRENCY is a currency quote without the U.S. dollar (EUR/GBP, EUR/CHF and EUR/JPY).
There is a BID PRICE (buy) and an ASK PRICE (sell) in a currency transaction.
When buying a currency pair, the ASK PRICE refers to the amount of the quoted currency that has to be paid in order to buy one unit of the base currency (how much the market will sell one unit of the base currency to the quoted currency), the BID PRICE is used when selling a currency pair (how much the market will pay for the quoted currency in relation to the base currency).
For example: USD/CAD = 1.2000/05, BID = 1.2000, ASK = 1.2005. If you want to buy USD/CAD, you must look at the ask price (1.2005 in Canadian dollars); to sell USD/CAD, you must look at the bid price (1.2000).
The base currency is always the one in which the transaction is being conducted. The difference between the bid price and the ask price is called a SPREAD, for the above example, the SPREAD is 0.0005 or 5 PIPS (points). Even the smallest point change can result in thousands of dollars being made or lost due to LEVERAGE, this is the reason why speculators are attracted to the forex market the tiniest price movement can result in huge profit). In the FORWARDS or FUTURES markets foreign exchange is quoted against the US Dollar.
RISK AND BENEFITS Due to the highly liquid nature of the forex market, investors can make big transactions without affecting any given exchange rate.
The currency market is open 24 hours a day with decent liquidity throughout the day:
Tokyo open: 7:00 pm, Tokyo close: 4:00am,
London open: 3:00 am,
London close: 12:00 am,
New York open: 8:00am, New York close: 5:00pm.
The high LEVERAGE of the forex market can make the huge gains quickly turn to damaging losses and wipe out your account because in the forex market wih the large amount of money involved and the number of traders will react quickly to the markets news.
DIFFERENCES BETWEEN FOREX AND EQUITIES:
The FOREX MARKET has very few instrument (EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD and cross currencies) as compared to the thousands found in the EQUITIES MARKET.
It is hard to open and close positions in the EQUITIES MARKET due to shrinking volumes and activity, furthermore, in a declining market, only with extreme ingenuity that an equities investor can make a profit while the FOREX MARKET offers the opportunity to profit in both rising and declining markets.
The FOREX MARKET is so liquid, traders are not required to wait for an uptick before they are allowed to enter into the market as they are in the EQUITIES MARKET. In the FOREX MARKET, margins are low and leverage is high, most margin traders in the equities markets need at least 50% of the value of the investment available as margin, whereas forex traders need as little as 1%. Commissions in the equities market are much higher than in the forex market.
Before the creation of the GOLD STANDARD MONETARY SYSTEM in 1875, many countries use gold and silver as means of international payment.
When buying a currency pair, the ASK PRICE refers to the amount of the quoted currency that has to be paid in order to buy one unit of the base currency (how much the market will sell one unit of the base currency to the quoted currency), the BID PRICE is used when selling a currency pair (how much the market will pay for the quoted currency in relation to the base currency).
For example: USD/CAD = 1.2000/05, BID = 1.2000, ASK = 1.2005. If you want to buy USD/CAD, you must look at the ask price (1.2005 in Canadian dollars); to sell USD/CAD, you must look at the bid price (1.2000).
The base currency is always the one in which the transaction is being conducted. The difference between the bid price and the ask price is called a SPREAD, for the above example, the SPREAD is 0.0005 or 5 PIPS (points). Even the smallest point change can result in thousands of dollars being made or lost due to LEVERAGE, this is the reason why speculators are attracted to the forex market the tiniest price movement can result in huge profit). In the FORWARDS or FUTURES markets foreign exchange is quoted against the US Dollar.
RISK AND BENEFITS Due to the highly liquid nature of the forex market, investors can make big transactions without affecting any given exchange rate.
The currency market is open 24 hours a day with decent liquidity throughout the day:
Tokyo open: 7:00 pm, Tokyo close: 4:00am,
London open: 3:00 am,
London close: 12:00 am,
New York open: 8:00am, New York close: 5:00pm.
The high LEVERAGE of the forex market can make the huge gains quickly turn to damaging losses and wipe out your account because in the forex market wih the large amount of money involved and the number of traders will react quickly to the markets news.
DIFFERENCES BETWEEN FOREX AND EQUITIES:
The FOREX MARKET has very few instrument (EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD and cross currencies) as compared to the thousands found in the EQUITIES MARKET.
It is hard to open and close positions in the EQUITIES MARKET due to shrinking volumes and activity, furthermore, in a declining market, only with extreme ingenuity that an equities investor can make a profit while the FOREX MARKET offers the opportunity to profit in both rising and declining markets.
The FOREX MARKET is so liquid, traders are not required to wait for an uptick before they are allowed to enter into the market as they are in the EQUITIES MARKET. In the FOREX MARKET, margins are low and leverage is high, most margin traders in the equities markets need at least 50% of the value of the investment available as margin, whereas forex traders need as little as 1%. Commissions in the equities market are much higher than in the forex market.
Before the creation of the GOLD STANDARD MONETARY SYSTEM in 1875, many countries use gold and silver as means of international payment.
The GOLD STANDARD MONETARY SYSTEM was built with the underlying idea behind the gold standard, that governments guaranteed the conversion of currency into a specific amount of gold, and vice versa (a currency would be backed by gold). So, governments needed a fairly substantial gold reserve in order to meet the demand for currency exchanges…
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