Forex Basics

Foreign Exchange
Foreign exchange (Forex or FX) is the largest financial market in the world with a daily turnover of over $2.0 trillion.

What is traded on the Foreign Exchange?
The answer is money. Forex trading is the simultaneous buying of one currency and 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).


This kind of trading is often very confusing to people because they are not buying anything physical. 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 country's economy.

Unlike other financial markets, the foreign exchange market has no physical location and no central exchange. The Forex market operates 24 hours a day through an electronic network of banks, corporations and individual traders. Forex trading begins every day in Sydney, then moves to Tokyo, followed by London and then New York. The major market makers, or dealers, consist of the commercial and investment banks, the exchange traded futures, and registered futures commission merchants. Our dealing desk is open 24-hours a day from Sunday 17:00 EST to Friday 17:00 EST.

Foreign Exchange Prices
Foreign exchange markets and prices are mainly influenced by international trade flows and investment flows. The FX markets are also influenced, but to a lesser extent, by the same factors that influence the equity and bond markets: economic and political conditions especially interest rates, inflation, and political instability. Those factors usually have only a short-term impact, which makes Forex attractive as it offers some of the diversification necessary to protect against adverse movements in the equity and bond markets.

Currencies are usually quoted to four decimal places, such as the Euro/US Dollar trading at 1.2400/1.2403, with the last decimal place referred to as a point or "pip". A pip for most currencies is 0.0001 of an exchange rate; the one exception is the USD/JPY quote in which each pip is equal to 0.01.

Quoting Conventions

Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the "basis" for the buy or the sell. For example, if you BUY EUR/USD you have bought euros (simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar.

EUR/USD
In this example euro is the base currency and thus the "basis" for the buy/sell.

If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate versus the US dollar.

USD/JPY
In this example the US dollar is the base currency and thus the "basis" for the buy/sell.

If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.

Bid/Ask Spread

All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price.
The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price in which you the trader will sell.
The ask is the price at which the dealer will sell the base currency in exchange for the quote currency. This means the ask is the price in which you the trader will buy.
The difference between the bid and the ask price is popularly know as the Spread.

Analysis of Foreign Exchange Markets
Foreign exchange traders base their decisions on either technical analysis and fundamental analysis.
Technical traders use charts, trend lines, support and resistance levels, mathematical models and other means to identify opportunities and drive trading decisions.
Fundamental traders identify trading opportunities by analyzing economic information.

24-Hour Access to the World
When you choose to trade currencies, you’re choosing greater freedom in your trading. With the ability to trade forex 24 hours a day, 5.5 days a week with extreme liquidity, you participate when you want to, not when the market dictates.

The market is able to stay open 24 hours a day, 5.5 days a week, because trading begins with the open in Australia, and flows through the open and close of the major financial trading centers in Asia, Europe, the United States and back again to Australia.

The daily foreign currency trading volume is determined by which markets are open at any point in time. When international market open times overlap, such as when the U.S. and British market are open simultaneously, greater trading volume is seen, resulting in peak trading.