What is FOREX

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What is FOREX?


	Welcome to the fascinating world of Foreign Exchange trading. If you have been involved in the investment world, you have probably heard the term Forex thrown around, but what exactly is Forex?

	Forex Forex is a term which stands for foreign exchange, also referred to as “Spot FX”, “Retail FX”, “FX” or “4X”. In the simplest of definitions, it is buying and selling two nations currencies at the same time. Hence the term currency trading, it is a continuous physical occurrence taking place in the global economic system. With the daily average turnover of approximately US$4.0 Trillion, it is the largest financial market in the world. If you compare that to the $25 billion a day volume that the New York Stock Exchange trades, you will easily realize how enormous the Foreign Exchange really is. It actually equates to more than 3 times the total amount of the New York Stock Exchange and the NASDAQ combined! Interbank Market / Over-The-Counter Unlike stock and futures markets, FX trading is not centralized on any one exchange. It is considered to be an Over-the-Counter (OTC), or 'Inter-bank,' market. This is because transactions are conducted between two counterparts over the telephone, or via an electronic network. Participants in Forex trading Inter-bank market means that it was dominated by banks up until recently – i.e., central banks, commercial banks, investment banks, etc. However, thanks to market makers brokers, other market players then entered the market in record numbers. They include international money brokers, large multinational corporations, registered dealers, global money managers, private speculators, and futures and options traders. A 24-Hours Market There is no waiting for the opening bell daily. It is 24-hours market from Monday morning to Saturday morning SST (Singapore Standard Time). The Forex market never sleeps except weekend. That is why recently many part time individual traders involve in Forex trading in their own base. The Factors that affect the currency price Currency prices are affected by a variety of economic and political conditions – most importantly inflation, interest rates, large market orders, and political climate. Furthermore, one nation governments sometimes enter the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency to lower its price, or conversely by buying it to give it a boost. This is commonly called “central bank intervention.” Any of these factors can cause volatile currency prices. However, the sheer size and volume of the Forex market makes it virtually impossible for any one entity to "influence" the market for any length of time. The Majors Currencies The most commonly traded are those that are 'liquid' – i.e., those of countries with stable governments, low inflation, and respected central banks. Over 85% of all trading activity revolves around the major currencies – i.e., the U.S. Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, the Australian Dollar and the New Zealand Dollar. Forex currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency. The most popular currencies along with their symbols are shown below: 　 Country Currency Symbol Nickname U.S.A. Dollar USD Green Buck Euro members Euro EUR Fiber Japan Yen JPY Yen Great Britain Pound GBP Cable Switzerland Franc CHF Swissy Canada Dollar CAD Loonie Australia Dollar AUD Aussie New Zealand Dollar NZD Kiwi 　 The Exchange Rate The base currency is the term for the first currency in the pair. The counter currency is the term for the second currency in the pair. The exchange rate represents the number of units of the counter currency that one unit of the base currency can purchase. In a foreign exchange trade, clients are speculating on the exchange rate between two currencies. The exchange rate measures the relative value of a currency-- meaning it measures how much one currency is worth in terms of another currency. Price Interest Points (P.I.P.) A pip is the unit of measurement for exchange rate movement. The number of pips a currency pair moves determines how much a trader will earn or lose on the position. A pip is the fourth significant digit after decimal point in an exchange rate, and is the term used to define the unit of measurement for exchange rate movements. The number of pips that the exchange rate moves dictates how much a trader has gained or lost through an FX trade. Spreads You will notice that there are always 2 prices for each currency pair. In Forex, there is a BID and ASK price The “Bid” is the price at which a dealer is willing to buy and clients can sell the base currency in exchange for the counter currency. The “Ask” is the price at which a dealer is willing to sell and a client can buy. BID = the price at which the trader (You) Can sell ASK = the price at which the trader (You) Can buy Margins In Forex, only a small percentage of the actual position value needs to be deposited prior to entering the trade. This small deposit, known as the margin, is not a down payment, but rather a performance bond or good faith deposit to ensure against trading losses. The margin requirement allows traders to hold positions much larger than their account value. Margin requirements are as low as 1%. Leverage In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 dollars and so on. Long Position and Short Position A long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. In this scenario, the investor benefits from a rising market. A short position is one in which the trader sells a currency in anticipation that it will depreciate. In this scenario, the investor benefits from a declining market. However, it is important to remember that every Forex position requires an investor to go long in one currency and short the other. An Intraday Position and Overnight Position Intraday positions are all positions opened anytime during the 24 hour period after the close of normal trading hours at 4:30a.m. SST. Overnight positions are positions that are still on at the end of normal trading hours (4:30a.m. SST). Which are automatically rolled at competitive rates (based on the currencies interest rate differentials) to the next day's price.