| The global
marketplace has changed dramatically over the past several years. New investment
strategies are becoming more important in order to minimize risk, as well as
to maintain high portfolio returns. Among the most rewarding of the markets opening
up to traders is the Foreign Exchange market. Identifiable trading patterns,
as well as comparatively low margin requirements, offer many trading opportunities. |
 Forex
Market BackgroundIn contrast to the world’s stock markets, foreign exchange is traded without the constraints of a central physical exchange. Transactions are instead conducted via telephone or online. With this transaction structure as its foundation, the Foreign Exchange Market has become by far the largest marketplace in the world. Average volume in foreign exchange exceeds $1.9 trillion per day versus only $25 billion per day traded on the New York Stock Exchange. This high volume is advantageous from a trading standpoint. As a result, foreign exchange trading has long been recognized as a superior investment opportunity by major banks, multinational corporations and other institutions. Spot foreign exchange is always traded as one currency in relation to another. So a trader who believes that the dollar will rise in relation to the Euro, would sell EURUSD. That is, sell Euros and buy US dollars. |
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| World’s Largest Financial
Market The Foreign Exchange market, also referred to as the “Forex” or “FX” market is the largest financial market in the world, with a daily average turnover of US$1.9 trillion—30 times larger than the combined volume of all U.S. equity markets. Forex is the simultaneous exchange of one country’s currency for that of another. Speculators in the Forex market wish to purchase or sell one currency for another with the hope of making a profit when the value of the currencies changes in favor of the investor, whether from market news or events that take place in the world. There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation. For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called “the Majors.” Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. |
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| Understanding
Forex Quotes The first currency listed first is the base currency and the value of the base currency is always 1. The US dollar is the centerpiece of the Forex market and is normally considered the ‘base’ currency for quotes. In the “Majors”, this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen. When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before. |
The three exceptions to this rule are the British
pound (GBP), the Australian dollar (AUD) and the Euro
(EUR). In these cases, you might see a quote such as
GBP/USD 1.7366, meaning that one British pound
equals 1.7366 U.S. dollars. In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar. In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening. Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen. |
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