FOREX: What Is It And How Does It Work?
Frederic Madore
The Foreign Exchange market, also referred to as the "FOREX" is the biggest and largest financial market in the world. It has a daily average turnover of US$1.9 trillion- just imagine that amount of money! Don't you want to join this trillion-dollar industry?
FOREX is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY). So basically, FOREX is trading.
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 what you call speculation. Investors frequently trade on information they believe to be superior and relevant, when in fact it is not and is fully discounted by the market.
On one side of each speculative stock trade is a participant who believes he has superior information and on the other side is another participant who believes his information is superior.
For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid- meaning its in cash or convertible to cash) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors.
A true 24-hour market, FOREX trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - real time- day or night.
The FOREX market is considered an Over The Counter (OTC) or 'interbank' market. This is because the transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange compared to stocks and futures markets.
Understanding FOREX quotes
Reading a FOREX quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) 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.
When trading FOREX you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).
About The Author
Frederic Madore is the founder of the http://forex-information-center.info website. Get the best information about Forex. Learn how to do Online forex trading.
(c)Copywright 2005
The latest information and news on Forex:
FOREX-US dollar slides broadly on easing growth fears - FOXBusiness
msnbc.com
FOREX-US dollar slides broadly on easing growth fears
FOXBusiness
NEW YORK (Reuters) - The dollar slipped againstmajor currencies Thursday as better-than-expected US dataon housing ...
FOREX-Euro edges up; market cautious before TrichetReuters
FOREX: Bond auctions boost euro currency trading?iF...
WORLD FOREX: Dollar Up Vs Yen; May Drop Depending On Jobs Data - MarketWatch
WORLD FOREX: Dollar Up Vs Yen; May Drop Depending On Jobs Data
MarketWatch
TOKYO (MarketWatch) -- The dollar rose slightly against the yen in Asia Friday as stable Japanese share prices prompted hedge funds to ...
and more »
CFTC Decision On Retail Forex Trading Effective As Of October 18, 2010 - Dail...
CFTC Decision On Retail Forex Trading Effective As Of October 18, 2010
Daily Markets
After months of speculation, the CFTC finally released the rules regarding retail foreign exchange (Forex) transactions. The rules implement provisions of ...
New CFTC Forex Trading Rules Call For 50:1 LeverageForbes (...
FOREX-Dollar on defensive after data whets risk appetite - Reuters
Corporate FX
FOREX-Dollar on defensive after data whets risk appetite
Reuters
TOKYO, Sept 2 (Reuters) - The dollar was on the defensive on Thursday, retaining most of the losses sustained the previous day when upbeat ...
Dollar defensive after trading lower on risk appetiteCorporate FX
all 19 news articl...
EUR/USD: (1.2825) Pair currently above 1.2780 - Forexrazor
EUR/USD: (1.2825) Pair currently above 1.2780
Forexrazor
High-Risk Warning Forex, Futures, and Options trading has large potential rewards, but also large potential risks. The high degree of leverage can work ...
and more »
foreign exchange - Google News
Japan, Indonesia, China, India: Asia Bond, Currency Preview - BusinessWeek
Daily News Corner
Japan, Indonesia, China, India: Asia Bond, Currency Preview
BusinessWeek
Taiwan: The Central Bank of China (Taiwan) will report foreign-exchange reserves data for August. The reserves were $370.1 billion in July. ...
Japan Said to View US Opposition as Yen Intervention ObstacleBloomber...
Trading In Emerging/Exotic Currencies Increases - FavStocks (blog)
Globe and Mail
Trading In Emerging/Exotic Currencies Increases
FavStocks (blog)
The Bank of International Settlements (BIS) has just released the results from its Triennial Central Bank Survey of Foreign Exchange and Derivatives Market ...
A Brave New World In Currencies?Wall Street Journal (blog)
Trend ...
China PBOC Hu Says Developing Econs Face Reserve Asset Losses - IMarketnews.com
Reuters India
China PBOC Hu Says Developing Econs Face Reserve Asset Losses
IMarketnews.com
Hu Xiaolian, a deputy-governor of the People's Bank of China and former director of the State Administration of Foreign Exchange, said that developing ...
Heavy in dollars, China warns of depreciationReuters
C...
Daily Foreign Exchange Market Summary - International Business Times
Daily Foreign Exchange Market Summary
International Business Times
The US dollar continues to weaken against a basket of currencies after mixed economic news. The Labor Department reported new claims for unemployment ...
and more »
CFTC's Retail Currency Rules Back Off Strictest Leverage - Wall Street Journal
CFTC's Retail Currency Rules Back Off Strictest Leverage
Wall Street Journal
That's the same limit voluntarily imposed by some dealer firms already in the US and it's also in line with retail foreign exchange leverage rules in some ...
CFTC Issues New Forex Trading RulesNew York Times (blog...