Trade Forex

Foreign exchange, commonly known as 'Forex' or 'FX', is the exchange of one currency for another at an agreed exchange price on the over-the-counter (OTC) market. All forex is quoted in terms of one currency versus another. Each currency pair has a 'base' currency and a 'counter' currency. The base currency is the currency on the left of the currency pair and the counter currency is on the right. For example, in EUR/USD, EUR is the 'base' currency and USD the 'counter' currency. Forex is the world's largest financial market, with an average volume of US$ 4 trillion per day. Compare this to the New York Stock Exchange, which has a daily turnover of US$50 billion, and it's easy to see how the worldwide forex market is the biggest financial market in the world.

Unlike other financial markets like the New York Stock Exchange, the forex market has neither a physical location nor a central exchange. The forex market is considered an Over-the-Counter (OTC), or "Interbank" market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period, traded globally by a large number of individuals and organizations. At 5:00 pm EST Sunday, trading begins as markets open in Sydney. At 7:00 pm EST the Tokyo market opens, followed by London at 3:00 am EST. And finally, New York opens at 8:00 am EST and closes at 4:00 p.m. EST. Before New York trading closes, the Sydney market is back open – it's a 24-hour seamless market!

FX markets and prices are mainly influenced by international trade and investment flows. To a lesser extent, FX prices are also influenced by economic and political conditions, such as interest rates, inflation, and political instability (the same factors that influence the equity and bond markets). This means that currency prices are constantly fluctuating in value against each other, offering multiple trading opportunities.

Economic and political conditions usually have only a short-term impact, which makes FX attractive as it offers some of the diversification necessary to protect against adverse movements in the equity and bond markets.

All FX prices, or quotes, include a 'Bid' and 'Ask' similar to other financial products. Bid is the price at which you can sell currency. Ask is the price at which you can buy currency. The difference in the BID/ASK of the currency pairs is referred to as the 'spread'. An example would be EUR/USD dealing at 1.41800/1.41808 (in this case the spread is 0.8 pips or 0.00008). The exceptions to this are the JPY pairs which are quoted to just 2 decimal places. A USD/JPY price of 76.41/76.44 displays a 3 pip 'spread'.

Pip stands for Percentage in Points. Most of our currency pairs are quoted to 5 decimal places with the change from the 4th decimal place (0.0001) in price commonly referred to as a 'pip'. For example, if the price of the EUR/USD forex pair moved from 1.41800 to 1.41920, it is said to have climbed by 12 'pips' (92-80=12). The exceptions to this are the JPY pairs which are quoted to just 2 decimal places (0.01).

Regarding predicting the movements of the FX market, traders are usually divided into two camps, technical analysis and fundamental analysis. Traders who use technical analysis uses charts, trend lines, support / resistance levels, mathematical models to identify opportunities and to make trading decisions. Traders who use fundamental analysis analyse the tendency of the economic indicators and market factors, such as GDP growth rate, inflation rate, interest rates and so on.