Forex Currency Trading Explained

FOREX MARKET HOURS
At 7:00 pm Sunday, New York time, trading begins as markets open in Tokyo,
Japan. Next, Singapore and Hong Kong open at 9:00 pm EST, followed by the
European markets in Frankfurt (2:00 am), and then London (3:00 am). By 4:00 am,
the European markets are in full swing, and Asia has concluded their trading
day. The U.S. markets open first in New York around 8:00 am Monday, as Europe
winds down. Australia will take over around 5:00 pm, and by 7:00 pm Tokyo is
ready to re-open.
All times are quoted in Eastern Standard Time (New York).

FX or Forex, currency trading is the trading of one currency against another. In
terms of trading volume, the currency exchange market is the world's largest
market, with daily trading volumes in excess of $1.5 trillion US dollars. This
is orders of magnitude larger than the bond or stock markets. The New York Stock
Exchange, for example, has a daily trading volume of approximately $50 billion.

Currencies are traded for hedging and speculative purposes. Various market
participants such as individuals, corporations, and institutions trade forex for
one or both reasons.

Corporate treasurers, private individuals and investors have currency exposures
during the the regular course of business. The FXTrade Platform is an ideal
platform to hedge any such exposure. An investor, who has bought a European
stock and expects the EUR exchange rate to decline, can hedge his currency
exposure by selling the EUR against the USD.

Currency markets are ideally suited for speculative trading. The foreign
exchange market has a daily volume in excess of 1.5 trillion USD, which is 50
times the size of the transaction volume of all the equity markets taken
together. This makes the foreign exchange market, by far, the most liquid and
efficient financial market of the world. Thanks to its efficiency, there is
little or no slippage of market price for the execution of even large buy and
sell orders. Traders are able to take advantage of intra-day volatility thanks
to the low spreads and enter positions for short time periods, such as minutes
and hours. Unlike equity trading, where restrictions limit a trader's ability to
profit from a market down turn, there are no such constraints on currency
trading. Currency traders can take advantage of both up and down trends thus
increasing their profit potential.



The most commonly traded currencies are: USD, EUR, JPY, GBP, CHF, CAD and AUD.


The most commonly traded currency pair is EUR/USD.

Forex Symbol Guide

Symbol Currency Pair Trading Terminology


GBP/USD British Pound / US Dollar "Cable"

EUR/USD Euro / US Dollar "Euro"

USD/JPY US Dollar / Japanese Yen "Dollar Yen"

USD/CHF US Dollar / Swiss Franc "Dollar Swiss", or "Swissy"

USD/CAD US Dollar / Canadian Dollar "Dollar Canada"

AUD/USD Australian Dollar / US Dollar "Aussie Dollar"

EUR/GBP Euro / British Pound "Euro Sterling"

EUR/JPY Euro / Japanese Yen "Euro Yen"

EUR/CHF Euro / Swiss Franc "Euro Swiss"

GBP/CHF British Pound / Swiss Franc "Sterling Swiss"

GBP/JPY British Pound / Japanese Yen "Sterling Yen"

CHF/JPY Swiss Franc / Japanese Yen "Swiss Yen"

NZD/USD New Zealand Dollar / US Dollar "New Zealand Dollar" or "Kiwi"

USD/ZAR US Dollar / South African Rand "Dollar Zar" or "South African Rand"

GLD/USD Spot Gold "Gold"

SLV/USD Spot Silver "Silver"



CURRENCY PAIRS

All currencies are assigned an International Standards Organization (ISO) code
abbreviation. In currency trading, these codes are often used to express which
specific currencies make up a currency pair. For example, USD/JPY refers to two
currencies: the US Dollar and the Japanese Yen.



SPOT FOREX

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 EUR/USD. That is, sell Euros and buy US dollars. The following is
guide for quoting conventions:



What does it mean to be "long" or "short" a currency?

Being long means buying a currency. Being short means selling a currency.

If a trader goes long USD/JPY, he or she buys US Dollars and sells Japanese Yen.
Buying a currency is synonymous with taking a long position in that currency. A
trader takes a long position in a currency if he or she believes it will
appreciate in value.

If a trader goes short USD/JPY, he or she sells US Dollars and buys Japanese
Yen. Selling a currency is synonymous with shorting that currency. A trader
would short a currency if he or she believes it will depreciate in value.



CURRENCY TRADING: BUYING AND SELLING CURRENCIES

All Forex trades result in the buying of one currency and the selling of another
(currency trading), simultaneously.



Buying ("going long") the currency pair implies buying the first, base currency
and selling an equivalent amount of the second, quote currency (to pay for the
base currency). It is not necessary to own the quote currency prior to selling,
as it is sold short. A trader buys a currency pair if he/she believes the base
currency will go up relative to the quote currency, or equivalently that the
corresponding exchange rate will go up.



Selling ("going short") the currency pair implies selling the first, base
currency, and buying the second, quote currency. A trader sells a currency pair
if he/she believes the base currency will go down relative to the quote
currency, or equivalently, that the quote currency will go up relative to the
base currency.



An open trade or position is one in which a trader has either bought or sold one
currency pair and has not sold or bought back an adequate amount of that
currency pair to effectively close the trade. When a trader has an open trade or
position, he/she stands to profit or lose from fluctuations in the price of that
currency pair.



Forex is the backbone of all international capital transactions. Compared to the
slim profit margins rendered in other areas of commercial banking, huge profits
are generally produced in a matter of minutes form minor currency market
movements. Some banks generate 60% of their profits from trading currency
aggressively.



Trading volume has been growing at a rate of 25% per year since the mid-1980s
and therefore it is not difficult to accept the notion that the currency market
is one of the world fastest growing industries. What used to require days to
accomplish in Europe or Asia now oly takes a few minutes. Needless to say,
technology has changed everything and millions of Dollars are moved from one
currency into another every second of every day by major banks through computers
and for the average investor, with the touch of a computer key.

Foreign exchange is the backbone of all international capital transactions.
Compared to the slim profit margins rendered in other areas of commercial
banking, huge profits are generally produced in a matter of minutes from minor
currency options market movements. Some banks generate up to 60% of their
profits from trading currency aggressively.

Transactions in foreign currencies take place when one country's currency is
purchased (exchanged) with another country's currency. The price agreed upon or
negotiated for the currency purchased is referred to as the foreign exchange
rate. Major commercial banks in the money market centers throughout the world
are responsible for the majority of foreign currencies bought and sold.

Trading volume has been growing at a rate of 25% per year since the mid-1980s
and therefore it is not difficult to accept the notion that the currency options
is the world\'s fastest growing industry. What used to require days to
accomplish in Europe or Asia now only takes a few minutes. Needless to say,
technology has changed everything and millions of Dollars are moved from one
currency into another every second of every day by major banks through computers
and for the average investor, with the touch of a phone.

FOREX BASICS - What's a PIP

A "pip" is the smallest increment in any currency pair. In EUR/USD, a movement
from .8951 to .8952 is one pip, so a pip is .0001. In USD/JPY, a movement from
130.45 to 130.46 is one pip, so a pip is .01.

CALCULATING THE WORTH OF A PIP

How much in dollars is this movement worth, for example, per 10,000 Euros in EUR/USD?
How much is one pip worth per 10,000 Dollars in USD/JPY? We will refer to the
size, in this case 10,000 units of the base currency, as the "Notional Amount".
The formula for calculating a pip value is therefore:

(one pip, with proper decimal placement / currency exchange rate) x (Notional
Amount)

Using USD/JPY as an example, this yields:

(.01/130.46) x USD 10,000 = $0.77 or 77 cents per pip

Using EUR/USD as an example, we have:

(.0001/.8942) x EUR 10,000 = EUR 1.1183

But we want the pip value in USD, so we then must multiply EUR 1.1183 x (EUR/USD
exchange rate): EUR 1.1183 x .8942 = $1.00

This is in fact a phenomenon you will see with any currency in which the
currency is quoted first (such as EUR/USD or GBP/USD): the pip value is always
$1.00 per 10,000 currency units. This is why pip (or "tick") values in currency
futures, where the currency is quoted first, are always fixed.

Approximate pip values for the major currencies are as follows, per 10,000 units
of the base currency:

USD/JPY: 1 pip = $.77 (i.e. a change from 130.45 to 130.46 is worth about $.77
per $10,000)

EUR/USD: 1 pip = $1.00 (.8941 to .8942 is worth $1.00 per 10,000 Euros)

GBP/USD: 1 pip = $1.00 (1.4765 to 1.4766 is worth $1.00 per 10,000 Pounds)

USD/CHF: 1 pip = $.59 (1.6855 to 1.6866 is worth $.59 per $10,000)

Spread

The spread is the difference between the price that you can sell currency at (
Bid) and the price you can buy currency at ( Ask). The spread on majors is
usually 3 pips under normal market conditions.

Market Hours

The spot Forex market is unique to any other market in the world; trading
24-hours a day. Somewhere around the world a financial center is open for
business and banks and other institutions exchange currencies every hour of the
day and night, only stopping briefly on the weekend. Foreign exchange markets
follow the sun around the world, giving traders the flexibility of determining
their trading day and the ability to take advantage of global economic events.

FOREX or The Foreign exchange rate market is an international market where
various currency exchange transactions take place; this is in the shape of
simultaneously buying one currency and selling another. The most commonly traded
currencies are referred to as Majors ; over 85% of daily transactions on Forex
trading involve the Majors. These seven currencies are the US Currency (Dollar,
USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss Franc (CHF),
Canadian Dollar (CAD) and Australian Dollar (AUD). The Forex system in operation
today was established in the 1970s when free currency exchange rates were
introduced, this period also saw the US Dollar overtake the British Pound as the
benchmark currency. Prior to this and in particular during World War II,
exchange rate remained more stable.

Forex trading in simplest terms is the buying of one currency and the selling of
another. Forex trading, also referred to, as FX is open to corporations, small
businesses, commercial banks, investment funds and private individuals, it is
the largest financial market in the world averaging a daily turnover of over $1
trillion dollars, making it a diverse and exciting market. It is a 24-hour
market enabling it to accommodate constant changing world currency exchange
rates . According to New York time, trading begins at 2.15pm on Sunday in Sydney
and Singapore and progresses through to Tokyo at 7pm, London at 2am and reaches
New York at 8am. This leaves investors free to respond to global political,
economic and social events when they take place, day or night.

Unlike trading on the stock market, the forex market is not conducted by a
central exchange, but on the interbank market, which is thought of as an OTC
(over the counter) market. Trading takes place directly between the two
counterparts necessary to make a trade, whether over the telephone or on
electronic networks all over the world. The main centres for trading are Sydney,
Tokyo, London, Frankfurt and New York. This worldwide distribution of trading
centres means that the forex market is a 24-hour market.