Foreign Exchange (FOREX), Forex trading, or Fx trading is nothing more than direct access trading of different types of foreign currencies. The foreign exchange market is the largest and most liquid financial market in the world. According to the data from Bank for International Settlements released on September 25, 2007, currency trading volumes have reached to $3.2 trillion changing hands daily; more than the aggregate amount of the US Equity and Treasury markets combined. Unlike other financial markets, the forex market has no physical location and no central exchange (off-exchange). It operates through a global network of banks, corporations and individuals trading currency by buying one and selling another. The lack of a physical exchange enables the forex market to operate on a 24-hour basis, spanning from one zone to another in all the major financial centers. The fact is that the foreign exchange market never stops, even on September 11, 2001 you could still get your hands on two-side quotes on currencies.

The forex market is opened 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - across almost every time zone. This means that when the trading day in the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly. Extreme liquidity and the availability of high leverage have helped to spur the market’s rapid growth and made it the ideal place for many forex traders. Positions can be opened and closed within minutes or can be held for months.

In the past, foreign exchange trading was mostly limited to large banks and institutional traders and not available to small currency traders because of the large minimum transaction sizes and strict financial requirements. However, recent technological advancements have allowed foreign exchange market brokers to be able to break down the larger sized inter-bank units, and offer small traders the opportunity to make money by buying or selling any number of these smaller units. Forex traders can now take advantage of the many benefits of forex trading just by using the various online forex trading platforms to trade forex online.

Forex trades can be placed through a forex broker or market maker, and will be the couples, for example the Euro and the U.S. Dollar (EUR / USD), or the Great British Pound and the Japanese Yen (GBP / JPY). If you purchase, for example, the U.S. Dollar, you believe that the health of U.S economy is doing well and expect the currency to appreciate against the other currencies. About 85 percent of all daily transactions involve trading of the four major currency pairs. They are: Euro against U.S. dollar, U.S. dollar against Japanese yen, Great British Pound against U.S. dollar, and US dollar against Swiss franc.

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The most common increment of currencies is the PIP. If the EUR/USD moves from 0.9550 to 0.9551 that is one Pip. A pip is the last decimal place of a quotation. The Pip or POINT as it is sometimes referred to depending on context is how we will measure our profit or loss.

As each currency has its own value it is necessary to calculate the value of a pip for that particular currency. We also want a constant so we will assume that we want to convert everything to US Dollars. In currencies where the US Dollar is quoted first the calculation would be as follows.

Example JPY rate of 116.73 (notice the JPY only goes to two decimal places, most of the other currencies have four decimal places)

In the case of the JPY 1 pip would be .01 therefore

USD/JPY: (.01 divided by exchange rate = pip value) so .01/116.73=0.0000856 it looks like a big number but later we will discuss lot (contract) size.

USD/CHF: (.0001 divided by exchange rate = pip value) so .0001/1.4840 = 0.0000673

USD/CAD: (.0001 divided by exchange rate = pip value) so .0001/1.5223 = 0.0001522

In the case where the US Dollar is not quoted first and we want to get to the US Dollar value we have to add one more step.

EUR/USD: (0.0001 divided by exchange rate = pip value) so .0001/0.9887 = EUR 0.0001011 but we want to get back to US Dollars so we add another little calculation which is EUR X Exchange rate so 0.0001011 X 0.9887 = 0.0000999 when rounded up it would be 0.0001.

GBP/USD: (0.0001 divided by exchange rate = pip value) so 0.0001/1.5506 = GBP 0.0000644 but we want to get back to US Dollars so we add another little calculation which is GBP X Exchange rate so 0.0000644 X 1.5506 = 0.0000998 when rounded up it would be 0.0001.

By this time you might be rolling your eyes back and thinking do I really need to work all this out and the answer is no. Nearly all the brokers you will deal with will work all this out for you. They may have slightly different conventions but it is all done automatically. It is good however for you to know how they work it out. In the next post we will be discussing how these seemingly insignificant amounts can add up.

The word FOREX is derived from Foreign Exchange and is the largest financial market in the world. Unlike many markets the FX market is open 24 hours per day and has an estimated $1.2 Trillion in turnover every day. This tremendous turnover is more than the combined turnover of all the wordls’ stock markets on any given day. This tends to lead to a very liquid market and thus a desirable market to trade.

Unlike many other securities (any financial instrument that can be traded) the FX market does not have a fixed  exchange. It is primarily traded through banks, brokers, dealers, financial institutions and private individuals. Trades  are executed through phone and increasingly through the Internet. It is only in the last few years that the smaller investor has been able to gain access to this market. Previously the large amounts of deposits required precluded the smaller investors. With the advent of the Internet and growing competition it is now easily in the reach of most investors.

You will often hear the term INTERBANK discussed in FX terminology. This originally, as the name implies was simply banks and large institutions exchanging information about the current rate at which their clients or themselves were prepared to buy or sell a currency. INTER meaning between and Bank meaning deposit taking institutions normally made up of banks, large institution, brokers or even the government. The market has moved on to such a degree now that the term interbank now means anybody who is prepared to buy or sell a currency. It could be two individuals or your local travel agent offering to exchange Euros for US Dollars. You will however find that most of the brokers and banks use centralized feeds to insure reliability of quote. The quotes for Bid (buy) and Offer (sell) will all be from reliable sources. These quotes are normally made up of the top 300 or so large institutions. This insures that if they place an order on your behalf that the institutions they have placed the order with is capable of fulfilling the order.

Now although we have spoken about orders being fulfilled, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words the person or institution that bought or sold the currency has no intention of actually taking delivery of the currency. Instead they were solely speculating on the movement of that particular currency.