FOREX is short for Foreign Exchange, but the class we refer to is Currencies. FOREX is the act of changing one Country’s Currency into another for a number of reasons, usually tourism or Commerce. Now that Currencies are allowed to float freely against one another, the values of individual Currencies have varied, which has given rise to the need for FOREX Services. This service has been taken up by the Commercial and Investment Banks on behalf of their clients,and has provided an environment for Trading one Currency against another on the internet.
There are two different features of Currency Trading.
1/ You can earn interest on the difference in value of Currencies.
2/ you can gain value on the exchange rate of different currencies.
Why we Trade Currencies
Until the Internet arrived Currency Trading was limited to Banks trading on behalf of their clients, but now with the Internet a retail market has emerged aimed at individual Traders, this has provided easy access to the FOREX markets, either through the banks or brokers making a secondary market.
Pros and cons of trading FOREX
If you intend to trade currencies the pros and cons of trading are as follows.
1 – The fOREX market is the largest in the world, and therefore offer the most liquidity, this means it is easy to enter and exit a position in any major currency in seconds.
2 – As mentioned in a previous blog FOREX Trades 24hours a day, so you can trade anywhere any time.
3 – Because Traders can enter or exit a trade Banks or brokers offer large Leverages, which means that a Trader can control quite large positions with little money of their own. Of course a Trader must understand the use and risk of Leveraging and the Trader has to be cautious or he could lose the trade.
FOREX as a Hedge.
Doing business in Foreign countries can be risky due to the ups and downs in the currency value,where they have to buy or sell goods and services to another country. So the FOREX market provide a way to hedge the risk by fixing a rate at which the transaction will be conducted at some time in the future.
So to do this a Trader can buy or sell currencies in the forward or swop markets, at which the bank will lock in a rate, so the Trader knows exactly what the exchange rate will be, and so lowers the risk.
The futures Market is conducted in a centralized exchange, and is less liquid than the Forward Markets ,which are decentralized and exist within the interbank system throughout the world.
What is Forex?
Foreign Exchange usually referred to as FOREX or FX is the exchange of one currency for another at an agreed exchange price on the [OTC] over the counter market. FOREX is the most traded market,with an average turnover of $4 Trillion per day! So basically you decide if a currency will fall [depreciate] or will rise [appreciate] against another currency.
If you think values will fall you go short [sell] If you think values will rise you go long [buy] So if you compare this to the NY Stock Market which has a turnover of around $50 billion its easy to see how the FOREX Market is the biggest in the world!
24 HOUR TRADING
One of the main reasons why FOREX is so popular is because the Markets are open 24 hrs per day. Monday morning in New Zealand, to the Asian Markets Tokyo, Soul, Singapore, then on to Europe and the UK, and closing in NY.
So Traders can trade 24/7 at any time that suits them. 24 hrs means that price gapping [when a price jumps from one level to the next without trading in between] is less and the Traders can take a position whenever they want.
FOREX is a leveraged Product, which means that you are only required to deposit a small amount of the full value of your position to place a trade. This means that the potential for profit or loss, from an initial outlay is much higher than normal Trading.
All FOREX is quoted in terms of one currency against another. Each currency has a base currency and a counter currency. The base currency is on the left, and the counter currency is on the right. For example in GPD/USD , GPD is the base currency and USD is the counter currency, so the price movements are caused by the currencies either appreciating in value [strengthening] or depreciating [weakening].
So if the price of GPD/USD was to fall this would mean that the counter currency [USD] was appreciating while the Base currency [GPD] was depreciating] So when Trading you would buy a currency pair if you thought the base currency will strengthen against the counter currency, or you would sell a currency pair if you thought the base currency would weaken against the counter currency.
Here are some examples of currency pairs.
GPD/USD [The value of one pound in US dollars.}
USD/EUR [The value of one Dollar in Euros ]
PIPS. [PERCENTAGE IN POINTS].
Most of the currency pairs are quoted in 5 decimal point places, with the change from the 4th decimal place [0.0001] in price commonly referred to as a “pip” So if the price of the EURO/USD moved from 1.33900 to 1.33920 it has climbed by 2 points.
The difference in the Bid/Ask of the currency pairs is called “Spread”Heres an example, EUR/USD 1.33801/ 1.338808[ in this case the spread is 0.7 pips or 0.00007.
The exception to this are the JPY pairs which are quoted to just 2 decimal places, a USA/JPY price of 97.40/97.44 displays a 4 pip spread.
FOREX PRICE EFFECTS
FOREX prices are affected by a range of different factors that come into play, from Recessions. International Trade, Political or Economic conditions. This is why the FOREX market is so exciting , nothing remains the same! High Market Liquidity means that prices can change very quickly, depending on the conditions. So this opens the door for opportunities for Traders.
- Political and Economic situations.
2. Monetary Policy.
3. Natural Disasters [Floods, Earthquakes,]
4. Currency Manipulation.
A warning, trading in the FOREX markets is high risk, and it is not suitable for everyone.