Foreign Exchange trading (also called Forex, FX, or currency trading) describes trading in the many currencies of the world. It is the largest and least regulated market providing the greatest liquidity to investors. Daily volume in the currency markets is around $5.2 trillion. By comparison, the NYSE daily volume averages $25 billion a day
The spot Forex market is the most liquid. Spot, meaning that trades are settled within two banking days. There is no central exchange of physical location. Trading takes place over-the-counter, 24-hours a day directly between the two parties of a trade over the telephone and electronically.
Participants in Forex include central banks, corporations, individual investors and speculators, and hedge funds. With the advent of electronic trading platforms, self-directed investors and smaller financial firms now have access to the same liquidity as larger market participants.
Trading, or speculation, makes up 95% of the daily volume. The other 5% of daily volume consists of governments and commercial companies converting one currency into another from buying and selling goods and services.
When trading currencies, the trade is always done in pairs - currency Pair. One currency is bought and the other sold. For example, you buy Euros with Dollars, anticipating, the Euro to increase in value relative to the Dollar. If the Euro rises relative to the Dollar, you sell the position and have made a profit.
When the United States went off the gold standard in 1971, national currencies became increasingly controlled by supply and demand. Volume of trading expanded, and volatility escalated. With the flourishing of the Internet and technology, capital flowed more freely from country to country, and continent to continent. Today, time zones are irrelevant. Forex trading follows the sun.
Known as the Interbank, the trading and exchange marketplace is over-the-counter. Telephone, computer, or Reuters do currency trading electronically. No such entity as a stock exchange exists in the world of spot Forex Trading. With over $5.2 trillion traded daily, foreign currency trading is the world's largest financial forum.
Globalization & Forex Trading
Buying and selling foreign currencies electronically in forex trading results in high liquidity. The marketplace is open 24 hours a day, from Sunday evening to Friday afternoon. With constant liquidity, the forex trader can respond instantly to any event in any country in the world. All the more reason for only very experienced investors to participate in the forex market, namely, those who understand and can interpret trading signals. Margined currency trading is among the most perilous of financial transactions. Only seasoned, knowing professionals should participate.
Successful, that is, profitable, currency trading demands careful attention to economic conditions and political decisions in countries worldwide. These matters affect the value of each national currency relative to other national currencies. Confidence in the country's policies and decisions is reflected in the buying and selling of its currency. A country's stability is a strong factor in the flow of foreign investment into its economy.
Most Commonly Traded Currencies (the “Majors”):
US Dollar (USD)
Japanese Yen (JPY)
British Pound (GBP)
Canadian Dollar (CAD)
Australian Dollar (AUD)
Swiss Franc (CHF)
Commonly Traded Currency Pairs:
US Dollar and the Japanese Yen (USD/JPY)
Euro and US Dollar (EUR/USD)
US Dollar and Swiss franc (USD/CHF)
British Pound and US Dollar (GBP/USD)
When quoting currency pairs, the first currency is referred to as the base currency and the second, the counter or quote currency. The base currency is always equal to 1 monetary unit of exchange, for example, 1 Dollar, 1 Pound, 1 Euro. The dominant base currencies are, in order of frequency, the EUR, GBP, and USD. When a currency is quoted against the US Dollar it is called a direct rate. Any currency not against the US Dollar is referred to as a cross rate.
The quote currency is translated into a certain number of units of the base currency. For example, a quote of USD/JPY at 1.20, says that for every 1 US Dollar, you get 1.20 Japanese Yen, while a quote for AUD/JPY of 67.73 says that for every 1 Australian Dollar, you get 67.73 Yen.
Currency pairs are generally traded as 100,000 units of the base currency. For example, if you were buying EUR/USD at .97 you would be paying Dollars for Euros as follows:
100,000 x .97 = $97,000 for 100,000 Euros
Dominant Base Currencies
Euro - EUR/USD, EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD
British Pound - GBP/USD, GBP/CHF, GBP/JPY, GBP/CAD
US Dollar - USD/CAD, USD/JPY, USD/CHF
Trading is a speculative endeavor that requires proper training and education, and should include strong discipline, risk management and money management skills. Just like in any market, the forces of supply and demand are at play. The emotional elements of greed and fear cannot be escaped. Have a plan that focuses on proper money and risk management techniques. Use stops to protect your money and minimize losses.
Make money in both directions, up or down. Unlike the equity market, there is no uptick rule that limits a traders ability to sell short. Short positions can easily be entered by hitting the bid and are part of most speculative trading strategies. There is equal opportunity to profit in up and down markets.
CFDs, which are leveraged products, incur a high level of risk and can result in the loss of all your invested capital. Therefore, CFDs may not be suitable for all investors. You should not risk more than you are prepared to lose. Before deciding to trade, please ensure you understand the risks involved and take into account your level of experience. Seek independent advice if necessary. Hastings Asset Management reserves the right to make a final determination on whether or not you are eligible for any particular product or service.
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