Forex is the largest market in the world. Forex traders exchange $4 trillion each day, but are forex the best market for you? The answer depends on what you are looking for. If you want a market that never sleeps, if you want the opportunity to trade at any time of the day, if you would like to make a boatload of money in a short amount of time, forex may be for you (it should be noted that you may also lose an incredible amount of money in a short amount of time).
What is Forex Trading?
The foreign exchange market is the “place” where currencies are traded. Currencies are important to most people around the world, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in Euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into Euros. The same goes for traveling. A French tourist in Egypt can’t pay in Euros to see the pyramids because it’s not the locally accepted currency. As such, the tourist has to exchange the Euros for the local currency, in this case the Egyptian pound, at the current exchange rate.
“Forex” is simply an abbreviation for “foreign exchange.” All foreign exchange transactions involve two currencies.
The foreign exchange market most often called the forex market, or simply the FX market is the most traded financial market in the world.
The participants of the Forex market include banks, corporations, institutional investors, hedge funds and individuals. In simple terms Forex trading is where you can buy and sell currencies, simultaneously. The way it works is much like the process of currency exchange at airports or hotels where you can exchange the currency you deal with for the local currency.
The Forex market is open 24 hours a day 5 days a week, enabling traders to buy and sell around the clock acting on global news events as they happen.
How Currencies Are Traded ?
An example may be helpful to illustrate how currencies are traded. If you are a hotshot forex trader, and you believe that the EUR/USD is going to go up, you may decide to buy the EUR/USD. Thus, you think that the Euro currency will get stronger, and the U.S. dollar will weaken. You are buying the EUR/USD currency pair, another way to look at this is to say you are buying Euros and simultaneously selling U.S. dollars. The unique (and often difficult to understand) aspect of forex trading to keep in mind is this: Each forex transaction involves the buying of one currency pair and simultaneously the selling of another currency pair.
Liquidity refers to the level of market interest the level of buying and selling volume available at any given moment for a particular asset or security. The higher the liquidity, or the deeper the market, the faster and easier it is to buy or sell a security.
The Open Time of the Trading Week
There is no officially designated starting time to the trading day or week, but for all intents the market action kicks off when Wellington, New Zealand, the first financial center west of the international dateline, opens on Monday morning local time. Depending on whether daylight saving time is in effect in your own time zone, it roughly corresponds to early Sunday afternoon in North America, Sunday evening in Europe, and very early Monday morning in Asia.
The Sunday open represents the starting point where currency markets resume trading after the Friday close of trading in North America (5 p.m. Eastern time). This is the first chance for the forex market to react to news and events that may have happened over the weekend. Prices may have closed New York trading at one level, but depending on the circumstances, they may start trading at different levels at the Sunday open.
|Forex Market Center||Time Zone||Opens Asia/Calcutta||
|Frankfurt – Germany||Europe/Berlin||12:30 PM||08:30 PM|
|London – Great Britain||Europe/London||01:30 PM||09:30 PM|
|New York – United States||America/New_York||06:30 PM||02:30 AM|
|Sydney – Austrailia||Australia/Sydney||02:30 AM||10:30 AM|
|Tokyo – Japan||Asia/Tokyo||04:30 AM||12:30 PM|
What are Technical Indicators?
Indicators are simply another way of looking at a market price. In much the same way that it is possible to examine the speed of a car in many different ways, it is possible to examine price charts in many different ways, with indicators. Just for a moment, consider how many different ways you may measure the speed of a car:
- Measured in kilometers per hour.
- Measured in miles per hour.
- Measured in the time it takes to travel one mile.
- Measured by the time it takes to accelerate to 60 mph.
- Measured by how quickly the car can stop.
Likewise, there are many ways to look at price on a chart. There are more technical indicators than telephone call centers in India.
Other Financial Markets
Some of the other key financial markets
Reading a Forex Quote
When a currency is quoted, it is done in relation to another currency, so that the value of one is reflected through the value of another. Therefore, if you are trying to determine the exchange rate between the U.S. dollar (USD) and the Euro (EUR), the forex quote would look like this:
EUR/USD = 1.1950
This is referred to as a currency pair. The currency to the left of the slash is the BASE currency, while the currency on the right is called the QUOTE or counter currency. The base currency (in this case, Euros) is always equal to one unit (in this case, Euro €1), and the quoted currency (in this case, the U.S. dollar) is what that one base unit is equivalent to in the other currency. The quote means that Euro €1 = 1.1950 U.S. dollar. In other words, Euro €1 can buy 1.1950 U.S. dollar.
Direct Currency Quote vs. Indirect Currency Quote
There are two ways to quote a currency pair, either DIRECTLY or INDIRECTLY. A direct currency quote is simply a currency pair in which the domestic currency is the base currency (Direct); while an indirect quote, is a currency pair where the domestic currency is the quoted currency (Indirect).
So if you were looking at the Euros as the domestic currency and U.S. dollar as the foreign currency, a direct quote would be EUR/USD, while an indirect quote would be USD/ EUR. The direct quote varies the foreign currency, and the quoted, or domestic currency, remains fixed at one unit. In the indirect quote, on the other hand, the domestic currency is variable and the foreign currency is fixed at one unit.
For example, if Euro is the domestic currency, a direct quote would be 1.1950 EUR/USD, which means with E€1, you can purchase US$1.1950. The indirect quote for this would be the inverse
When a currency quote is given without the U.S. dollar as one of its components, this is called a CROSS currency. The most common cross currency pairs are the EUR/GBP, EUR/CHF and EUR/JPY.
Bid and Ask
Bid Price (Buy). Buying means going long.
Ask Price (Sell). Selling means going short.
The bid price is used when selling a currency pair (going short).
Currency Quote Overview
USD/CAD = 1.2232/37
Base Currency : Currency to the left (USD)
Quote/Counter Currency : Currency to the right (CAD)
Bid Price : 1.2232
Price for which the market maker will buy the base currency. Bid is always smaller than ask.
Ask Price : 1.2237
Price for which the market maker will sell the base currency.
Pip : One point move, in USD/CAD it is .0001 and 1 point change would be from 1.2231 to 1.2232 The pip/point is the smallest movement a price can make.
Spread : Spread in this case is 5 pips/points; difference between bid and ask price (1.2237-1.2232).
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