Foreign Exchange

Forex means nothing more than Foreign Exchange, the trade in foreign currencies. The Forex market is also known as the FX market. The Forex market is the place where currencies are bought and sold. The Forex market is open 24-hours a day, 5 days a week. The Forex market is based in four leading cities spread around the world:

New York
London
Sydney
Tokyo
The table below lists the most common currencies which are being traded in the Forex market. Behind every currency the correct abbreviation is given.

Currency Abbreviation
US dollar USD
Euro EUR
British Pound GBP
Japanese Yen JPY
Swiss Franc CHF
Canadian dollar CAD
Singapore dollar SGD
New Zealand Dollar NZD


Basics Forex trading
Foreign currencies are always traded in pairs. Example: (USD / EUR) (GBP / EUR) (JPY / USD) The first currency is called the 'base' currency, the second is called the 'counter' or 'quote' currency. When a pair is listed as: (EUR / USD) the Euro is the base currency and the US dollar is the counter currency.

The US dollar is a world leading currency, therefore it's listed as a base currency more than any other currency. Currencies are quoted in the following way:
EUR / USD 1.4958
This quotation means that 1 Euro can buy 1.4985 US dollar. If the base currency's value would rise in comparison with the counter value, one Euro could buy more US dollars. We call this an increasement of the quote. When the opposite would take place, it's what we call a decreasement of the quote.

Basic Forex terms
For people who are new to Forex we list some words of which you need to know the meaning before you start trading Forex.

Pip or point
Pip means Percentage In Point (PIP) also known as point. A pip is a rate's minimum price increasement in Forex trading. A pip of 0.0001 is most common. Sometimes quotes are abbreviated to the last two digits. A quote of 1.3594/1.3345 then will be abbreviated to 94 / 45
Ask price
The ask price is the price for which a particular currency can be bought. The ask price is the price for which the market is willing to sell the currency.
Bid price
The bid price is the price for which a particular currency can be sold. The market is willing to pay this price for this currency.
Spread
The spread is nothing more than the difference between bid and ask. To figure out the spread, just calculate the difference between the bid and ask price.
Currency rate
The rate of a particular currency valued against another currency rate

Managing a Margin Account

Trading on margin can be a profitable investment strategy, but it's important that you take the time to understand the risks.

You should make sure you fully understand how your margin account works. Be sure to read the margin agreement and talk to your account representative if you have any questions.


The positions in your account could be partially or totally liquidated should the available margin in your account fall below a predetermined threshold.


You may not receive a margin call before your positions are liquidated.

You should monitor your margin balance on a regular basis and utilize stop-loss orders on every open position to limit downside risk. In fact, most traders place a stop-loss order at the same time of the entry order to limit risk.

Understanding Margin

The margin deposit is not a down payment on a purchase of equity, as many perceive margins to be in the stock markets. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value. Forex.ca’ s online trading platform has margin management capabilities, which allow for this high leverage.

In the event that funds in the account fall below margin requirements, the Dealing Desk will close all open positions. This prevents clients' accounts from falling into a negative balance, even in a highly volatile, fast moving market.



Trading currencies on margin lets you increase your buying power. Here's a simplified example: If you have $2,000 cash in a margin account that allows 100:1 leverage, you could purchase up to $200,000 worth of currency-because you only have to post 1% of the purchase price as collateral. Another way of saying this is that you have $200,000 in buying power.



With more buying power, you can increase your total return on investment with less cash outlay. To be sure, trading on margin magnifies your profits AND your losses.



Here's a hypothetical example that demonstrates the upside of trading on margin:



With a US$5,000 balance in your margin account, you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF).

To execute this strategy, you must buy Dollars (simultaneously selling Francs), and then wait for the exchange rate to rise.

The current bid/ask price for USD/CHF is 1.2322/1.2327 (meaning you can buy $1 US for 1.2327 Swiss Francs or sell $1 US for 1.2322 francs)

Your available leverage is 100:1 or 1%. You execute the trade, buying a one lot: buying 100,000 US dollars and selling 123,270 Swiss Francs.

At 100:1 leverage, your initial margin deposit for this trade is $1,000. Your account balance is now $4000.

As you expected, USD/CHF rises to 1.2415/20. You can now sell $1 US for 1.2415 Francs or buy $1 US for 1.2420 Francs. Since you're long dollars (and are short francs), you must now sell dollars and buy back the francs to realize any profit.



You close out the position, selling one lot (selling 100,000 US dollars and receiving 124,150 CHF) Since you originally sold (paid) 123,270 CHF, your profit is 880 CHF.



To calculate your P&L in terms of US dollars, simply divide 880 by the current USD/CHF rate of 1.2415. Your profit on this trade is $708.82

Understanding Forex Quotes

Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things:
1) The first currency listed is the base currency and
2) the value of the base currency is always 1.

The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 120.01 means that one U.S. dollar is equal to 120.01 Japanese yen.

When the U.S. dollar is the base unit and a currency quote goes up, it means the U.S. dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 123.01, the dollar is stronger because it will now buy more yen than before. The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.4366, meaning that one British pound equals 1.4366 U.S. dollars. In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR

What is the Forex Market

The Foreign Exchange market is also referred to as the "Forex", "FX" market, "Cash" Forex and Spot Forex market and is the largest financial market in the world, with a daily average turnover of well over US$1 trillion -- 30 times larger than the combined volume of all U.S. equity markets.

"Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation. And that's where Forex.ca can help!

For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.



Forex trading is a 24 hour market and begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.



The Cash Forex market is considered an Over The Counter (OTC) or 'interbank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Forex trading is not centralized on an exchange like the stock and futures markets.

Learn forex Trading

Learn Forex Trading

In order to better understand Forex, please read the following article explaining basic and fundamental information about specifics of the Forex market.

CURRENCY PAIR

Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.

The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 120.01 means that one U.S. dollar is equal to 120.01 Japanese yen.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 123.01, the dollar is stronger because it will now buy more yen than before.

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.4366, meaning that one British pound equals 1.4366 U.S. dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.

In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.

When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).

PIP

Learn to love this word, because this is what you will be seeking for the rest of your forex career. A pip is the smallest denominator of a particular currency pair, so for the above example, if the EUR/USD moves from 1.2150 to 1.2155 then it has moved up 5 pips.

LEVERAGE

Leverage is a simple concept. If you have $10,000 to trade with, your forex broker will let you borrow money from him so that you can trade in larger quantities. They will let you borrow as much as 400 times (400:1) what you put up in a trade. Most brokers allow between 50:1 and 100:1 margin. So, if you put up $1,000, and your broker allows 100:1 margin, then you’ll be trading $100,000 worth of currency (instead of $1,000).

That’s important, because every pip equals a certain dollar amount. When you trade $10,000, each pip movement equals $1. The chart below shows how it goes from there. If you trade 10,000 worth of currency, each movement would be equal to $1. So if you bought at 1.1445 and sold at 1.1545, you would make 100 x $1, or $100. If you trade $100,000, each pip movement would equal $10 and so on.

forex online

The Foreign Exchange, often referred to as the Forex or FX, is the world’s largest financial market, with approximately 3 trillion dollars traded daily.

The “goods” traded are currencies of various countries, with the majority of the action involving the so-called majors currencies: the United States dollar (USD), the European euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP), the Swiss franc (CHF) and the Australian dollar (AUD). Gold and silver are also popular trading instruments. With the explosion of internet usage, the Forex market has become accessible to almost everyone.

Leverage

Because of the Foreign Exchange’s relatively volatile nature, and the corresponding potential for very high profit, investing in the Forex market might be considered a form of speculation. The highly leveraged financing commonly offered by Forex operators allows traders extremely high potential profits with a comparably small amount of capital investment.

In Forex, clients are offered leverage as high as 1:200, so the client must invest, in this case, only 1/2 percent of the position they would like to buy. In practice, the trader uses a credit, and covers only the risk of the operation (the percentage of presumed currency volatility).

For example, suppose a trader utilizes a 100:1 leverage, and buys a contract valued at $100,000 with an investment of $1,000. With a 1% increase in the position, the trader would make a profit of $1000, or a 100% return on investment.

Spread

Obviously, brokerages make a commission for every trade executed, which is generally factored into the prices quoted in the form of a “pip spread”. This cost is very small, usually 0.0003 of a unit or, in Forex lingo, three pips. Three pips is equivalent to three-hundredths of one penny. Of course, when trading extremely large amounts of currencies, this can add up.

For example, if a currency pair is quoted as EUR/USD 1.4000/1.4003, the price at which a broker will sell (Ask) one EUR is 1.4003 USD, while the price at which a broker will buy (Bid) one EUR is 1.4000 USD. The price difference is the broker’s profit. With such a pip spread, the cost of buying one lot (USD 100,000) would be USD 30.

Of course, a lower spread is better for the client. If the position above increases by 10 pips, to 1.4010/1.4013, a trader would earn seven pips, having bought the position at 1.4003 (broker’s selling price), and selling at 1.4010 (broker’s buying price).

Internet Forex Platforms

Today, anyone with an Internet connection can exploit the Forex market utilizing Forex trading platforms, computer applications that enable you — in few simple steps — to buy and sell currencies. These online brokerages provide trader’s the real time information needed to make informed decisions, and the technology to instantly execute trades.

This site offers useful information about the Forex market, helping you gain the practice, information and knowledge necessary to become a successful trader.

Forex marketing&Trading

Unlike stock markets, where investors have access to the same prices, the Forex market is divided in different access levels. What does this mean? According to their financial position, main players have different functions and privileges. Above all levels is the inter-bank market. Here, governments, central banks and important financial institutions are given the opportunity to trade their own currencies. Within this inner circle, the spread, which is the difference between bids and asking prices, is extremely low and convenient and unavailable to players outside this market; such as retail investors, small trading parties and speculators.

As we descend access levels, spreads widen. In order to gain better spreads, participants need to guarantee large numbers of transactions, while investing large amounts of money. The more you have the more you get! The more money that is traded on Forex, the bigger the size of the market line. As we move from a higher level to a lower one, the line gets smaller and the spread higher.

It sounds all pretty complicated which is why Forex should be studied before you enter into it, familiarize yourself with all the terminology and of course find a reputable broker with whom you can explain what your expectations are. High gains usually means higher risk, slower long term gains mean a long term commitment and more gradual increments of growth.

The top inter-bank Forex market accounts for half of all world transactions and the remainder is carried out by the lower levels: investment banks, large multi-national corporations, large hedge funds and retail Forex – metal market makers. Since 1999, the year in which the Euro was created, many banks trade in the Euro with the US dollar losing its position as the centre of market exchange with new growing economies in China and Asia.

The Forex exchange rates or trading rates mainly depend on the supply and demand for any given currency. These important factors change rapidly and constantly, according to the economical and political situation of different countries. Political instability in fact will have a negative impact on the nations’ economy as will a country’s export deficit.

The Forex market reflects a lot on what goes on both politically and economically in the world at any given moment and can often be the precursor in foreseeing the development of future global events. Forex trading is instantaneous and with the advent of the internet it has become accessible to anyone with a computer and a fast internet connection.

forex market

The Forex market was founded in 1971.

The main principle of forex is converting one currency into another. Even if you compare it to the turnover of the American equity exchange (300 billion dollars a day) and to the turnover of the stock market (10 billion dollars a day), the volume of currency Forex operates with will seem really huge. As registered by Wall Street Journal, in September, 1992 this amount was about a trillion dollars a day. Nowadays, the turnover of Forex is from 1 to 1,5 trillion dollars a day.

The main thing in the Forex is that dollar competes with four main currencies: British pound sterling, Japanese yen, Swiss franc and Euro. Government and commercial banks, corporations, brokers and other financial organizations are involved into operations on the forex market in the first place. Most active participants are brokers.

Forex is not a usual market. It has no single center. Today, trading on this market is carried out with the help of telephones and computer terminals. So what is the Forex market in comparison with a regular foreign exchange?

It is really important for a potential investor to know the difference between the Forex foreign exchange market and operations at a regular foreign exchange. In case with a foreign exchange, the total sum of each contract is always known in advance. Exchange traders at foreign exchanges use "performance bond" or "margin" to control exchange contracts ("margin" means money deposited by the buyer or the seller while making a contract). However, as to liquidity on such a market, foreign exchanges seems to be rather limited because the information flow stops when the exchange is closed at the end of each day (the same as at a stock exchange), which interrupts the continuity of your evaluations and your staying in touch with the market. This fact makes a lot of traders worry. For example, if important data are coming from England and Japan while the American foreign exchange is already closed, a trader will lack the information necessary to successfully start trading the next day.

Unlike foreign exchanges, trading at the Forex market is held 24 hours a day and never stops. In all time zones in any of the world's major trading centers (London, New York, Tokyo, Hong Kong, Sydney, etc.) there are dealers ready to give you the opportunity to start trading in both directions. It was mentioned above that the turnover of this market is from 1 to 1.5 trillion dollars a day and this fact gives the market virtually unlimited liquidity. Due to its huge daily turnover and permanent purchasing power, the Forex market has no match in the entire world regarding its dynamic and tension.

What makes the market move? Among the main factors influencing currency exchange rates there are balance of mutual payments, economic condition, forecasts based on technical analysis graphs, as well as political and psychological factors.

The movement of capital between countries can be considered as the main factor determining the current state of the market. Besides, such factors as inflation and discount rates can also considerably influence currency exchange rates. At the same time, there is no doubt that another important fact is that there is always a ceratin state behind each currency. There are two ways states can control the market. The first one is just control and the second one is the so-called intervention. Currency control prevents citizens from doing anything that can have a negative influence on the exchange rate (for example, transferring money abroad). In the first place, intervention means changing the discount rate, which makes the currency more or less attractive for foreigners. And second, it means selling or buying the currency in order to increase or reduce its cost on the market.

All the factors mentioned above may cause sudden and often dramatic changes on the market if some unexpected and considerable changes occur in them. This is the main reason accounting for the fact that sometimes the anticipation of some economic changes alone exerts much more influence on the exchange rate than actual events. The activities of large financial funds also influence the market greatly. Though all of them can make moves on their own, they are at least well aware about all the peculiarities in the changes of exchange rates for each main currency. When the graph describing how some exchange rate floats reaches some node point, the market behavior becomes technically predictable and, therefore, managers of major financial funds react in a predictable way, which often means the same or similar way. As a result, there is a sudden and powerful upsurge in prices and large financial volumes get invested into the same positions.

Recently, professional investors have considerably increased the level of participating in Forex. Together with a constantly increasing number of private individual investors, it makes the Forex market a dynamically developing one.

Currency Trading News & Analysis

Having already lowered interest rates essentially to zero, the Fed has announced that it will now focus on ‘quantitative easing,’ a fancy way of saying that it intends to turn on the printing presses. It will purchase over $1 Trillion in credit instruments, split between Treasury securities and Mortgage-backed debt, expanding its balance sheet to $3 Trillion. This should (temporarily) put an end to speculation over whether foreign Central Banks are still willing to finance the US debt, as this question is now moot, since the Fed has demonstrated its willingness to fulfill that role. “The Fed is basically financing our deficit by buying the debt issued by the Treasury. If the Obama administration pushes through another stimulus package, the dollar is done.”

When the news was announced, the Dollar plummeted by 2.7%, the highest daily margin since 1971, as traders mulled the inflationary implications of printing over $1 Trillion and injecting it directly into the money supply, with the potential of more to come. Wrote one analyst, “Interest rates now are effectively negative across the board. The dollar is selling off because this may contribute to long-term weakness in the currency.”
dollar-collapses

Unfortunately for the Fed and the Dollar, the last few weeks have witnessed a slight pickup in risk tolerance, as investors began to focus more on fundamentals. If this development took place in the deepest chasm of the credit crisis, investors might have been willing to look the other way, but now they are very concerned that a huge expansion of the US monetary supply could trigger long-term inflation. A less pessimistic way of looking at the Dollar sell-off would be to attribute it to investor confidence that the Fed plan will help revive the global economy, decreasing the appeal of the US as a safe haven for investing.

Whether this will push the Dollar down further towards the $1.40 range depends on a couple factors. First of all, will other Central Banks follow suit? “All the major central banks may end up in the same position. The way we look to play it is to see which goes the first and which one lags, and try to explore the timing difference between the two,” explained one analyst. If this proves to be the case, investors will once again focus on the “least worst” currency, in which case the Dollar could once again come out on top.

It also depends on whether this action is intended as a quick fix, or as part of a series of purchases by the Fed. “Sell the dollar!” said…a portfolio manager. “This is huge, huge. It’s equivalent to the Plaza accord. This is the last thing theyhave in the closet, and they used it a bit early.”