Foreign Exchange Trading Basics

Foreign exchange trading describes trading in various currencies of the world.It is the largest and least regulated market providing the greatest liquidity to investors.The spot foreign exchange 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,24hrs a day,directly between two parties of a trade over the telephone or electronically.Participants in foreign exchange include banks,corporate organizations,individual investors,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 markets participants.Trading or speculation makes up 95% of daily volume.The other 5% of daily volume consists of government and commercial companies converting one currency into another from buying and selling of 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,if 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.Most commonly traded currency(the majors) include;US Dollar,Japanese Yen,Euro,British Pound,Canadian Dollar,Australian Dollar,Swiss Franc.Commonly traded currency pair,and

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 to 1 monetary unit of exchange.For example,1 Dollar,1 Pound,1 Euro.The dominant base currencies are in order of frequency.When a currency is quoted against the US Dollar it is called a direct rate. Any currency not 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 US dollar/Japanese Yen at 1.20 says that for every 1 Dollar you get 1.20 Japanese Yen,while a quote for Australian Dollar/Japanese Yen 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 Euro/US Dollar at 0.97,you would be paying Dollars for Euros as follows:100,000 x 0.97=$97,000 for 100,000 Euros.Dominant base currencies are Euro,British Pound,US Dollar.

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