Introduction Forex

The 1971 abandonment of the Bretton Woods Accord and the subsequent unwinding of the system of fixed exchange rates gave rise to the foreign exchange market as we know it today.

Forex refers to the foreign exchange market, where brokerage firms and banks are connected over an electronic network that allows them to convert the currencies of countries around the globe.

The forex market is the largest and most liquid financial market in the world. The daily dollar volume of currencies traded in the currency market exceeds $1.9 trillion, many times larger than the combined volume of all U.S. equities and futures markets.

While forex trading used to be executed exclusively between government central banks and commercial and investment banks, trading forex has become increasingly accessible to private investors thanks to the PC and internet.

The most commonly traded currencies are the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. The FX market runs 24-hour hours a day, 5 days a week with continuous access to global dealers. Trading is not centralized on a physical location or an exchange, as with the stock and futures 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).

For example, you would execute a trade when you expect the currency you are buying to increase relative to the one you are selling. If the currency you are buying increases in value, you must sell the other currency to close the position and take a profit. The first currency in the pair is called the base currency and the second is called the counter or quote currency. Usually the US currency is the base currency and quotes are given in $1 USD per counter currency, e.g. USD/JPY. The exceptions are the British Pound, the Euro and the Australian Dollar.

Understanding forex quotes: 1 unit of the base curreny = the exchange rate in the quote currency. Eg if EUR/USD is trading at 1.2762, 1 Euro will buy you 1.2762 Dollars.

Understanding contract size in forex trading: The contract size is normally a lot of 100,000. This means per standard contract you are controling 100,000 units of the base currency. For this contract size, each pip (the smallest price increment) is worth $10. Many firms offer mini accounts now where you can trade units of 10,000, where the pip value is $1.

Trading the Forex market allows very low margin requirements relative to other markets.

Learn How To Read Forex Quote

Forex is an abbreviated name for "foreign exchange." The Forex market is a non-stop cash market where the currencies of nations are bought and sold, typically via brokers. For example, you buy Euros, paying with U.S. Dollars, or you sell Euros for Japanese Yen.The value of your Forex investment increases or decreases because of changes in the currency exchange rate or Forex rate. These changes often result from economic and political factors, such as the price of oil or political unrest. To better understand how the exchange rate can affect the value of your Forex investment, this article shows you how to read a Forex quote.Forex quotes are always expressed in pairs. In the following example, your "pair" of currencies are the U.S. Dollar (USD) and the Euro (EUR). The Forex quote, USD/EUR = 265.50, means that one U.S. dollar is equal to 265.50 Euros. The currency to the left of the / (USD in this case) is referred to as base currency and its value is always 1. The currency to the right of the / (EUR in this case) is referred to as the counter currency. In this example, one USD can buy 265.50 EUR, since it is the stronger of the two currencies.Because the U.S. dollar is regarded as the central currency of the Forex market, it is always treated as the base currency in any Forex quote where it is one of the pairs. Incidentally, the U.S. Dollar is involved in nearly 90% of all Forex transactions.In this example, your "pair" of currencies are the Japanese Yen (JPY) and the Euro (EUR). The Forex quote, JPY/EUR= 175.10, means that one Japanese Yen is equal to 175.10 Euros. The currency to the left of the / (JPY in this case) is referred to as base currency and its value is 1. The currency to the right of the / (EUR in this case) is referred to as the counter currency. In this example, one JPY can buy 175.10 EUR, since it is the stronger of the two currencies.The goal of any Forex trading system is to profit from foreign currency movements. This requires adequate training in basic Forex principles, such as performing a Technical Analysis, using Forex charts and Stop/Loss tools, and keeping up-to-date with economic and political events. In a sense, Forex training never ends.

About Forex

The Forex market is a cash inter-bank or inter-dealer market established in 1971 when floating exchange rates began to materialize. Today, the exchange of currency has expanded from trading floors to home computers. The simplest definition of foreign exchange is the changing of one currency to another, and, unlike the stock market, one may earn profits whether buying or selling within the currency exchange. In comparison to the daily trading volume averages of $300 billion in the U.S. Treasury Bond market and the less than $10 billion exchanged in the U.S. stock markets, the Forex market is huge. Currently there is often an average of 3.5 trillion levels exchanged daily.

The most important foreign exchange activity is the spot business between the dollar and the four major currencies (Euro, British Pound, Swiss Franc and Japanese Yen). Activity within the market is created by six main groups: central banks, commercial banks, other financial institutions, corporate customers, brokers and independent currency traders who have established home-based businesses.

Forex is not a "market" in the traditional sense. There is no centralized location for trading activity as there is in currency futures. Trading occurs over the telephone and through computer terminals at thousands of established locations, as well as within home-based trading businesses worldwide.