An introduction to Forex basics
Posted on April 8, 2008
Filed Under basics, forex |
The Foreign Exchange Market, sometimes called the “Forex” or even “FX” market, is the largest financial market in the world. On an average day, well over a trillion US dollars exchange hands, about 25 times as much as change hands in the US stock market daily. Unlike the stock markets, however, the FX market has no physical location or central point of exchange. It is a market where buyers and sellers conduct business “over-the-counter.” Buyers and sellers include banks, corporations and private and institutional investors.
The Forex market is a true 24-hour market. Trading begins each day in Sydney, Australia, and moves around the globe, to Toyko, London, and finally landing in New York. Since the market never closes, investors can respond to news, economic or geopolitical, at any time day or night. Because of this access, and the market’s huge size, it is difficult for governments and central banks to control the direction of the market. It also makes the market ideal for active traders.
It used to be that the forex market was closed to all but the biggest players. The moves were big, the action fast, and the dollar amounts out of the reach of the individual, and probably out of the reach of the big investor. However, in recent years, plenty of opportunities have opened for even retail investors to get in on the game. These platforms offer a gateway to the primary market, the Interbank.
In an FX trade, all currencies are priced in pairs. Each trade involves the simultaneous buying of one currency and selling of another. The point of trading currencies is to exchange one for another, with hopes that the market rate will move such that the new currency you hold is worth more than the one you just sold. Much like a stock, in order to actually realize a gain, you must resell your holding, and re-aquire your home currency. It is possible to have an “open” trade, that is, a trade where only the buy, or only the sell, has executed. This can be a risky proposition.
As will all markets, FX quotes are priced with a “bid” and an “ask.” The bid is the price the market maker is willing to buy the currency, relative to the other currency in the trading pair. The ask is the opposite, its’ the price that the market maker is willing to sell the base currency. The difference between the two is known as the spread.
Comments
Leave a Reply
