Foreign exchange trading is the simultaneous buying of one currency and selling of another. Examples of currency trading pairs are Euro/US Dollar (EUR/USD) and US Dollar/Japanese Yen (USD/JPY). Most currency transactions involve the „Majors” – US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.
Unlike most financial markets, the foreign exchange market has no physical location and no central exchange. The Forex market operates through an electronic network of banks, corporations and individual traders. Forex trading begins every day in Sydney, then moves to Tokyo, followed by London and then New York. The major market makers, or dealers, consist of the commercial and investment banks, the exchange traded futures, and registered futures commission merchants (FCMs).
Foreign Exchange Prices
Foreign exchange markets and prices are mainly influenced by international trade flows and investment flows. The FX markets are also influenced, but to a lesser extent, by the same factors that influence the equity and bond markets: economic and political conditions especially interest rates, inflation, and political instability. Those factors usually have only a short-term impact, which makes Forex attractive as it offers some of the diversification necessary to protect against adverse movements in the equity and bond markets.
Foreign Exchange prices, or quotes, include a „Bid” and „Ask” similar to other financial products:
Bid: Price at which Dealer is willing to Buy and Traders can Sell Currency
Ask: Price at which Dealer will Sell and Traders can Buy Currency
The difference between the Bid and Ask is called the „Spread”, which is the Trader’s cost of the transaction.
Currencies are usually quoted to four decimal places, such as the Euro/US Dollar trading at 1.2400/1.2403, with the last decimal place referred to as a point or „pip”. A pip for most currencies is 0.0001 of an exchange rate; the exception to this is all pairs that we offer with a JPY denominator have pips of .01.
Analysis of Foreign Exchange Markets
Foreign exchange traders generally fall into two groups and base their decisions on either technical analysis and fundamental analysis. Technical traders use charts, trend lines, support and resistance levels, mathematical models and other means to identify opportunities and drive trading decisions. Fundamental traders identify trading opportunities by analyzing economic information, such as interest rates, while others are long-term, buy and hold traders.