The purpose of this ebook is to introduce the forex market to you. As with many markets there are many derivatives of the central market such as futures, options and forwards. In this book we will only be discussing the main market, sometimes referred to as the Spot or Cash market. The word FOREX is derived from the term Foreign Exchange and is the largest financial market in the world. Unlike many other markets the FX market is open 24 hours a day and has an estimated $1.2 Trillion in turnover every day. This tremendous turnover is more than the combined turnover of the main worlds' stock markets on any given day. This tends to create a very liquid market and thus a very desirable market to trade. Unlike many other securities, (any financial instrument that can be traded) the FX market does not have a fixed exchange. It is primarily traded through banks, brokers, dealers, financial institutions and private individuals. Trades are executed through telephonic communications and now increasingly through the Internet. It is only in the last few years that the smaller investor has been able to gain access to this market. Previously the large deposits that were required precluded the smaller investors but with the advent of the Internet and growing competition, it is now easily within reach of most investors. INTERBANK You will often hear the term INTERBANK discussed in FX terminology. This originally, as the name implies, was simply banks and large institutions exchanging information about the current rate at which their clients or themselves were prepared to buy or sell a currency. Sure-Fire Forex Trading ‘INTER’ meaning between and ‘Bank’ meaning any deposit taking institution. The market has moved on to such a degree that now the term interbank means anybody who is prepared to buy or sell a currency. It could be just two individuals changing currencies or your local travel agent offering to exchange Euros for US Dollars. You will however find that most of the brokers and banks use centralized feeds to insure reliability of quote. The quotes for Bid (buy) and Offer (sell) will all be from reliable sources. These quotes are normally made up of the top 300 or so large institutions. This ensures that if they place an order on your behalf, the institutions they have placed the order with will be capable of fulfilling the order. Now although we have spoken about orders being fulfilled, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words the person or institution that bought or sold the currency has no intention of actually taking delivery of the currency. Instead they were solely speculating on the movement of that particular currency. Source: Bank For International Settlements .Extract From The Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity. Currency 1989 1992 1995 1998 2001 US Dollar 90 82.0 83.3 87.3 90.4 Euro 37.6 Japanese Yen 27 23.4 24.1 20.2 22.7 Pound Sterling 15 13.6 9.4 11.0 13.2 Swiss Franc 10 8.4 7.3 7.1 6.1 As you can see from the above table, over 90% of all currencies are traded against the US Dollar. The four next most traded currencies are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc (CHF).Sure-Fire Forex Trading Because currencies are traded in pairs and exchanged one for the other when traded, the rate at which they are exchanged is called the exchange rate. These four currencies traded against the US Dollar make up the majority of the market and are called major currencies or the majors. Market Mechanics So now we know that the FX market is the largest in the world. Your broker or the institution that you are trading with is collecting quotes from a centralized feed and/or individual quotes comprising of interbank rates. So how are these quotes made up? Well, as we previously mentioned, currencies are traded in pairs and are each assigned a symbol. For the Japanese Yen it is JPY, for the Pounds Sterling it is GBP, for Euro it is EUR and for the Swiss Frank it is CHF. So, EUR/USD would be the Euro-Dollar pair. GBP/USD would be the Pounds Sterling-Dollar pair and USD/CHF would be the Dollar-Swiss Franc pair and so on. You will always see the USD quoted first aside for a few exceptions such as Pounds Sterling, Euro Dollar, Australia Dollar and New Zealand Dollar. guide to technical Analysis
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