Currency Description

The world's currencies are on a floating exchange rate and are always traded and quoted in pairs. The most often traded currencies are those of countries with relatively stable governments, respected central banks, and low inflation. The major currencies in today’s market are - US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

The first listed currency is known as the base currency (With a value of 1), while the second is called the counter or quote currency; If a trader buys a EUR/USD position for example, he/she has bought the base currency, EURO and simultaneously sold USD, believing that the base currency in this case, EURO, will increase in value. (If a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening).

Currency pairs that do not involve the U.S. dollar are called cross currencies, but they are valued the same. Currency pairs are quoted either Direct (GBPUSD, EURUSD, AUDUSD, NZDUSD), Inverse (USDJPY, USDCHF, USDCAD, USDZAR) or Cross (EURGBP, EURJPY, EURCHF, GBPCHF, GBPJPY, CHFJPY) rate terms.

A forex quote will include a “Bid / Ask” spread; the 'bid' is the price at which you can sell the base currency (At the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (At the same time selling the counter currency).

The calculation of the value of a single PIP (The movement unit of a currency pair), a trader will utilize the following methods:

• For a Direct Quote, the PIP Value = Lot Size X Tick Size, where Tick size is the smallest possible change in price.
• For an Inverse Quoted currency pair, the PIP Value = (Lot Size X Tick Size) / Current Quote
• For Cross Quotes, the PIP Value = (Lot Size X Tick Size X Base Quote) / Current Quote where the Base Quote is the current Base Pair quote.

Exchange rate quotes are given as five digit numerals. For example, USDJPY = 108.25 signifies that US$1 equates to 108.25 Yen, and EURUSD = 1.2525 signifies that 1 EURO equates to US$1.2525.

For a quote expressed as AAABBB = C, 1 Unit of AAA = C Units of BBB.

Symbol		Currency Pair		Nickname
EURUSD		Euro / US Dollar		"Euro"
EURGBP		Euro / British Pound		"Euro Sterling"
EURJPY		Euro / Japanese Yen		"Euro Yen"
EURCHF		Euro / Swiss Franc		"Euro Swiss"
USDJPY		US Dollar / Japanese Yen		"Dollar Yen"
USDCHF		US Dollar / Swiss Franc		"Dollar Swiss" or "Swissy"
USDCAD		US Dollar / Canadian Dollar		"Dollar Canada"
USDZAR		US Dollar / South African Rand		"Dollar Zar"
GBPUSD		British Pound / US Dollar		"Cable"
GBPCHF		British Pound / Swiss Franc		"Sterling Swiss"
GBPJPY		British Pound / Japanese Yen		"Sterling Yen"
AUDUSD		Australian Dollar / US Dollar		"Aussie Dollar"
CHFJPY		Swiss Franc / Japanese Yen		"Swiss Yen"
NZDUSD		New Zealand Dollar / US Dollar		"New Zealand Dollar" or "Kiwi"

Foreign Currency Trading

Forex - (short for Foreign Exchange) is real-time buying of one currency and selling of another. One of the biggest trading markets in the world, trading foreign currency allows people to trade one currency for another trying to determine which currency's value will increase by the end of a determined time. For example, one could choose to buy the US Dollar against the Euro in anticipation for a rate change in favor of the US Dollar. The foreign currency trading market is considered the largest financial market in the world with average daily trading rates currently amassing to over three trillion US Dollars.

To start with, remember that the first currency listed is called the "base currency." A base currency is usually the US dollar. People (traders) will usually pit the USD against another currency – say, for example, a Japanese Yen.

The American dollar is usually considered the base currency for quotes. For example, a quote of USD/JPY 2.34 means that one U.S. dollar is equal to 2.34 Japanese Yen.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has increased in value and the other currency has weakened. If, after the allotted time, the USD/JPY quote is 2.50, then the dollar is stronger because it can buy more Japanese Yen. There are exceptions to the rule, such as the British pound (GBP) or Euro, which would be the base currency if matched against the US Dollar. In this case the American currency is the "weaker" one.

To sum up: if a currency quote goes higher, this increases the value of the base currency. A lower quote means the base currency is weakening.

Market participants

Source: Euro money FX survey
Top 10 Currency Traders % of overall volume,May 2007 Rank	Name	% of volume
1	Deutsche Bank	19.30
2	UBS AG	14.85
3	Citi	9.00
4	Royal Bank of Scotland	8.90
5	Barclays Capital	8.80
6	Bank of America	5.29
7	HSBC	4.36
8	Goldman Sachs	4.14
9	JPMorgan	3.33
10	Morgan Stanley	2.86

Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips only for major currencies like the Euro ). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.

Fed Dramatically Lowers Interest Rates

Last week, the New York Times published an article with the byline "Is the Federal Reserve’s chairman, Ben Bernanke too nice for the job?" Apparently, talk had been building on Wall Street that Bernanke was not tough enough to deal with the growing problems faced by the world's largest economy. Bernanke responded publicly in a speech in which he promised that the Fed would act quickly and decisively to confront such problems. Then on Tuesday, the critics were silenced peremptorily by a Fed rate cut of 75 basis points, the largest single cut in two decades. Moreover, Bernanke intimated that additional rate cuts could come as soon as next week.

It's unclear how this activity will affect the Dollar. On the one hand, it implies beyond a reasonable doubt that the US economy is indeed headed for recession. Bond yields are declining and the stock market has lost 15% of its value since October. On the other hand, the Fed has demonstrated that it is willing and able to take the necessary steps to avoid a hard landing at any cost. At the same time, investors around the world fear that a US recession will have an adverse impact on the global economy. And where do investors park their money during periods of global economic uncertainty? Answer: USA. Sure enough, the Dollar has already begun to rally after taking a big hit immediately following the rate cuts.

forex introduction and definition

For those unfamiliar with the term, FOREX (FOReign EXchange market), refers to an international exchange market where currencies are bought and sold. The Foreign Exchange Market that we see today began in the 1970's, when free exchange rates and floating currencies were introduced. In such an environment only participants in the market determine the price of one currency against another, based upon supply and demand for that currency.

FOREX is a somewhat unique market for a number of reasons. Firstly, it is one of the few markets in which it can be said with very few qualifications that it is free of external controls and that it cannot be manipulated. It is also the largest liquid financial market, with trade reaching between 1 and 1.5 trillion US dollars a day. With this much money moving this fast, it is clear why a single investor would find it near impossible to significantly affect the price of a major currency. Furthermore, the liquidity of the market means that unlike some rarely traded stock, traders are able to open and close positions within a few seconds as there are always willing buyers and sellers.

Another somewhat unique characteristic of the "forex money market"is the variance of its participants. Investors find a number of reasons for entering the market, some as longer term hedge investors, while others utilize massive credit lines to seek large short term gains. Interestingly, unlike blue-chip stocks, which are usually most attractive only to the long term investor, the combination of rather constant but small daily fluctuations in currency prices, create an environment which attracts investors with a broad range of strategies.

How FOREX Works

Transactions in foreign currencies are not centralized on an exchange, unlike say the NYSE, and thus take place all over the world via telecommunications. Trade is open 24 hours a day from Sunday afternoon until Friday afternoon (00:00 GMT on Monday to 10:00 pm GMT on Friday). In almost every time zone around the world, there are dealers who will quote all major currencies. After deciding what currency the investor would like to purchase, he or she does so via one of these dealers (some of which can be found online). It is quite common practice for investors to speculate on currency prices by getting a credit line (which are available to those with capital as small as $500), and vastly increase their potential gains and losses. This is called marginal trading.

Marginal Trading

"Marginal trading" is simply the term used for trading with borrowed capital. It is appealing because of the fact that in FOREX investments can be made without a real money supply. This allows investors to invest much more money with fewer money transfer costs, and open bigger positions with a much smaller amount of actual capital. Thus, one can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital. Marginal trading in an exchange market is quantified in lots. The term "lot" refers to approximately $100,000, an amount which can be obtained by putting up as little as 0.5% or $500.

EXAMPLE: You believe that signals in the market are indicating that the British Pound will go up against the US Dollar. You open 1 lot for buying the Pound with a 1% margin at the price of 1.49889 and wait for the exchange rate to climb. At some point in the future, your predictions come true and you decide to sell. You close the position at 1.5050 and earn 61 pips or about $405. Thus, on an initial capital investment of $1,000, you have made over 40% in profits. (Just as an example of how exchange rates change in the course of a day, an average daily change of the Euro (in Dollars) is about 70 to 100 pips.)

When you decide to close a position, the deposit sum that you originally made is returned to you and a calculation of your profits or losses is done. This profit or loss is then credited to your account.

Investment Strategies: Technical Analysis and Fundamental Analysis

The two fundamental strategies in investing in FOREX are Technical Analysis or Fundamental Analysis. Most small and medium sized investors in financial markets use Technical Analysis. This technique stems from the assumption that all information about the market and a particular currency's future fluctuations is found in the price chain. That is to say, that all factors which have an effect on the price have already been considered by the market and are thus reflected in the price. Essentially then, what this type of investor does is base his/her investments upon three fundamental suppositions. These are: that the movement of the market considers all factors, that the movement of prices is purposeful and directly tied to these events, and that history repeats itself. Someone utilizing technical analysis looks at the highest and lowest prices of a currency, the prices of opening and closing, and the volume of transactions. This investor does not try to outsmart the market, or even predict major long term trends, but simply looks at what has happened to that currency in the recent past, and predicts that the small fluctuations will generally continue just as they have before.

A Fundamental Analysis is one which analyzes the current situations in the country of the currency, including such things as its economy, its political situation, and other related rumors. By the numbers, a country's economy depends on a number of quantifiable measurements such as its Central Bank's interest rate, the national unemployment level, tax policy and the rate of inflation. An investor can also anticipate that less quantifiable occurrences, such as political unrest or transition will also have an effect on the market. Before basing all predictions on the factors alone, however, it is important to remember that investors must also keep in mind the expectations and anticipations of market participants. For just as in any stock market, the value of a currency is also based in large part on perceptions of and anticipations about that currency, not solely on its reality.

"Make Money with Currency Trading on FOREX"

FOREX investing is one of the most potentially rewarding types of investments available. While certainly the risk is great, the ability to conduct marginal trading on FOREX means that potential profits are enormous relative to initial capital investments. Another benefit of FOREX is that its size prevents almost all attempts by others to influence the market for their own gain. So that when investing in foreign currency markets one can feel quite confident that the investment he or she is making has the same opportunity for profit as other investors throughout the world. While investing in FOREX short term requires a certain degree of diligence, investors who utilize a technical analysis can feel relatively confident that their own ability to read the daily fluctuations of the currency market are sufficiently adequate to give them the knowledge necessary to make informed investments.