Foreign exchange is also referred to as forex or just FX . It refers to converting one currency to another at a pre-determined exchange price at the forex market. This market is the most traded market in the world and boast of an average turnover of US $ 4 trillion per day.
This figure can best be understood if one compares it to the New York stock Exchange market whose turnover is about US $ 50 billion. In essence it implies that the forex market is the biggest financial market in the world.
Forex trading is a complex transaction that pairs two currencies. It is a simultaneously transaction where one sells one currency and acquires another one. The buying and selling of the currencies is based on speculation hence it is merely a speculative activity. Appreciation and depreciation of currencies is what makes it possible for traders to trade forex. Currency appreciation refers to the rise of value of a currency while depreciation refers to the fall in value of a currency. Factors that lead to appreciation and depreciation of currency are many and varied. They are categorized into two; economic and geopolitics. Thus, forex traders seize the fluctuations in the value of the currencies to profit by speculating the direction in which the prices are likely to turn in the future.
Surprisingly, the Over- the counter (OTC) forex market has no physical location and is traded on 24 hour basis. It uses the global network of businesses, individuals and banks. The fact that the world currencies are constantly fluctuating against each other is the main impetus for trading forex since it offers unlimited number of trading opportunities at any given time.
24- Hour Forex Trading
The forex market is open for 24 hours a day from Sunday evening through to Friday night. Trading opens on Monday morning in Wellington, New Zealand and progresses to Tokyo, Singapore before it moves to London and later closes on Friday evening in New York.
Given that the trades are available in 24 hours a day reduces price gapping and tends to stabilize the price making it possible for traders to take a position any time without worrying. However, the truth of the matter is that there are occasions when the volumes traded fall below their daily trading average, a thing that widens market spreads.
In foreign exchange, the binary boom review trader is only required to deposit a small percentage of the full value of his position when trading forex. This means that the market is leveraged implying that the potential for profit or loss from the initial capital outlay can be higher compared to traditional trading. To learn more about this read more on risk management.
As mentioned earlier, forex trading pairs one currency against another. This is what is referred to as a currency pair and is defined in terms of base currency and counter currency. The ‘base’ currency refers to the currency on the left while the ‘counter’ currency is the currency stated on the right .For in EUR/UDS pairing, the EUR is the ‘base’ currency while the USD is the ‘counter ‘currency.
All forex is quoted in terms of one currency versus another. Each currency pair has a ‘base’ currency and a ‘counter’ currency. The ‘base’ currency is the currency on the left of the currency pair and the counter currency is on the right. The appreciation (strengthening) and the depreciation (weakening) of currencies is what triggers price movements that lead to forex trading. If the EUR/USD was to fall, it implies that the USD is appreciating while the EUR is depreciating.
Any trader who believes that the ‘base’ currency will weaken in value against the ‘counter’ currency will sell the currency. However if he expects the ‘base’ currency to strengthen against the counter, he will buy the currency.
EUR/USD implies that the value of 1EUR is expressed in US dollars
USD/CHF means that the value of 1USD is expressed in Swiss francs
Percentage in Points (Pipes)
Currency pairs are quoted to 5 decimal places and changes are expected after the fourth decimal referred to as a pipe. A good example is where the price of the EUR/USD is moved from 1.33800 to 1.33920 the currency is said to have climbed by 12 pipes i.e. the difference between 92 and 80
The difference between the base currency and the counter currency is referred to as a spread. For instance EUR/USD dealing at 1.33800/1.33808 has a spread of 0.8 pipes which can also be stated as 0.00008. Note that the Japanese yen is quoted at 2 decimal places for instance USD/JPY dealing at 97.41/97.44 displays a 3 pip spread.
Factors That Affects Forex Prices
Forex prices are influenced by both economical and political occurrences. When the market is said to be highly liquid or volatile, it implies that the prices can change rapidly to news and create a multiple of trading opportunities for traders.
Thus, factors such as economic and political stability, currency intervention, monetary policy and natural disasters such as earthquakes and tsunami can adversely affect the forex market.