What’s Foreign Exchange Trading?
Forex, FX, or Foreign Exchange, is the simultaneous exchange of one country’s funds for that of another. This market of exchange has more daily volume both buyers and sellers than any other market in the world. The FX market is obtainable 24-hours a day, four days a week.
Furthermore, the foreign exchange Market is the largest financial market in the world with daily reported volume of over $1.4 trillion changing hands between buyers and sellers across the globe, making it one of the most fascinating markets for trading.
Although a fund trading is inherently governmental (central banks) and institutional (commercial and investment banks), technological innovations, like the net, have made it easy for individuals to participate in the funds trading markets and to trade by intermediaries online.
In the FX market you can buy or sell one funds for another. When you buy a fund, you’re said to be “long” in that funds and when you sell a funds, you’re said to be “short” in that funds. As the worth of one fund rises or falls relative to another, traders pick to buy or sell currencies in order to make profits – since the goal is to earn a profit from their position. Placing a trade in the foreign exchange market is simple and the mechanics of a trade are virtually identical to those present in other markets. Because of the symmetry of funds transactions, you’re always simultaneously long in one fund and short in another. An open position is one that’s live and ongoing. As long as the position is open, its value will fluctuate in accordance with the exchange rate in the market. To close out your position, you conduct an equal and opposite trade in the same funds pair. For example, in case you have gone long in one lot of EUR/USD you can close out that position by subsequently going short in one EUR/USD lot (at the prevailing bid price).
Quoting funds Pairs
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed funds are called the base funds, while the second is called the counter or quote funds. The base funds are the “basis” for the buy or the sell. For example, in case you BUY EUR/USD you have bought Euros (simultaneously sold dollars). You would do so in expectation that the Euro will appreciate (go up) relative to the US dollar.
EUR/USD
In this example Euro is the base funds and thus the “basis” for the buy/sell. In case you think that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought Euros in the expectation that they will appreciate versus the US dollar. In case you think that the US economy is strong and the Euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold Euros in the expectation that they will depreciate versus the US dollar.
USD/JPY
In this example the US dollar is the base funds and thus the “basis” for the buy/sell. In case you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. in case you think that Japanese investors are pulling funds out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
GBP/USD
In this example the GBP is the base funds and thus the “basis” for the buy/sell. In case you think the British economy will continue to be the leading economy among the G8 nations in terms of growth, thus purchasing the pound, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. In case you think the British are going to adopt the Euro and this will weaken pounds as they devalue their funds in anticipation of the combine, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/CHF
In this example the USD is the base funds and thus the “basis” for the buy/sell. In case you think the US dollar is undervalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. In case you think that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.
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on December 10, 2010. Filed under 
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