Foreign Exchange market
FOREX is the World's Largest Exchange by Jim Pretin
The Foreign Exchange market (Forex) is truly the largest
exchange in the world. The amount of dollars traded on the
Forex market on a daily basis is in the trillions. Most of
this currency trading takes place between between large
banks, central banks, currency speculators, multinational
corporations, governments, and other financial markets and
institutions. However, individual traders are starting to
get in the mix, using internet discount brokers such as
Etrade to participate in the currency exchange market.
There is no central exchange or meeting place for the Forex.
All trading is done over computer networks between traders
in different parts of the world. Also, unlike the stock
market, the foreign exchange market is open 24 hours per
day, because it is a global market. A trader in Hong Kong
may be exchanging currency with a trader in Australia while
an American trader is sleeping.
There are several different markets within the Forex
exchange system. First, there is the spot market. The spot
market deals with trades that are based on the current
values of currencies. One person trades a certain amount of
currency with another trader in exchange for an equivalent
amount of a different foreign currency. Spot trades take two
days for settlement.
The other two types of foreign exchange markets are the
forward and futures markets. In the forward market, the
buyer and seller agree on an exchange rate and a transaction
date is set for a specific time in the future, at which
point the trade is executed regardless of what the rates are
at that time. On the futures market, futures contracts are
bought and sold based upon a standard contract size and
maturity date. Futures trades take place on public
commodities markets.
A currency quote is listed differently from a stock quote.
Stocks are quoted in terms of price per share. Currency
exchange prices are listed as either a direct quote or an
indirect quote. A direct quote uses the domestic currency as
the base and the foreign currency as the quote. An indirect
quote works the exact opposite way.
So, if you were to view a quote in an American newspaper
that said USD/JPY = 75, that would be a direct quote and
would mean that $1 of U.S. currency is equal to 75 Japanese
yen. If that same quote appeared in that same American
newspaper and was listed as JPY/USD = 0.013, that would be
an example of an indirect quote.
As with stock prices, currency exchange prices have a bid
and ask spread. The current bid is the amount of foreign
currency that someone is willing to spend in order to buy $1
U.S. base currency. The ask is the amount of foreign
currency that someone is demanding in order to be willing to
sell $1 U.S. base currency.
The Forex markets are generally considered to be less
volatile than then stock market because within the course of
a trading day, it is highly unlikely for the value of a
single currency to move all that much. With equities, it is
not uncommon for a trader to buy a stock, and then a
negative press release causes the stock to lose considerable
value within a day or even a couple of hours. Sometimes,
however, the Forex can be volatile. If there is a
significant economic or political development with a certain
country, the currency of that country can lose value
quickly.
There is a higher degree of liquidity on the currency
exchange then there is on the stock exchange because the
currency exchange is open 24 hours per day and because the
very nature of currency exchange is to bet on when certain
currencies will go up or down; so, it is easy to sell your
position in a certain currency even when the value of that
money is going down. A plummeting stock is more difficult to
unload, but not impossible.
If you want to begin currency tranding, try to set aside
some money and open an account with an online broker. Start
slowly, then as you get the hang of it, work your way up to
larger trades and higher volume. However, do not gamble your
nest egg on currency trading because inexperienced traders
can lose everything they have rather quickly in spite of the
relative safety of the Forex market.
About the Author
Jim Pretin is the owner of http://www.forms4free.com, a
service that helps programmers make an HTML form
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