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Lesson 1
Forex History
The word FOREX is derived from Foreign Exchange and is the largest financial market in the world. Unlike many markets, the FX market is open 24 hours per day and has anestimated $3 Trillion in turnover every day. This tremendous turnover is more than thecombination of all the worlds' stock markets on any given day. This tends to lead to avery liquid market and thus a 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 phone andincreasingly 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 amounts of deposits required precluded the smaller investors. With the advent of the Internet and growing competition it is now easily in the reach of most investors.
So now we know that the FX market is the largest in the world and that your broker orinstitution that you are trading with is collecting quotes from a centralized feed orindividual 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 andfor the Swiss Frank it is CHF. So, EUR/USD would be Euro-Dollar pair. GBP/USDwould be pounds Sterling-Dollar pair and USD/CHF would be Dollar-Swiss Franc pairand so on. You will always see the USD quoted first with few exceptions such as PoundsSterling, Eurodollar, Australia Dollar and New Zealand Dollar. The first currency quotedis called the base currency. Have a look below for some examples.
Currency symbol Currency pair
EUR/USD EUR/US Dollar
GBP/USD Pound Sterling / US Dollar
USD/CHF US Dollar / Swiss Franc
USD/CAD US Dollar/ Canadian Dollar
AUD/USD Australian Dollar/ US Dollar
NZD/USD New Zealand Dollar/US Dollar
When you see FX quotes you will actually see two numbers. The first number is calledthe bid and the second number is called the offer (sometimes called the ASK). If we usethe EUR/USD as an example you might see 0.9950/0.9955 the first number 0.9950 is thebid price and is the price traders are prepared to buy Euros against the USD Dollar. Thesecond number 0.9955 is the offer price and is the price traders are prepared to sell theEuro against the US Dollar. These quotes are sometimes abbreviated to the last two digitsof the currency such as 50/55. Each broker has its own convention and some will quotethe full number and others will show only the last two. You will also notice that there is adifference between the bid and the offer price and that is called the spread. For the fourmajor currencies the spread is normally 5 give or take a pip (we will explain pips later).To carry on from the symbol conventions and using our previous EUR quote of 0.9950bid, that means that 1 Euro = 0.9950 US Dollars. In another example if we used theUSD/CAD 1.4500 that would mean that 1 US Dollar = 1.4500 Canadian Dollars.
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