subject: Understanding The Forex Market [print this page] Foreign exchange market consists of purchase of the currency of a certain country and the simultaneous sale of the currency of another country. FOREX is the financial market of major size and liquidity that exists nowadays worldwide, with a daily volume of US$ 1.9 trillion in transactions. This is more than the principal stock and all united markets.
Forex transaction
In Forex Market the operation consist in the exchange of coins; the simultaneous action to buy a currency in exchange for the sale of another different currency, and for this reason Forex's transactions always come reflected in pairs of coins, one in relation to other one.
The coins are quote in couples, such as the EUR/USD. To the first mentioned currency he is known as the currency base, whereas the second one is the currency in contra or against currency.
The currency bases it is the "base" for the purchase or sale. For example, if you buy of Euro/Usd you bought Euros and sold simultaneously dollars. You take this position with the expectation of which the Euro is estimated higher in relation by the dollar.
The Most Traded Forex pairs
Before operating in the foreign exchange market, it is important that you start to understand the basic terminology of the market and know how to interpret correctly the currency market quotations.
What are pairs?
The Forex market trades by buying and selling currencies from different countries. A pair is the combination of two different currencies that are used to take positions on the market. Usually the first currency is known as the base currency, as this is not moving and the second currency that will comply with the pair, is called counter currency. The base currency is also known as primary and base coin currency as currency trading. The base currency will always be = 1 and the value will vary depending on the pair base coin you choose and the value this has in the international market.
It is important that you know what are the main currencies traded in the Forex market and its acronym in English, and the important pairs:
EUR/USD= Euro/U.S. Dollar
GBP/USD = Great British Pond/Canadian Dollar
EUR/JPY= Euro/Japanese Yen
GBP/JPY = Great British Pond/Japanese Yen
USD/CHF = U.S. Dollar/Swiss Franc
USD/CAD = U.S. Dollar/ Canadian Dollar
Pip
In Forex, a term called "pip" exists. Pip is called to the minimal movement in decimal that a pair in Forex could have. It is important to notice that some couples like the usd/jpy or the eur/jpy quote only with 2 decimal places; nevertheless pair like the eur/usd, they quote with four decimal points.
Therefore the value of a pip depends on the COUPLE. For a couple that handles four decimal points, a pip is equivalent to 0.0001. For a couple that handles 2 decimal points, a pip is equivalent to 0.01.
The pips are very useful because they allow taking easily an account of the earnings or losses obtained of a transaction observing only the variation of the price in pips, since his value is known. Also it is useful to fix in advance the number of pips to close a successful operation or to all the pips of variation actua the Stop Loss.
It is important to notice that every transaction is realized in quantities of 100,000 units of the currency base. This is known as a lot. Therefore in the previous example we can buy 100,000 units of eur or sell 100,000 units of Euro.
The investor has a very strong leverage and can handle very big quantities of money with relatively few investments. A person, depending the level of leverage, can control 100,000 units of a currency with basically us$1,000 for putting an example.
Who moves the forex market?
Forex, Foreign Exchange is where the term, traders call money market or spot market and is comprised of approximately 4,500 banks worldwide to other groups or entities.
The market movement is governed by supply and demand, and the Forex market has the greatest exposure to all global forces. Also in Forex are an unlimited number of buyers and sellers, who play an important role to generate movement in the market. So that you have a bigger picture, the volume of transactions in the Forex market, is about ten times the amount in stock markets around the world combined, and most trade is conducted in only a few currency pairs. Also another factor that causes this market to move is the large investments of recognized companies worldwide, causing large and obvious effects on prices of the Forex market. This is a liquidity effect; in other words, how big the market for buyers and sellers can see more movements in the market.
5 groups are those that make up this market, which directly influence the movement of it:
