Understanding The Forex Market

Forex Trading Hours

At 7:00 pm Sunday, New York time, trading begins as markets open in Tokyo, Japan. Next, Singapore and Hong Kong open at 9:00 pm EST, followed by the European markets in Frankfurt (2:00 am), and then London (3:00 am). By 4:00 am, the European markets are in full swing, and Asia has concluded their trading day. The U.S. markets open first in New York around 8:00 am Monday, as Europe winds down. Australia will take over around 5:00 pm, and by 7:00 pm, Tokyo is ready to re-open.

All times are quoted in Eastern Standard Time (New York).

FX or Forex, currency trading is the trading of one currency against another. In terms of trading volume, the currency exchange market is the world’s largest market, with daily trading volumes in excess of $1.5 trillion US dollars.

Currencies are traded for hedging and for speculative purposes. Various market participants such as individuals, corporations, and institutions trade forex for one or both reasons.

The most commonly traded currencies are the USD, EUR, JPY, GBP, CHF, CAD and AUD.

The most commonly traded currency pair is EUR/USD.

Forex Symbol Guide

Symbol Currency Pair Trading Terminology

GBP/USD British Pound / US Dollar “Cable”

EUR/USD Euro / US Dollar “Euro”

USD/JPY US Dollar / Japanese Yen “Dollar Yen”

USD/CHF US Dollar / Swiss Franc “Dollar Swiss”, or “Swissy”

USD/CAD US Dollar / Canadian Dollar “Dollar Canada”

AUD/USD Australian Dollar / US Dollar “Aussie Dollar”

EUR/GBP Euro / British Pound “Euro Sterling”

EUR/JPY Euro / Japanese Yen “Euro Yen”

EUR/CHF Euro / Swiss Franc “Euro Swiss”

GBP/CHF British Pound / Swiss Franc “Sterling Swiss”

GBP/JPY British Pound / Japanese Yen “Sterling Yen”

CHF/JPY Swiss Franc / Japanese Yen “Swiss Yen”

NZD/USD New Zealand Dollar / US Dollar “New Zealand Dollar” or “Kiwi”

USD/ZAR US Dollar / South African Rand “Dollar Zar” or “South African Rand”

GLD/USD Spot Gold “Gold”

SLV/USD Spot Silver “Silver”

Currency Pairs

All currencies are assigned an International Standards Organization (ISO) code abbreviation. In currency trading, these codes are often used to express which specific currencies make up a currency pair. For example, USD/JPY refers to two currencies: the US Dollar and the Japanese Yen.

Spot Forex

Spot foreign exchange is always traded as one currency in relation to another. So, a trader who believes that the dollar will rise in relation to the Euro, would sell EUR/USD. That is, sell Euros and buy US dollars. The following is guide for quoting conventions:

What does it mean to be “long” or “short” a currency?

Being long means buying a currency. Being short means selling a currency.

If a trader goes long USD/JPY, he or she buys US Dollars and sells Japanese Yen. Buying a currency is synonymous with taking a long position in that currency. A trader takes a long position in a currency if he or she believes it will appreciate.

If a trader goes short USD/JPY, he or she sells US Dollars and buys Japanese Yen. Selling a currency is synonymous with shorting that currency. A trader would short a currency if he or she believes it will depreciate.

Buying & Selling Currencies

Forex trading in simplest terms is the buying of one currency and the selling of another. Forex trading, also referred to, as “FX” is open to corporations, small businesses, commercial banks, investment funds and private individuals.

All Forex trades result in the buying of one currency and the selling of another (currency trading), simultaneously.

Buying(going long) the currency pair implies buying the first, base currency and selling an equivalent amount of the second, quote currency (to pay for the base currency). It is not necessary to own the quote currency prior to selling, as it is sold short. A trader buys a currency pair if he/she believes the base currency will go up relative to the quote currency, or equivalently that the corresponding exchange rate will go up.

Selling(going short) the currency pair implies selling the first, base currency, and buying the second, quote currency. A trader sells a currency pair if he/she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency.

An open trade or position is one in which a trader has either bought or sold one currency pair and has not sold or bought back an adequate amount of that currency pair to effectively close the trade. When a trader has an open trade or position, he/she stands to profit or loss from fluctuations in the price of that currency pair.

Forex is the backbone of all international capital transactions. Compared to the slim profit margins rendered in other areas of commercial banking, huge profits are generally produced in a matter of minutes form minor currency market movements. Some banks generate 60% of their profits from trading currency aggressively.

Trading volume has been growing at a rate of approximately 20% per year since the mid-‘and therefore it is not difficult to accept the notion that the currency market is one of the world’s fastest growing industries. What used to require days to accomplish in Europe or Asia now only takes a few minutes. Technology has changed everything, and millions of dollars are moved from one currency into another, every second of every day, for traders all around the world.

Transactions in foreign currencies take place when one country’s currency is purchased (exchanged) with another country’s currency. The price agreed upon or negotiated for the currency purchased is referred to as the foreign exchange rate. Major commercial banks in the money market centers throughout the world are responsible for most of the foreign currencies bought and sold.

What’s a Pip?

A “pip” is the smallest increment in any currency pair. In EUR/USD, a movement from .8951 to .8952 is one pip, so a pip is .0001. In USD/JPY, a movement from 130.45 to 130.46 is one pip, so a pip is .01.

Calculating The Worth of A Pip

How much in dollars is this movement worth, for example, per 10,000 Euro’s in EUR/USD? How much is one pip worth per 10,000 Dollars in USD/JPY? We will refer to the size, in this case 10,000 units of the base currency, as the “Notional Amount”. The formula for calculating a pip value is therefore:

(one pip, with proper decimal placement / currency exchange rate) x (Notional Amount)

Using USD/JPY as an example, this yields:

(.01/130.46) x USD 10,000 = $0.77 or 77 cents per pip

Using EUR/USD as an example, we have:

(.0001/.8942) x EUR 10,000 = EUR 1.1183

But we want the pip value in USD, so we then must multiply EUR 1.1183 x (EUR/USD exchange rate): EUR 1.1183 x .8942 = $1.00

This is in fact a phenomenon you will see with any currency in which the currency is quoted first (such as EUR/USD or GBP/USD): the pip value is always $1.00 per 10,000 currency units. This is why pip, or “tick” values in currency futures, where the currency is quoted first, are always fixed.

Approximate pip values for the major currencies are as follows, per 10,000 units of the base currency:

USD/JPY: 1 pip = $.77 (i.e. a change from 130.45 to 130.46 is worth about $.77 per $10,000)

EUR/USD: 1 pip = $1.00 (.8941 to .8942 is worth $1.00 per 10,000 Euros)

GBP/USD: 1 pip = $1.00 (1.4765 to 1.4766 is worth $1.00 per 10,000 Pounds)

USD/CHF: 1 pip = $.59 (1.6855 to 1.6866 is worth $.59 per $10,000)

Spread

The spread is the difference between the price that you can sell currency at (Bid) and the price you can buy currency at (Ask). The spread on majors is usually 3 pips under normal market conditions.

The Basics of The Forex Market – https://www.mastersofmoney.com/thebasicsoftheforexmarket/

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