What is the Forex Market

The Foreign Exchange market is also referred to as the "Forex", "FX" market, "Cash" Forex and Spot Forex market and is the largest financial market in the world, with a daily average turnover of well over US$1 trillion -- 30 times larger than the combined volume of all U.S. equity markets.

"Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation. And that's where Forex.ca can help!

The most commonly traded (and therefore most liquid) currencies are called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.

The Cash Forex market is considered an Over The Counter (OTC) or 'interbank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Forex trading is not centralized on an exchange like the stock and futures markets.

Trailing Stop
A stop-loss order that follows the prevailing price trend.

Trend
The general drift or tendency of a currency to move in a specific direction. An upward trend is categorized as having higher highs and higher lows. A downward trend is categorized as having lower highs and lower lows.

Trend Channel
A parallel price range centered about the most likely price line. An area between the base trend line and the reaction trend line defined by price moves against the prevailing trend.

Trend Day
A day in which the price of a currency moves consistently away from the opening range and does not return to the opening range prior to the close.

Trend-following
Moving in the direction of the prevailing price movement.

Trending Market
Price moves in a single direction.

Trend less
Price movement that changes but a clear trend cannot be identified.

Trend line
A line drawn that connects either a series of highs or lows in a trend. The trend line can represent either support as in an up trend line or resistance as in a down trend line. Consolidations are marked by horizontal or converging trend lines.
VolatilityA measure of the amount by which an asset price is expected to fluctuate over a given period. Normally measured by the annual standard deviation of daily price changes (historic).

Weighing Quotes
This can happen if the Broker/IB takes the opposite trade in a transaction and in effect is competing with their own client. In this case, there could be situations where the quotes could favour the Broker at the back-end. http://www.forexreports.blogspot.com will not be associated with any market maker that practices this. We succeed if you succeed! It's that simple.

World BankA bank made up of members of the IMF whose aim is to assist in the development of member states by making loans where private capital is not available.

Account Balance
The net The net dollar amount of an account.

Autotrading
A computer automatically issues pre-defined buy and sell signals directly to the dealer.

Back Testing
The process of testing a trading idea or strategy using historical price data. Then to apply the strategy to the new data to see if the results are consistent.

Balance of Payments
The record of all transactions carried out by a country with the rest of the world within a certain time frame, including trade balances and capital flows.

Bar Chart
Used to plot price movements using vertical bars indicating price ranges.

Base Currency
The first currency in a pair is called the BASE CURRENCY.

Bear Market
A market characterized by declining prices.

Bid and Ask
Highest price and lowest price that an investor will pay for a currency.

Black Box
A proprietary, computerized trading system whose rules are not disclosed or readily accessible.

Bull Market
A market characterized by rising prices.

Candlestick Charts
A charting method originally developed in Japan, where the highs and lows are plotted as a single line and are referred to as shadows. The price range between the open and the close is plotted as a narrow rectangle and is referred to as the body. (If the close is above the open, the body is white. If the close is below the open, the body is black).

Capital Flows
Capital Flows measure the net amount of a currency that is being purchased or sold due to capital investments.

CFTCThe Commodity Futures Trading Commission, the US Federal regulatory agency for futures traded on commodity markets. Charts
A display or picture of a currency pair that plots price data. The chart is the foundation of technical analysis, and over the years, many different types of charts have been developed.

Congestion Area or Pattern
A series of trading days or periods in which there is no major change in price. Typically a trend-less area of price data.

Consolidation
Also known as a congestion period. A pause that allows participants in a market to re-evaluate the market and sets the stage for the next price move.

Cross Currency
The second currency in a pair is called the CROSS CURRENCY.

Cross Rate An exchange rate between two currencies.
CurrencyThe type of money that a country uses. It can be traded against other currencies on the foreign exchange market, so each currency has a value relative to another.

Curve-Fitting
Developing complicated rules that map known conditions while back-testing a strategy.

Doji
A candlestick formation in which the open and close are the same (or almost the same). Different varieties of doji lines (such as a gravestone or long-legged doji) depend on where the opening and close are in relation to the entire range. Doji lines are among the most important individual candlestick lines. They are also components of important candlestick patterns.

Entry
The point at which a trader gets into a position in the market.

Exit
The point at which a trader closes out of a trade.

Foreign ExchangeThe purchase or sale of a currency against another.

ForexAn abbreviation of foreign exchange.
Fundamental Analysis
Fundamental Analysis focuses on the economic, social and political forces that drive supply and demand.

G7
The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy. G10G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions. Switzerland is sometimes peripherally involved.

Gold StandardThe original system for supporting the value of currency issued. This system was active before 1973 when the fixed exchange rates were prevalent.

Margin
This is a percentage of the total value of a transaction that a trader is required to deposit as collateral.
Market Makers
Organizations that maintain a firm bid and offer price in a given currency pair by standing ready to buy or sell at these executable prices (called making a market).

Moving Average (simple)
A mathematical procedure to smooth or eliminate the fluctuations in data and to assist in determining when to buy and sell. Moving averages emphasize the direction of a trend, confirm trend reversals and smooth out price and volume fluctuations or "noise" that can confuse interpretation of the market; the sum of a value plus a selected number of previous values divided by the total number of values.

Moving Average Crossovers
The point where the various moving average lines intersect each other or the price line on a moving average price bar chart. Technicians use crossovers to signal price-based buy and sell opportunities.

PIP
Price Interest Point. The smallest decimal point in an exchange rate.

Resistance
A price level at which rising prices have stopped rising and either moved sideways or reversed direction. Resistance can become a support area. It is an important area because it is where selling is expected to take place.

Rollover Where the settlement of a deal is carried forward to another value date based on the interest rate differential of the two currencies.

Roll-Over Interest
Traders that hold a position overnight pay interest on the currency they borrow and earn interest on the currency they purchase. Typically roll-over interest is applied at 5PM EST (NY Time).

Skimming Pips
This can happen if the Broker/ IB varies what quotes are shown to specific clients or adds a pip or two to the quote screen to make an extra buck. At Forex.ca we charge no commissions and skim no pips.* We are forthright and disclose that we make our profit on the forex spread on all trades. As do most reputable market makers.

SMA
Simple Moving Average.

Spot Forex Prices
Same as cash price. The price at which a currency is selling at a particular time and place.

Spread
In cash forex trading it is the difference between the bid price and ask price.

Stops
Buy stops are orders that are placed at a predetermined price over the current price of the market. The order becomes a "buy at the market" order if the market is at or above the price of the stop order. Sell stops are orders that are placed with a predetermined price below the current price. Sell-stop orders become "Sell at the market" orders if the market trades at or below the price of the stop order.

Support
A historical price level at which falling prices have stopped falling and either moved sideways or reversed direction. Support can become a resistance area later in the chart. It is an important level because it is where the buying is expected to take place.

Technical Analysis
Technical traders focus on price movements and use historical data to forecast the direction of future prices. Technicians also attempt to identify price trends in a market using charts and modeling techniques.
Technical CorrectionAn adjustment to price not based on market sentiment but technical factors such as volume and charting.
Tick
The minimum fluctuation of a currency.

Trade Flows
Trade Flows represent a country’s net trade balance of exported goods minus imported goods.

Trading Range
The difference between the high and low prices traded during a period of time.

Main Principles of Trading

The Main Principles of Trading In contrast to exchange transactions with real supply or real currency the participants of FOREX use trading with a margin deposit; i.e. marginal or leverage trading. In marginal trading, each transaction has two obligatory stages (they can be divided by period of time, which can be as long as you like): buying (selling) of currency at one price, and then selling (buying) it at another (or at the same) price. The first transaction is called opening the position, the second one, closing the position. Opening a position, a trader furnishes a deposit sum from 0.5 to 4 per cent of the credit line, granted for the transaction. So, in order to buy or sell 100,000 US dollars for Japanese yens, you will not need the whole sum, but only from 500 to 2000 US dollars depending on your policy of controlling risks. When the position is closed, the deposit sum returns, and calculation of profits or losses is done. All the profit or losses caused by the change of currency rates is credited on your account.

Forex: fundamental analysis

Fundamental analysis is an analysis of current situations in the country of the currency, such as its economy, political events, and rumors. The country's economy depends on the rate of inflation and unemployment, on the interest rate of its Central Bank, and on tax policy. Political stability also influences the exchange rate. Policy of the Central Bank has a special role, as concentrated interventions or refusal from them greatly influence the exchange rate. At the same time one should not consider fundamental analysis just as an analysis of the economic situation in the country itself. A far bigger role in the FOREX market belongs to the expectations of the market participants and their assessment of these expectations. Various prognoses and bulletins, issued by the participants, have a strong influence on the expectations. Very often an effect of the so-called self-filfilling prophecy occurs when market players raise or lower the exchange rates according to the prognosis. But a deep and thorough fundamental analysis is available only for big banks with a staff of professional analysts and constant access to a wide field of information.

Forex : technical analysis

A technical analysis is founded on three suppositions: Movement of the market considers everything; Movement of prices is purposeful; History repeats itself. That is, technical analysis is a statistical and mathematical analysis of previous quotes and a prognosis of coming prices. A number of technical indicators have been installed into the PRO-CHARTS trading system. Analyzing the indicators one can come to the conclusion about further movements of the quoted currencies. For a more detailed description of the indicators, analyzing price charts and volumes of trading, click here.

Situation of market

In order to assess the situation in the market a trader has to be able to use fundamental and/or technical analysis, as well as to make decisions in the constantly changing current of information about political and economic character. Most small and medium players in financial markets use technical analysis. Technical analysis presupposes that all the information about the market and its further fluctuations is contained in the price chain. Any factor, that has some influence on the price, be it economic, political or psychological, has already been considered by the market and included in the price. The initial data for a technical analysis are prices: the highest and the lowest prices, the price of opening and closing within a certain period of time, and the volume of transactions.

Fluctuations of currencies

Everyday fluctuations of currencies constitute about 100 to 150 pips, giving FX traders an opportunity to make money on these changes. In FOREX, it's not obligatory to buy some currency first in order to sell it later. It's possible to open positions for buying and selling any currency without actually having it. Usually Internet-brokers establish the minimum deposit such as $ 2000, for working in the FOREX market, and grant a leverage of 1:100. That is, opening the position at $100,000, a trader invests $1,000 and receives $99.000 as a credit. The major currencies traded in FOREX, are Euro (EUR), Japanese yen (JPY), British Pound (GBP), and Swiss Franc (CHF). All of them are traded against the US dollar (USD).

Margin trading

Margin trading is trading with a borrowed capital. Marginal trading in an exchange market uses lots. 1 lot equals approximately $100,000, but to open it it is necessary to have only from 0.5% to 4% of the sum.
For example, you have analyzed the situation in the market and come to the conclusion that the pound will go up against the dollar. You open 1 lot for buying the pound (GBP) with the margin 1% (1:1000 leverage) at the price of 1.49889 and wait for the exchange rate to go up. Some time later your expectations become true. You close the position at 1.5050 and earn 61 pips (about $ 405). For the calculation of 1 pip click here.

Idea of marginal trading

The idea of marginal trading stems from the fact that in FOREX speculative interests can be satisfied without a real money supply. This decreases overhead expenses for transferring money and gives an opportunity to open positions with a small account in US dollars, buying and selling a lot of other currencies. That is, on can conduct transactions very quickly, getting a big profit, when the exchange rates go up or down. Many speculative transactions in the international financial markets are made on the principles of marginal trading.

Forex objective market

FOREX is a more objective market, because if some of its participants would like to change prices, for some manipulative purpose, they would have to operate with tens of billions dollars. That is why any influence by a single participants in the market is practically out of the question. The superior liquidity allows the traders to open and/or close positions within a few seconds. The time of keeping a position is arbitrary and has no limits: from several seconds to many years. It depends only on your trading strategies. Although the daily fluctuations of currencies are rather insignificant, you may use the credit lines, that are accessible even to currency speculators with small capitals ($ 1,000 - 5,000), where the profit may be impressive. (You can learn more about it in the section: The main principles of trading.)

What is Forex ?

As far as the freedom from any external control and free competition are concerned, FOREX is a perfect market. It is also the biggest liquid financial market. According to various assessments, money masses in the market constitute from 1 to 1.5 trillion US dollars a day. (It is impossible to determine an absolutely exact number because trading is not centralized on an exchange.) Transactions are conducted all over the world via telecommunications 24 hours a day from 00:00 GMT on Monday to 10:00 pm GMT on Friday. Practically in every time zone (that is, in Frankfurt-on-Main, London, New York, Tokyo, Hong Kong, etc.) there are dealers who will quote currencies.

Market Participants

In a stock market, all participants have access to the same prices but the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips only for major currencies like the Euro). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.

Participants: Banks - Commercial companies - Central banks - Investment management firms - Hedge funds - Retail forex brokers

FX Market

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is over US$ 3 trillion. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks, and are subject to forex scams.

Thanks, BJ. I enjoyed reading

Thanks, BJ. I enjoyed reading through that discussion - I doubt there are many Congressional candidate’s websites were so much interesting commentary can be found.
There certainly is a potential danger in inflating a currency, but I think that banks would realize that if they provide a bank note which has an unstable value or which devalues over time, people would be more reluctant to use it.
I don’t think that the supply of a bank’s notes would fluctuate much in practice, as banks would likely settle on a ratio and would probably not alter it much from there.
Also, doesn’t the discovery of gold confiscate the purchasing power of gold?

Forex Strategy Outlook: Japanese Yen Provides Breakout Trading Opportunities Monday, 13 July 2009 14:46:19 GMT By David Rodriguez, Quantitative Strate

Forex markets remain incredibly choppy and major currencies remain in wide ranges. Though volatility expectations crept higher through last week’s trade, we continue to favor Range trading strategies on US Dollar currency pairs. It is nonetheless critical to note that Japanese Yen crosses show great potential for further breakouts, and we will accordingly position ourselves for big JPY moves.

Spike in Eastern Europe is Short-Lived

Last week, the currencies of Eastern Europe (Hungary, Poland, Czech Republic, etc.) received a nice bump from the announcement of a $25 Billion loan from several multilateral banks, as well as from a slight pickup in risk aversion. The sense of optimism proved to be short-lived, however, as the EU recently rejected a request to provide large scale ($200 Billion+) assistance to the the region. The swift and decisive refusal to intervene injected a fresh wave of uncertainty into a region that is already among the hardest-hit from the credit crisis. The move also carried important political implications, conveying that the EU still sees a clear distinction between eastern and western Europe. Bloomberg News reports:Growth in Poland, the biggest eastern European economy, will slow to 2 percent, the slackest pace since 2002, the European Commission forecasts. Latvia, a former Soviet republic, will contract 6.9 percent.

Forex Achieves New Prominence

The credit crisis has resulted in a collapse in prices for nearly every type of investable asset class (i.e. stocks, bonds, commodities, real estate)- with the notable exception of one: currencies. Of course, this is an inherent quality of forex: a rise in one currency must necessarily be offset by a fall in another currency. While you are probably rolling your eye at the obviousness of this observation, it is still worthwhile to make because it implies that there is always a bull market in forex. Accordingly, capital from both institutions and retail investors continues to pour in, causing daily turnover to surge by 41% (according to one survey), which would imply a total of $4.5 Trillion per day!
Investment banks, especially, are trying to increase their forex business in order to compensate for a decline in other divisions. Said one representative: ”We have probably made more of an aggressive leapfrog in growing our revenue base, which has virtually doubled in 2008 versus 2007. With the situation that has been developing over the past six months, where banks are clearly re-embarking on a new role leading back to basics, foreign exchange has to be one of the products that tops that list.” Based on New York data, which generally reflects global forex activity, transactions between the Dollar, Euro, and Yen (i.e. not including outside currencies) now account for more than half of the total.
Contrary to popular belief, however, most foreign exchange transactions involve derivatives, rather than spot trades. In the case of swaps, it is the nominal value of the swap that is reported, which well exceeds the total amount of currency that is exchanged, and thus results in an inflated estimate of total daily turnover. One would expect that the increase in both liquidity and the role of derivatives in forex markets would result in a corresponding decrease in volatility. Of course, this is quickly belied by the turbulence of the last six months, in which many currency pairs set daily, weekly, and/or monthly records for swings and volatility. I recently read an article about so-called “predictive markets,” which use a grassroots approach to make forecasts by “by giving people virtual trading accounts that allow them to buy and sell “shares” that correspond to a particular outcome. Shares in an outcome that is considered more likely to occur then trade at a higher price than those that represent a less likely outcome.” Given that the “experts” are almost invariably wrong, I think this idea has tremendous potential to make forex markets even more transparent.

Dave Knaack Says

Regarding fractional reserve lending. After spending lots of time reading about how banking systems work (including lots of really dry stuff like international settlement systems) I’ve come to the conclusion that fractional reserve practices fill critically important and likely delicate roles in highly interconnected and critical global systems and that leading the charge to change those rules would be tilting at windmills. This is not the sort of problem where we should write a new system, reinstall and reboot.
We should instead address one of the major flaws of the system, the accumulation of debt in excess of the money supply (think of it as an in-memory patch).
Perhaps this issue could be solved with by tasking the Treasury with issuing into circulation of non-debt dollars in a quantity equal to the interest paid for each reporting period (quarterly I’d suppose).
I’m not convinced that the ‘boom and bust’ cycle is solely the result of Fed control of the monetary system (seems to me that complex social factors probably also play in important role; consider the development of CDOs and MBSs), or that it is /necessarily/ a bad thing. Booms encourage and enable new ideas (lots of money available results in funding of wild and harebrained ideas that just might work but that wouldn’t be able to pay off in an environment of higher interest rates one would expect in a completely stable economy), and busts weed out marginal or weak practices (the harebrained ideas). The cycle (provided it describes mild recessions rather than Great Depressions) may help to prevent stagnation.
What is bad is that in conjunction with the current practice of creating only principle rather than principle+interest the system can be managed to (or perhaps must) cause an accumulation of debt obligation toward the entities permitted to practice fractional reserve lending.
Perhaps we can greatly improve the system simply by causing to exist each quarter all the money required to pay off the interest on loans. This would begin the injection of credit money into the system with minimal impact on business.

Paul Monroe Says

Thanks, BJ. I enjoyed reading through that discussion - I doubt there are many Congressional candidate’s websites were so much interesting commentary can be found.
There certainly is a potential danger in inflating a currency, but I think that banks would realize that if they provide a bank note which has an unstable value or which devalues over time, people would be more reluctant to use it.
I don’t think that the supply of a bank’s notes would fluctuate much in practice, as banks would likely settle on a ratio and would probably not alter it much from there.
Also, doesn’t the discovery of gold confiscate the purchasing power of gold? The same goes with any other commodity. I think the morality argument applies more with the current system since it is a policy decision to debase the value of the currency. Even still, it is certainly debatable that it would also be immoral in a “free banking” system.

Pakistan faces bankruptcy with $3bn forex reserves: report

London, Oct 7 (IANS) Pakistan’s foreign exchange reserves are on the brink at a mere $3 billion - enough to buy only a month’s supply of oil and food, a newspaper reported Tuesday.The Daily Telegraph said that on paper the country’s central bank holds $8.14 billion of foreign currency, but if forward liabilities are included, the real reserves may be only $3 billion.

It said Pakistan had $16 billion of foreign exchange nine months ago, but high oil prices “have combined with endemic corruption and mismanagement to inflict huge damage on the economy”.

The report comes after President Asif Ali Zardari told the Wall Street Journal newspaper his country needs a $100 billion bail out package.

“If I can’t pay my own oil bill, how am I going to increase my police? The oil companies are asking me to pay $135 [per barrel] of oil and at the same time they want me to keep the world peaceful and Pakistan peaceful,” Zardari said in an interview published Saturday.

The Daily Telegraph said Pakistan’s efforts to defer payment for 100,000 barrels of oil supplied every day by Saudi Arabia have not yet yielded results, and that the government has failed to raise loans on favourable terms from “friendly countries”.

It said Zardari is expected to ask the international community for a rescue package at a meeting in Abu Dhabi next month.

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Forex Blog

The Foreign Exchange market, also referred to as the Forex or FX market, is an international exchange market in the world, with a daily average turnover of approximately from 1.5 trillion to 2.5 trillion US dollar. Hundreds of thousands of individuals have already joined the Forex market.

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Here we collect the most popular and helpful Forex articles. All these Forex articles are written by the excellent Forex traders, strategists and analysts. You'll find the articles, trading courses and methods that are an indispensable inherent part of improving your Forex trading strategy.