Forex

Forex has become very popular in recent years, and it gives you a good amount of leverage for your money together with simplicity – most Forex trading is just around six different currency pairs. So you don’t get involved with hundreds of different stocks. They say that the Forex market trades nearly $4 trillion ($4,000,000,000,000) every day, which is much more than any stock markets. There is no one central marketplace, and trading takes place 24/5 as the world turns.

They say that there is always a bull market in Forex, and the reason for that is obvious – for every currency pair you can either buy or sell, so whichever currency is increasing in value you can choose it and be in a bull market. Each currency is identified by three letters, and they are fairly self-explanatory-USD stands for the US dollar, GBP is the Great Britain pound, CAD is the Canadian dollar, AUD the Australian dollar, EUR is the euro, CHF is the Swiss franc and, finally, JPY is the Japanese yen. Of course, you can trade in other countries’ currencies, and some of them are known as the “exotics”, but most action happens in these seven.

The currencies are traded in pairs, and the prices are quoted against six letters, the two currency codes put together. For instance, you have the GBPUSD, the USDJPY, etc. The numbers are always quoted the same way round as the currency codes, with one unit of the first mentioned currency being equal to the quoted number of the second. So the GBPUSD is at 1.6280 right now, which means one GB pound is equal to 1.6280 US dollars.

When you come to trade you will be offered a choice of buying or selling, and there is a small difference between the two rates, which is where the broker makes his money. For instance you may buy dollars at 1.6280 for a pound sterling, but if you wanted to sell US dollars and buy sterling, you might need $1.6285 for each pound. These gaps, which are called ‘spreads’, are usually quite small, because there is so much trading going on. By the way, Forex traders talk about ‘pips’ when prices change. A ‘pip’ just stands for ‘percentage in point’, a percent of a percent or 0.0001, so the spread above is five pips. The pip is the same decimal for all currencies, with the exception of the Japanese yen. As there are about ¥100 to the US dollar, a pip is defined as 0.01 of the yen.

Each foreign exchange standard contract is usually for 100,000 of the first named currency, for instance dealing the GBPUSD you would be controlling ₤100,000 worth of pounds or dollars, and making a profit from the price changes between the currencies. As I mentioned at the start of this section, you do enjoy good leverage with Forex, and you may typically only need one percent of the traded amount in your account. You can also get smaller or mini-contracts nowadays.

I mentioned that there were six commonly traded currency pairs. These are the USDJPY, USDCHF, GBPUSD, EURUSD, USDCAD and AUDUSD. The first four are the major ones, and the Canadian and Australian dollars also have some interest. This does not mean that you shouldn’t trade other currencies, but you’re probably more familiar with these so you will be better aware of the fundamentals that can affect currency values. You can use all the technical analysis tools that you will learn about, and get used to the daily cycles of the currencies, with the traders in different countries waking up, doing their trading during the day then going back to sleep.

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