Forex trading is a foreign exchange transaction in which a trader purchases a quantity of one currency by paying with a quantity of another currency. Its present day incarnation took form following the abandonment of the old Bretton Wood system of fixed exchange rate regimes, and the adoption of floating exchange rates by most major countries.
In volume, liquidity and 24 hour participation, it surpasses all other trading instruments, such as stocks, fixed income and options. According to the Bank for International Settlements, the average daily turnover in global foreign exchange markets is estimated at $3.98 trillion.
In terms of trading styles and disciplines, the speed and 24 hour operation of forex trading make it suitable for both the technical and fundamental trader.
Forex trading is used by day traders, swing traders, position traders and long term investors alike.
Currency Pairs
Forex trades are structured in instruments knows as currency pairs. Currency pairs are established so as to allow for the simultaneous purchasing of one currency and the selling of yet another.http://www.investopedia.com/terms/c/currencypair.asp This form of instrument structuring allows a trader to negotiate what would normally take multiple transactions through a single unit purchase or sale.
Currency pairs are denominated by the three-letter symbols of each of the two currencies involved departed by a slash. The most commonly traded pairs being the EUR/USD, GBP/USD and USD/JPY pairs.
What is known as the "base currency" appears first in the currency pair format. The currency appearing in the second position is what is known as the "quote currency." http://www.investopedia.com/terms/c/currencypair.asp When one sees a price value assigned to a currency pair, one is seeing the amount of "quote currency" required to purchase one whole unit of the "base currency."http://www.investopedia.com/terms/c/currencypair.asp
The Spot and Futures Markets
Forex trading can involve the forex spot market as well as forex futures market. The spot market involves trading at the current price of a currency pair.http://www.babypips.com/school/the_skinny_on_forex.html The futures market trades contracts to either purchase or sell a set amount of a currency pair on a predetermined date in the future at a set price.http://www.investopedia.com/terms/f/forexfutures.asp
Forex Trading Basics video
In this video, a review of the basic principles involving forex trading are presented. From the structuring of the instruments known as currency pairs, to how they are traded on the spot market, the basics of forex are presented. The notion of how leverage is applied in forex trades and the impact that macroeconomic events have on the forex market are also covered.
References
Fast Facts
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Average Daily Turnover
$3.98 trillion USD
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Trading Instrument
Currency Pair
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Spot Market
Trades at the current price of a currency pair
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Futures Market
Trades contracts to purchase or sell a currency price at a set price and date
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Fact:
Forex trading came to be after the abandonment of the old Bretton Wood system of fixed exchange rates
