FOREX EXCHANGE & MARKET

INTRODUCTION
Foreign Currency Exchange (Forex) Trading allows an investor to participate in profitable
fluctuations of world currencies. Forex trading works by selecting pairs of currencies and
then measuring profit or loss by the fluctuations of one currency's market activity compared
to the other. For example, fluctuations in the value of the U.S. Dollar are measured against
another world currency such as the British Pound, Euro, Japanese Yen etc. Being able to
discern price trends in forex market activity is the essence of all profitable forex trading and
this is what makes foreign currencies so exciting, currencies are the world's 'best trending'
market. This gives Forex investors a profit making edge that is unavailable in most other
markets.
Forex trading is being called 'today's exciting new investment opportunity for the savvy
investor'. The reason is that the Forex Trading Market only began to emerge in 1978, when
worldwide currencies were allowed to 'float' according to supply and demand, 7 years after
the Gold Standard was abandoned. Up until 1995 Forex Trading was only available to banks
and large multinational corporations but today, thanks to the proliferation of the computer and
a new era of internet-based communication technologies, this highly profitable market is
open to everyone. The Forex Trading Market's growth has been unprecedented, explosive,
and
continues
to
be
unequaled
by
any
other
trading
market.
Unlike traditional trading which brings buyers and sellers together in a central location
(trading floors) in Forex Trading there is no need for a centralized location. Forex is a market
where worldwide traders conduct business by high-speed Internet connections with the
Interbank Foreign Currency Exchange via Forex Clearinghouses (also called Forex
Brokerage Firms). Forex has not only become the fastest growing trading market, but also the
most
profitable
trading
marketplace
in
the
world.
Simply stated, Forex is the most profitable because it is the world's largest marketplace. The
Foreign Currency market as a whole accounts for over 1.2 trillion dollars of trading per day
(as determined by the fourth Central Bank Survey of Foreign Exchange and Derivatives
Market Activity, 1998. This figure is understood to be significantly higher today). To put this
into perspective, on any given day the Foreign Currency Exchange Market activity is vastly
greater than the Stock Market. It is 75 times greater than the New York Stock Exchange
where the average total daily value (using 1998 figures) of both foreign and domestic stocks
is $16 billion, and much greater than the daily activity on the London Stock Exchange, with
$11
billion.
Furthermore, in addition to being the world's largest and most profitable market, The Foreign
Currency Exchange Market (forex) is the world's most powerful and persistent trading market
regardless of negative economic indicators. This is because currencies 'trend' better than
every other market due to their macro-economic nature. Unlike many commodities whose
supply and demand fundamentals can literally change overnight (as we found in the sudden
dot com 'market adjustment' and even more abruptly on September 11, 2001), currency
fundamentals are much less random, and far more predictable. This is well illustrated in the
way interest rates are changed gradually and only in small increments.

Other examples of fundamental predictability are illustrated by the following statistics. Of the
$1.2 trillion day trading in Foreign Currency Exchange, 83% of spot foreign exchange
activity and 95% of swap activity involves US Dollars. The Euro is the second most active
currency at 37%. The Japanese Yen (24%) and the British Pound Sterling (10%) are ranked
third and fourth. The Swiss Franc is 7%, and the Canadian and Australian Dollars account for
3%.
Spot Forex is the type of forex trade in which self-traders concentrate most of their
investment activity for reasons that are self-explanatory. By definition, a Spot Forex
transaction is a currency trade transaction that has a settlement (liquidation) within a
maximum of 2 working days following the closing of the trade. Therefore Spot Forex allows
the self-trader high liquidity. Another popular feature for well-advised Spot Forex self-traders
is the strong profit potential from continual market fluctuations by buying a specific currency
when it is weaker and selling it when it is stronger, and the continual pairing of strong
currencies against weak ones. This potential for profit or loss is amplified by the effect of
leverage. Leverage is a term that describes what can be achieved when a smaller amount of
money controls a much larger amount of money. With regards to Forex Trading for example,
a leverage-factor of 100 can allow the trader to hold a 100,000 US Dollar position with a
modest 1,000 US Dollar margin deposit. Online Forex day trading focuses its investment
activity largely on Spot Forex because of the 'risk manageability' of in-and-out trading plus
the
potential
to
generate
excellent
and
highly
liquid
profits.
"Few financial industries generate as much excitement and profit as currency exchange.
Traders around the world enter trades for weeks, days or split seconds, generating explosive
moves or steady flows, and money changes hands quickly at a staggering daily average of a
trillion US dollars. Forex profitability is legendary. George Soros of Quantum Fund realized a
profit in excess of 1 billion dollars for a couple of days work in September 1992. Hans
Hufschmid of Soloman Brothers, Inc. netted $28 million for 1993. Even by Wall Street
standards,
these
numbers
are
heartstoppers".*
Despite its high trading volume and its fundamental role in the world, the Forex Market is
rarely in the media limelight because its method of trading transaction is less visible than the
Floor of a Stock Exchange. However, trading on the Foreign Currency Exchange Market is
today surging into the public awareness, as flocks of internet traders are attracted by the
market's inherent profitability and risk manageability. Add to this the absence of geographic
or temporal boundaries and vibrantly active Forex market is open to all players.
* "Trading in the Global Currency Markets", Cornelius Luca, 2000
FOREX EDUCATION: FOREX PIP, LEVERAGE AND MORE

Forex trading education helps you to get fundamental information about forex market
peculiarities.
FOREX

CURRENCY

PAIR

Reading a foreign exchange quote may seem confusing at first. However, it's really quite
simple if you remember 2 things when starting your Forex trading education:

1)
2)

The
The

first
value

currency
of
the

listed
base

is
the
currency

base
currency
is
always
1

The US dollar is the centerpiece of the Forex market and is normally considered the 'base'
currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For
these currencies and many others, quotes are expressed as a unit of 1 USD per the second
currency quoted in the pair. For example, a quote of USD/JPY 120.01 means that one U.S.
dollar is equal to 120.01 Japanese yen. When the U.S. dollar is the base unit and a currency
quote goes up, it means the dollar has appreciated in value and the other currency has
weakened. If the USD/JPY quote we previously mentioned increases to 123.01, the dollar is
stronger
because
it
will
now
buy
more
yen
than
before.
The 3 exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and
the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.4366, meaning
that one British pound equals 1.4366 U.S. dollars. In these three currency pairs, where the
U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more
U.S. dollars to equal one pound, euro or Australian dollar. In other words, if a currency quote
goes higher, that increases the value of the base currency. A lower quote means the base
currency
is
weakening.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise
is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to
127.95 Japanese yen. When continuing your Forex trading education, you will often see a
two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the
base currency (at the same time buying the counter currency). The 'ask' is the price at which
you can buy the base currency (at the same time selling the counter currency).
FOREX

PIP

Once you start your Forex education, you will learn to love this word because it is what you
will be seeking for the rest of your Forex career. A pip is the smallest denominator of a
particular currency pair, so for the above example, if the EUR/USD moves from 1.2150 to
1.2155
then
it
has
moved
up
5
pips.
FOREX

LEVERAGE

Leverage is a simple concept of Forex education. If you have $10,000 to trade with, your
Forex broker will let you borrow money from him so that you can trade in larger quantities.
They will let you borrow as much as 400 times (400:1) what you put up in a trade. Most forex
brokers allow between 50:1 and 100:1 margin. So, if you put up $1,000, and your broker
allows 100:1 margin, then you'll be trading $100,000 worth of currency (instead of $1,000).
That's important, because every pip equals a certain dollar amount. When you trade $10,000,

each pip movement equals $1. The chart below shows how it goes from there. If you trade
10,000 worth of currency, each movement would be equal to $1. So if you bought at 1.1445
and sold at 1.1545, you would make 100 x $1, or $100. If you trade $100,000, each pip
movement
would
equal
$10
and
so
on.
FOREX

LONG

AND

SHORT

There are 2 different ways to trade on the Forex market and many beginners (or those who
continue their Forex trading education) are surprised to learn that they can actually make as
much money when currency price moves down as when it goes up. Let's start with the most
logical
movement,
when
the
price
moves
up.
Most people are very familiar with the concept of buying something at a low price and selling
it when the price increases. So the concept of buying the EUR/USD at 1.2150 and selling it at
1.2160 for a 10 pip gain should seem logical. This process is called going long. You can also
do this in reverse! If you know that the currency price is more likely to go down rather than
up, you can go short. This is just the opposite of the above transaction, selling it first and
buying it back later in the hope that the price will go down for you to make forex profit.
This may seem strange at first, but the concept remains the same either way. You always want
to buy something at a low price, and sell it expensive. The consecution of actions doesn't
matter. You must both buy and sell; as long as you sell at a higher price than you buy you
make
profit.
Let
us
continue
our
Forex
trading
education.
FOREX

SPREAD

The difference between stock markets and the Forex market brokers, is that in the Forex
market, broker commissions are either very low or zero. So how do the ?? make money?
They make it from the "spread" - difference between the actual price and the offered price
through a broker. On the right you can see a typical board of currency pairs and their spreads.
This one is taken from our feed this morning, and you can see the difference between the
Offer (the price you can place on a sell order) and the Bid (the price you can place on a buy
order)
is
3
pips
(the
spread).
What does this mean to you though? Well, let's look at the board. If you bought the
EUR/USD at 1.2158 as it is offered under the Offer column, and immediately sold it again
before the price moved, you would only get 1.2155 as is shown in the Bid column. So the net
result is -3 pips, or a loss to you, and a profit to the broker. Remember to always take the
spread into account when placing a trade, setting targets and stop losses.
FOREX

BEARS

AND

THE

BULLS

Once (you have) started your Forex education, you will constantly see the terms "Bears" and
"Bulls" in Forex books and chat rooms. These are terms that describe the general mood of the

market. A "bear" forex market, is when the general mood of the market is down, i.e. when
there are more sellers than buyers in the marketplace. A "bull forex market" is the opposite,
when there are more buyers than sellers and the general mood of the market is up. Forex is a
place where bulls and bears struggle, and if you can identify who is gaining the upper hand,
then you can identify the direction of the price. Easier said than done, of course. There are
many more areas to cover, this should help those only starting Forex trading education.
CALCULATING

FOREX

PROFIT

AND

LOSS

Forex market, is an around-the-clock cash market where the currencies of nations are bought
and sold. Forex trading is always done in currency pairs. For example, you buy Euros, paying
with U.S. Dollars, or you sell Canadian Dollars for Japanese Yen. The value of your Forex
investment increases or decreases because of changes in the currency exchange rate or Forex
rate. These changes can occur at any time, and often result from economic and political
events. Using a hypothetical Forex investment, this article shows you how to calculate profit
and loss in Forex trading. Let's push your Forex trading education to a new level together.
To understand how the exchange rate can affect the value of your Forex investment, you need
to learn how to read a Forex quote. Forex quotes are always expressed in pairs. In the
following example, your pair of currencies is the U.S. Dollar (USD) and the Canadian Dollar
(CAD). The Forex quote, USD/CAD = 170.50, means that one U.S. Dollar is equal to 170.50
Canadian Dollars. The currency to the left of the "/" (USD in this example) is referred to as
base currency and its value is always 1. The currency to the right of the "/" (CAD in this
example) is referred to as the counter currency. In this example, one USD can buy 170.50
CAD, because it is the stronger of the two currencies. The U.S. Dollar is regarded as the
central currency of the Forex market, and it is always treated as the base currency in any
Forex quote where it is one of the pairs.
FOREX EDUCATION: MARKET TYPES, SPREAD ETC.

Understanding clearly the importance of forex education, LiteForex aims to provide you with
all necessary currency trading information. Continue reading for some prior forex knowledge.

Long / short forex

There are 2 different ways to trade on the forex market and many beginners (or those who
even continue their forex education) are surprised to learn that they can actually make as
much money when currency price moves down as when it goes up. Let's start with the most
logical movement, when the price moves up. Most people are very familiar with the concept
of buying something at a low price and selling it when the price increases. So the concept of
buying the EUR/USD at 1.2150 and selling it at 1.2160 for a 10 forex pip gain should seem
logical. This process is called going long. You can also do this in reverse! If you know that
the currency price is more likely to go down rather than up, you can go short. This is just the
opposite of the above transaction, selling it first and buying it back later in the hope that the
price will go down for you to make forex profit. This may seem strange at first, but the

concept remains the same either way. You always want to buy something at a low price, and
sell it expensive. The consecution of actions doesn't matter. You must both buy and sell; as
long as you sell at a higher price than you buy you make profit. Let us continue our forex
education.

Forex spread
The difference between stock and forex markets is that broker commissions are either very
low or zero. Forex brokers make money from the spread a difference between the actual
price and the offered price through a broker. On the left (side menu) you can see a typical
board of currency pairs and their forex spreads. This one is taken from our feed this morning,
and you can see the difference between the Offer (the price you can place on a sell order) and
the Bid (the price you can place on a buy order) is 3 forex pips (spread). What does this mean
to you though? Take a look at the board. If you bought the EUR/USD at 1.2158 as it is
offered under the Offer column, and immediately sold it again before the price moved, you
would only get 1.2155 as is shown in the Bid column. So the net result is -3 forex pips, or a
loss to you, and a profit to the broker. Remember to always take the spread into account when
placing a trade, setting targets and stop losses.

Bears & Bulls

Once started your forex education, you will constantly see the terms "Bears" and "Bulls" in
books and chat rooms. These are terms that describe the general mood of the forex market. A
"bear" market is when the general mood of the market is down, i.e. when there are more
sellers than buyers in the marketplace. A "bull forex market" is the opposite, when there are
more buyers than sellers and the general mood of the market is up. Forex is a place where
bulls and bears struggle, and if you can identify who is gaining the upper hand, then you can
identify the direction of the price. There are many more areas to cover; this should help those
only starting forex education.

Calculating forex profit / loss

Forex market is an around-the-clock cash market where the currencies of nations are bought
and sold. Forex trading is always done in currency pairs. For example, you buy Euros, paying
with U.S. dollars, or you sell Canadian dollars for Japanese yen. The value of your forex
investment increases or decreases because of changes in the currency exchange forex rate.
These changes can occur at any time, and often result from economic and political events.
Using a hypothetical forex investment, this article shows you how to calculate profit and loss
in forex trading. Let's push your forex education to a new level together. To understand how
the exchange rate can affect the value of your Forex investment, you need to learn how to
read a forex quote. Forex quotes are always expressed in pairs. In the following example,
your pair of currencies is the U.S. dollar (USD) and the Canadian dollar (CAD). The Forex
quote, USD/CAD = 170.50, means that one U.S. dollar is equal to 170.50 Canadian dollars.
The currency to the left of the "/" (USD in this example) is referred to as base currency and
its value is always 1. The currency to the right of the "/" (CAD in this example) is referred to
as the counter currency. In this example, one USD can buy 170.50 CAD, because it is the
stronger of the two currencies. The U.S. dollar is regarded as the central currency of the forex

market, and it is always treated as the base currency in any forex quote where it is one of the
pairs.
This is part 2 of the article.

Forex Information Useful For Every Beginner

The most common information and the initial knowledge along with understanding Forex
trading can assist you a lot if you do your first steps in this direction. Surely, any article or
issue even the most detailed one cant give all necessary Forex information a beginner should
know before starting a trade but the most basic data you can learn from reading the
following article dealing mostly with explanation of terms and the Forex market scheme of
work.
Any basic Forex information would not be full without explanation of what Forex means.
Forex market or sometimes called as FX stands for a foreign exchange market (also known as
currency market) where people traders and brokers are involved into buying and
selling world currencies against each other. At the moment a lot of people join Forex market
as traders due to great popularity and huge financial base and opportunities this market can
offer even if comparing it with stock exchange markets. Besides approximate daily trade
results which Forex and related markets show are really impressive more than 3 trillion
USD which is over all results of all U.S stock markets. Due to the fact that trading at Forex
market can be conducted all over the world by means of the Internet and other
communication means like fax and phones Forex trading is also considered as one of the
most convenient and easy to use ones comparing with stock markets.

If you want to start your Forex education in a correct way you need to learn to distinguish
Forex market and stock market scemes of work because many newbies suppose by mistake
that these two markets work basing practically on the same principles and using the similar
tools and instruments. There are plenty of differences but only two of them denote the evident
dissimilarity
between
these
types
of
markets:
1) Difference in trading hours. The main advantage of Forex market is that it works 24/7
without breaks and day offs. Forex information and trading itself can be provided from three
continents from a lot of big cites like Tokyo, London, New York, Zurich and many others
which allows following and reacting in a proper way at various and fast fluctuations
happening at Forex market. As for the stock markets they open at Sunday night and close
on
Friday
evening.
2) Commissions can be different. Online electronic Forex trading and high competition
created circumstances making possible reducing in bit-off spreads (equals to stock
commissions). Such spreads cover all those risks which are inevitable when one deals with
the market makers. Many people find Forex spreads rather low but any spread can rise if the
currency liquidity drops due to some reasons. Besides such Forex commissions considered as
the lowest ones according to trade sizes comparing with stock markets in spite of the fact that
lately FX commissions have been reduced. In the most Forex trading houses leverage is
offered as 100 to 1 (for example a trader who can suggest a deposit fund of 10 000 USD can
leverage this sum up to 1 million USD). Such situation involves interference of speculators
who can narrow a pip spread but government and the hugest banks impact on prices and
commissions as well so the chances are equal. Besides never heed that stock markets offer all

participants involved into trading an equal level of an access and practically the same prices
while the Forex market suggests few totally various levels of an access where commissions
and spreads differ from every next level. The hugest investing banks involved into Forex
trading
can
offer
the
lowest
spreads.
Why

spreads

are

so

important

in

Forex

trading?

Any initial Forex information presupposes explanation of spreads functions and meaning. To
explain what is a spread we need to appeal to such terms as the BID price and the
ASK/OFFER price. The BID price means the price at which a trader can easily sell one unit
of any base currency offered at the Forex market (or buying one of secondary currencies) and
the ASK/OFFER price stands for the price used by a trader for buying a unit of one of base
currencies. The following example explains this in practice if the exchange rate of the
currency pair EUR/USD equals to 1.3473/1.2476 it denotes that a trader should pay 1.2476
USD to buy one Euro (which is obviously a base currency) and if a trader sells one Euro he
will get 1.3473 USD. You see, it is not so hard to figure out. As you have noticed the BID
price was lower than the ASK/OFFER price and that tiny difference between these two prices
is called a spread which is measured in pips (1.2476 - 1.3473 = 3 pips) and in such way
denotes the possible profit and the dealing room used in the Forex trading houses.
And the last piece of Forex information we want to discover deals with retail Forex trading.
The mentioned before market makers or also known as retail Forex brokers work
representing retail customers and capture one of the smallest niches of the Forex market. Due
to the dry statistics data retail Forex broker is responsible for estimation of the total volume
of retail trading which equals up to 50 billion per day (around two percent from the total
value of the whole Forex market). However this segment shows a tendency to grow lately
because of appearing high quality Forex trading platforms and individual traders using these
platforms.