Introduction to Foreign Exchange
Foreign Currency Exchange or, FOREX, is an international
financial market where money is bought and sold. An analogy
would be: take a vacation to a country that has a different currency
and cash a traveler’s check for spending money. You are
essentially ‘trading’ one currency for another. You will get more or
less than the face value of the check, depending on the value of the
two currencies involved. If your home currency is worth more,
you’ll get more ‘bang for your buck’. If your home currency is
weaker, it’ll cost you more for your travel and souvenirs.
Currencies fluctuate constantly for many different reasons,
including political, economic, and natural disasters, to name a few.
The Forex Market is open 24 hours worldwide closing only from
Friday afternoon until Sunday evening (US time), with major
trading centers in London, New York, and Tokyo. Traders can
access the market any time and trade on global developments.
Newly developed ‘robot trading software’ allows traders to sleep
while their accounts are traded.
It’s a cash market where you speculate on the possible changes in
exchange rates of the different world currencies. FOREX operates
through a global network of banks, corporations and even
individuals trading one currency for another but, it doesn’t have a
physical location. And, it doesn’t have a central exchange like
other financial markets, such as the stock markets. Since it has no
physical/centralized exchange, Forex is considered to be an over-
the-counter market or, OTC. Most of the trading is conducted by
telephone, internet, or electronic trading networks.
The FOREX Market
The FOREX Market as we know it today began in the 1970's with
the introduction of free exchange rates and floating currencies.
Before, retail investors could access the foreign exchange market
through banks that transacted large amounts of currencies for
commercial and investment purposes. After exchange rates were
allowed to float freely, trading volume has increased tremendously.
Today, the primary market for currencies is the “interbank market”
where banks, insurance companies, large corporations and other
large financial institutions (Importers/Exporters, Global Portfolio
Managers, Multinational Corporations, Speculators, Day Traders,
and Hedge Funds) manage the risks associated with fluctuations in
The Forex Market is a very liquid market because there are
always buyers and sellers for the currency you want to trade.
This gives the ‘trader’ the ability to quickly buy or sell a
currency. The Forex Market has an incredible trading volume
with daily averages in excess of $3trillion.
A quick comparison*:
• One day of Forex trades, is roughly equivalent to 9 days
of global equity markets
• Forex Market trades more in a day than the NYSE trades
in a month
• An annual turnover more than 9 times World GDP!
One element of the Forex Market that makes it very attractive to
traders is the low transaction cost. Traders pay only the spread, the
price at which a market maker will buy from a customer. A pip is
the smallest price increment in Forex trading - pip stands for
percentage in point. Prices are quoted to the fourth decimal point in
the Forex market - for example EUR/USD might be bid at 1.3391
and offered at 1.3394. When you enter a trade, you pay the spread
upfront. In this example we can see that the spread is 3 pips wide.
The Japanese Yen (JPY) is an exception – it’s quoted only to the
second decimal point.**
The value of a pip. Pip value can be either fixed or variable
depending on the currency pair, e.g. the pip value for
EUR/USD is always $10 for standard lots, $1 for mini-lots and
$0.10 for micro lots. Lots are the standard unit size of a
transaction. Typically, one standard lot is equal to 100,000
units of the base currency, 10,000 units if it's a mini, or 1,000
units if it's a micro.
There are three basic accounts available to traders. Your
available investment capital and trading experience will dictate the
account that is right for you. Many Forex trading platforms also
offer a demo account to allow you to trade in real time with ‘play
money’ until you’re comfortable enough to trade a ‘live’ account.
There are numerous programs available that allow any Trader,
regardless of experience, to ‘level the playing field’.
Opening A Trading Account
Find a Broker that offers different accounts to accommodate
you as you grow in experience. There should also be an option
available to open a demo account so you can practice trading
before you use real money. If you plan to use this trading robot,
you’ll need a platform that supports a Meta Trading Platform.
Trading with Standard Lot sizes, generally 100,000
units of the base currency. e.g. The pip value is $10
Trading with Mini Lot sizes, generally 10,000 units of
the base currency. e.g. The pip value is $1 for
Trading with Micro Lot sizes, generally 1,000 units of
the base currency. e.g. The pip value is $0.10 for
Some Forex pairs move from 100 to even 400 or more pips in a
day, depending on the factors mentioned earlier. So you can
understand the leverage you have with trading Forex! A 100 pip
move can mean a 100% return on your money!
How Interest Rates Play a Role
In The Currency Markets
Interest rates are the foremost important role in the prices of
currencies in the Forex market. Because the institutions that set
interest rates are central banks, they are therefore the most
influential factors. Interest rates dictate flows of investment. Since
the value of currencies are representative of a country’s economy,
differences in interest rates affect the relative worth of a currency
in relation to another. When central banks change interest rates
they cause movement and volatility in the Forex market. In the
world of Forex trading, accurate speculation of central banks’
actions can increase the trader's chances for a profitable trade.
Trading System Software can give you a huge advantage.
In the currency market, there are two basic types of analysis:
fundamental and technical. Fundamental analysis is a measure of
the intrinsic value of a country's economy, and judging on its
anticipated future performance, positions are opened to take
advantage of the predicted direction it will take in the currency
market. News that has an impact on the economy, directly and
indirectly, is considered a fundamental factor. Economic and
financial factors play a huge roll, and have the biggest impact on
movements in the currencies. These fundamentals are separated
into three major categories: economic, financial, and political
factors (which include crises). Among the most notable market
moving fundamentals are monetary and fiscal policy, government
reports such as GDP, CPI, PPI, and measures such as the
unemployment rate. The dates and times of economic data release
are known well in advance, and are
anticipated by the market. You can look online to find many
resources available concerning financial and economic
indicators. Political factors include, but are not limited to:
• High Level Talks, and
Political factors such as presidential elections and G-7 meetings
are scheduled beforehand and can be anticipated. A political crisis,
such as a nuclear test by a rouge nation, i.e. N. Korean missile
launch, or a terrorist attack, such as 9/11, can have a dramatic
effect on the currency markets and is next to impossible to predict.
It is significant to note that it’s the outlook of an event that impacts
the Forex market, more than the event itself. If the event matches
expectations, it should have already been priced in to the present
market price. If an event is unexpected, or the results are different
from what was anticipated, then the currency markets react to
"price in" the new information. Generally speaking, only big
political events that have the potential to affect the patterns of trade
of an economy, or a group of economies, will have an effect on the
financial market. Having software that analyses the markets for
you can increase your success rate dramatically.
Technical analysis has become extremely popular. The
Technical Trader uses charts, trend lines, moving averages,
support and resistance levels, stochastics, and a host of other
technical indicators to identify patterns in the market's
behavior. Traders use these technical factors to distinguish
buying and selling opportunities. Historically, currencies have
trends and patterns that are identifiable. In my opinion, a good
trading strategy will incorporate both the fundamental and
technical aspects. If you are trading without a broker, you should
educate yourself, and get a good trading platform. If you’re the
type that’s impatient and you want to flatten the learning curve,
here’s a system that is revolutionizing the way Forex is traded.
The 8 Major Currencies:
In the stock market there are thousands of securities for you to
invest in. In the FOREX market, most trading takes place in only a
• U.S. Dollar ($)
• European Currency Unit (€)
• Japanese Yen (¥)
• British Pound Sterling (£)
• Swiss Franc (Sf)
• Canadian Dollar (Can$)and to a lesser extent,
• Australian and New Zealand Dollars.
These major currencies are most often traded because they
represent the countries with esteemed central banks, stable
governments, and relatively low inflation rates.
Currencies are also always traded in pairs (i.e. USD/JPY or
Dollar/Yen) on a floating exchange rate.
It makes sense that the trading volumes in the various regions are
highest during their own business hours. The times of most
liquidity and market movement is the London open (3am EST),
and the overlap between London/Euro close and the New York
open (8am-11am EST).
Here’s a snapshot of the hours of the different regions based on
EST time zone.
• New York session opens at 8:00am and ends around 5:00pm.
• Sydney session starts at 5:00pm, ends around 2:00am.
• Tokyo session begins at 7:00pm, ends around 4:00am.
• Frankfurt session opens at 2:00am and ends around
• London opens at 3:00am and ends around 12:00am.
Each trading day begins in Sydney, Australia, and then progresses
to the next financial center as the business hours of that region
begin. Although the daily session ends at 5pm EST, the market
doesn’t actually close.
If you don’t want to have to lose sleep to be able to take advantage
of the markets when they’re most active, there are several systems
available that can trade for you automatically.
*These statistics were derived from commonly available online sources. They are, obviously,
subject to change.
** Due to possible changes/updates in the market rules, this is just a basic example
This report is for information purposes only. No investing advice is being given in any way. .
Although there is a lot of opportunity to make money in the Forex Market, it is a high risk Market.
There is also the possibility of substantial loss.Don’t invest money that you cannot afford to lose.