FOREX is the simultaneous buying of one currency and selling of another. Forex is a large financial market which is much bigger than the stock market. Forex daily trade volume exceeds $3 billion. Forex is an off-the-board market where the operations are conducted through brokers. The trading continues 24 hours a day, 5 days a week. With the help of brokers, it is possible to trade almost all currencies. Currencies, as a rule, are denoted by three letters, the two letters from the beginning denote the country, and the third letter – the name of the currency. The most liquid are considered to be the US dollar (USD), the euro (EUR), the Japanese yen (JPY), the British pound (GBP) and the Swiss franc (CHF).
A price of one currency versus another is constantly changing (rising or falling). For example, if we say that the US dollar is decreasing, it is not clear, as the US dollar can rise versus the Australian dollar and fall against the euro. Currencies are always traded in pairs. As currencies are quoted one versus another, the names of the currencies can be divided with a slash (/) and are written in the following way: EUR/USD. Currency pairs correspond to the ratio of currency prices making up the pair. For example, the price of the EUR/USD pair shows how many dollars you can buy for 1 euro. The first currency in the pair is a base currency and the second one is the currency of quoting or quote currency. The euro is a base currency versus other major world currencies.
There are the following base currency pairs:
|EUR/USD||Euro, US dollar||Euro|
|GBP/USD||pound, dollar||Sterling or Cable|
|USD/JPY||US dollar, yen||Yen|
|USD/CHF||US dollar, franc||Swissy|
|AUD/USD||Australian dollar, US dollar||Aussie|
|USD/CAD||US dollar, Canadian dollar||Loonie|
|NZD/USD||New Zealand dollar, US dollar||Kiwi|
There are so-called majors, for which around 75% of all market operations on Forex are held: the EUR/USD, GBP/USD, USD/CHF, and USD/JPY. As we see, the US dollar is represented in all currency pairs, thus, if a currency pair contains the US dollar, this pair is considered as a major currency pair. Pairs which do not include the US dollar are called cross currency pairs, or cross rates.
The following cross rates are the most actively traded:
Buy and sell currency
Traders in the foreign exchange market buy and sell currency to try to make profit. There are two prices for currency: the buy price, called the “BID”; and the sell price, called the “ASK”.
The difference between the “bid” and the “ask” is called the “spread”. The spread represents the difference between what the market maker gives to buy from a trader, and what the market maker takes to sell to a trader.
For example: the EUR/USD bid/ask rate is 1.2100/1.2200. The market maker gives $1.21 when buying from the trader, but takes $1.22 when selling to the trader. If traders buy and sell immediately without any change in the exchange rate, they lose money. This happens because of the spread – traders pay more to buy the currency than they receive when they sell in that one moment.
In fact, the spread is the leading source of income for the market maker. Like any other market, the merchant will buy at one price and sell at a higher price.
The price of a currency is called the “quote”. There are two forms of quotes in the Forex market: direct quotes, and indirect quotes.
A direct quote is the price for one US dollar in terms of another currency.
An indirect quote is the price for one UNIT of another currency in terms of the US dollar.
Please note: in general, most currencies are quoted against the USD (e.g. – “direct quote”).
But, the EUR, GBP, AUD, NZD (as well as Gold XAU and silver XAG) are indirect quoted, for example: GBP/USD.
The quote is the price to a currency pair that the deal will be made with. This is unlike an “indication”, where the price given by a market maker is only informational (for trader’s knowledge, rather than for execution). Real time quotes are provided to easy-forex® logged in users. Delayed quotes (“indication”) are provided to the rest of the site users.