We had already seen that Forex, FX or currency market is a form of exchange for the global decentralized trading of international currencies connecting a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies, buying and selling world currencies, taking profit from the exchange rates difference.
Traders include banks, central bank, institutional investors,
currency speculators, corporations, government, retail investors, etc...
USD - United States Dollar
CAD - Canadian Dollar
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
AUD - Australian Dollar
CHF - Swiss Franc
NZD - New Zealand Dollar
SEK - Swedish Korona
Around 80% of all trading transactions are made on 7 major currencies.
Currencies are traded in pairs as shown below:
GBP/USD or USD/JPY
Where GBP becomes Base Currency
and USD becomes Quote Currency.
Currency pairs are often quoted as bid asked spreads. Currencies are bought and sold in units called Lots.
1 Lot = 100,000 units of the base currency.
For example, 1 Lot of Euro/USD = 1 Euro x 100000
Just like any other investment with Forex, you want to buy low and sell high or sell high and buy low.
If you buy EUR/USD at 1.4172 and then sell it when it goes upto 1.5172 you will make a profit. If you do it other way around, you will lose.
Fluctuations seen with the currencies is due to the supply and demand in the market. When demands increases, pricing increases.
Demand for any currency increases depending upon various factors:
Now, below is a list of the main Forex trading centers around the world.
- New York
- London
- Tokyo
- Sydney
- Singapore
- Hongkong
The most traded currencies in Forex are:
- US Dollar
- British Pound
- Japanese Yen
- Euro
Standard symbols for most commonly traded currencies in Forex:
Eur - EuroUSD - United States Dollar
CAD - Canadian Dollar
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
AUD - Australian Dollar
CHF - Swiss Franc
NZD - New Zealand Dollar
SEK - Swedish Korona
Around 80% of all trading transactions are made on 7 major currencies.
Currencies are traded in pairs as shown below:
GBP/USD or USD/JPY
Where GBP becomes Base Currency
and USD becomes Quote Currency.
Currency pairs are often quoted as bid asked spreads. Currencies are bought and sold in units called Lots.
1 Lot = 100,000 units of the base currency.
For example, 1 Lot of Euro/USD = 1 Euro x 100000
Just like any other investment with Forex, you want to buy low and sell high or sell high and buy low.
If you buy EUR/USD at 1.4172 and then sell it when it goes upto 1.5172 you will make a profit. If you do it other way around, you will lose.
Fluctuations seen with the currencies is due to the supply and demand in the market. When demands increases, pricing increases.
Demand for any currency increases depending upon various factors:
- Higher interest rates -> better return on savings
- More national stability -> safer and more attractive banking environment
- Tourism -> Currency is needed during travelling.
Profit and Loss Formula in Forex Trading
Price where your sell the currency - Price where you buy the currency * The Transaction cost = Profit/Loss
For example, you buy 1 Lot of Eur/USD at $1.4180 and later sell a lot of Eur/USD at $1.4193. The transaction size is 1 Lot. To calculate your profit or loss:
1.4193 - 1.4180 = .0013 (13 pips)) * 100,000 (1 Lot) = $130 Profit!
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