 |
An introduction to foreign exchangeClient Services : Spread Betting Opportunities : About the Editor The foreign exchange market, also referred to as the currency market, FX market or forex market is the largest and most liquid market in the world, with average daily volumes in excess of $1.5 trillion. Historically, the foreign exchange market has been the domain of large financial institutions and these players, including central banks, investment and commercial banks continue to play a dominant role in the forex markets. However, the big guns are being joined by large corporations looking to hedge their currency risks, global money managers and hedge funds looking to profit from market speculation, and increasingly, by small private traders—including financial spread betters looking to profit from currency speculation. Unlike the stock market where there is a central, physical location where the bulk of trading takes place, the forex market is essentially virtual, with no single central location for conducting transactions. The bulk of currency transactions take place between banks (interbank market) or other counterparties dealing over the telephone or using an electronic platform. Features of the foreign exchange market
Liquidity: as stated above, the currency market is the most liquid financial market around. However, since forex is traded in pairs (such as $/£ also known as ‘Cable’ or the Dollar-Yen or Euro-Dollar currency pairs), it follows that some pairs are more liquid than others. Liquidity wanes once you go beyond the currencies of the major world economies. Extended trading hours: the forex markets are almost always open. Trading takes place across the major financial centres, in overlapping trading sessions rolling from Sydney–Tokyo–London–Frankfurt–New York from roughly 9pm GMT on Sunday to about 10pm GMT on Friday pretty much non-stop. Consequently, there are no opening or closing prices as such. For this reason, when most traders talk about closing prices, they are typically referring to the close in New York. Leverage: as a spread bet trader, you probably understand the concept of leverage. However, whereas, typical leverage factors in the equity market are around 10% (ie 10:1 leverage), in the FX market, leverage tends to be roughly 1% to 2%—which equate to 50:1 or 100:1. Of course, while on one hand this means that you can quickly parlay a small sum into a much larger amount if you trade successfully, on the other hand, trading losses can mount very quickly too. As always, you should never risk more than you can afford to lose. Long/Short trading: you can go long (buy) or sell short any traded currency pair. For instance, if you believe that the UK economy would strengthen and inflation would pick up thus necessitating further increases in short term interest rates while also believing that the US economy would falter with the consequent dampening effect on inflation and interest rates, then you may decide to back your assessment in the foreign exchange market by buying the British Pound against the US Dollar. In such a case, you buy the Cable (and essentially, you are short the Dollar against the GBP). Price quotes in the foreign exchange markets As with all other traded securities or financial instruments, forex prices display the bid and the ask. Perhaps the only immediate difference is that in the foreign exchange market, prices are typically quoted to four decimal places. The only major exception to this rule is the Japanese Yen which is typically quoted to two decimal places. For instance, the USD/GBP (Cable) may be quoted as 2.0345–2.0349. The quote above means that you can buy at 2.0349 and sell at 2.0345. As usual, the four-point (or ‘pip’ as it is referred to in the currency market) spread is the in-built profit for the broker.
|
