The Foreign Exchange Market is a cash interbank or interdealer market. The market is both highly differentiated from, yet intrinsically linked to, the currency futures market. Foreign exchange, however, is not a market in the traditional sense since there is no centralized location for trading activity. Trading occurs over the telephone and through computer terminals at thousands of locations worldwide. The direct interbank market consists of dealers with currency settlement capabilities who trade as principals. It is this dealer segment of the market that is responsible for generating a large portion of the overall foreign exchange volumes.

Daily trading volume in the Forex currency market now exceeds €1.4 trillion, easily making it the largest and most liquid investment market in the world. Unlike most financial markets, the Forex market is not limited to a single physical location or centralized investment exchange. The broad spectrum of Forex currency market participants covers all corners of the world, including most major banks, multinational corporations, governments, investment trusts, funds and private investors.

Increasing trade and international investment have made the economies of all nations more and more interrelated. Regularly reported economic figures around the world, such as inflation or unemployment levels, as well as unexpected news, such as natural disasters or political instability, alter the desirability of holding a particular currency, thus influencing the international supply and demand for that currency. As an example, the U.S. Dollar fluctuates constantly against the currencies of the rest of the world. The demand for this web of international trade and the resultant fluctuations in exchange rates has created this world's largest market - the Forex Market, and ensures that it remains the most efficient, fairest and liquid of all markets.

Foreign exchange trading occurs around the clock in every major city on the face of the earth. Virtually every major bank (worldwide) has established Forex dealing (trading) rooms as an integral part of their financial, risk management and investment operations. With thousands of Forex dealing rooms in operation, the Forex currency market enjoys unparalleled liquidity, around-the-clock global activity and seamless market efficiency. As a result the Forex currency market has entered into in a class by itself. Not surprisingly (given all of these attractive market characteristics), thousands of investors worldwide (each month) are diversifying their investment portfolios with Forex for the first time.

Currency Buy/Sell

In the Forex market, currencies are always priced in pairs; therefore all trading results in the simultaneous buying of one currency and the selling of another. The primary objective of currency trading is to exchange one currency for another with the expectation that the market rate or price will change so that the currency purchased has increased its value relative to the one sold. If the currency price appreciates in value, the trader must sell the currency back in order to lock in the profit. An open trade or position is one in which a trader has either bought/sold one currency pair and has not sold/bought back the equivalent amount to effectively close the position.

Standard Quoting Conventions

The first currency in the pair is referred to as the base currency, while the second is the counter or quote currency. The U.S Dollar, as a dominant currency, is often used as the base currency for quotes, and includes USD/CHF, USD/JPY, and USD/CAD. This means that quotes are expressed as a unit of 1 USD per the other currency quoted in the pair. Exceptions include the Euro, British Pound, and Australian Dollar. These currency pairs are quoted as the base currency (i.e. Euro, British Pound or Australian Dollar) per US dollar.

As with most financial instruments, FX quotes include a bid and ask. The bid is the price at which the FX dealer is willing to buy (and clients can sell) the base currency in exchange for the counter currency. The ask is the price at which a dealer will sell (and clients can buy) the base currency in exchange for the counter currency. The difference between the bid and ask prices is referred to as the spread.

Pips

In the wholesale market, currencies are quoted using five numbers, with the last placeholder called a point or a pip. In Forex, like most markets, there is a cost for establishing a position. For example, USD/JPY may bid at 136.40 and ask at 136.45, this five-pip spread defines the trader’s cost, which can be recovered with a favorable currency move in the market.

Margin

In the wholesale market, currencies are quoted using five numbers, with the last placeholder called a point or a pip. In Forex, like most markets, there is a cost for establishing a position. For example, USD/JPY may bid at 136.40 and ask at 136.45, this five-pip spread defines the trader’s cost, which can be recovered with a favorable currency move in the market.

Rollover

In the spot Forex market, all trades must be settled within two business days. For example, if a trader sells £500,000 on Tuesday, the trader must deliver £500,000 on Thursday, unless the position is rolled over. Most professional Forex Brokerage companies will automatically roll over all open positions i.e. swap the trade forward to the next sequential settlement date (two business days later). The swap rates are determined at the Interbank level and are also tradable instruments. In any spot rollover transaction, there is the difference in interest rates between the two currencies which will be reflected in the overnight loan. If a trader is long the currency with the higher interest rate within the pair, the trader will most likely gain profits on the spot rollover through the premium (favorable) relationship of the long currency relative to the short currency. The amount of the gain is determined by the interest rate differential between the two currencies, and fluctuates each day with the movement of each currency’s respective price. For day traders that never hold a position overnight, rollover does not affect trading.