Thread: 2) Introduction to the FX Markets

Introduction to the FX Markets

Currency Trading is the exchange of one country's currency for another. It is often referred to as the Foreign Exchange Market, Forex or FX. It is the largest financial market in the world and continues to grow. While the FX market is traded like other financial markets, there are some key differences.

The Symbol/Quote:

While $1 is always worth $1, the buying power of that US Dollar can vary both in the US and in other countries. So in order to determine its value today, the FX market measures the value of one currency against another currency. The EUR/USD measures the value of the Euro in US Dollars while the USD/JPY measures the value of the US Dollar in Japanese Yen. This really isn't all that different from a stock symbol. Just think of IBM as IBM/USD which means that the quote represents the value of IBM measured in US Dollars. An IBM quote of 102 means that one share of IBM is worth $102. A EUR/USD quote of 1.2500 means the one Euro is worth $1.25. A EUR/USD quote of 1.2501 means the Euro is worth $1.25 and 1/100th of a penny. However, in the FX markets, the last digit is not referred to as 1/100th of a penny, but rather a pip which stands for Percentage in Point. When the EUR/USD moves from 1.2501 up to 1.2502, it is a move of one pip. The first currency listed is the base currency which is what we are measuring while the second currency is known as the counter currency which is what we are using to measure the value of the first currency.

Currency Abbreviations

Symbol......Definition
EUR..........Euro
GBP..........British Pound
JPY...........Japanese Yen
USD..........US Dollar
CAD..........Canadian Dollar
CHF..........Swiss Franc
NZD..........New Zealand Dollar
AUD..........Australian Dollar


The Market:

There is no central market for the currency trading like there is for a stock market or the futures markets. Trading is done between the largest banks in the world and is known as the Interbank Market. Only the biggest traders had access to this market up until recent technological advances offered the opportunity for individual traders to also gain access through different FX firms. This access has lowered the cost of trading for the individual which is one of the big reasons for its recent popularity and growth.

Market Hours:

Unlike most other financial markets, the FX market is open for trading 24 hours a day. Three major trading periods define the daily FX market, namely the Tokyo Trading Session, the London Trading Session, and the New York Trading Session. Generally, the FX market is most active when sessions overlap with a US/Europe overlap between 8 AM - 12 PM (New York Time) and a Europe/Asia overlap between 2 AM - 5 AM (New York Time).

Tokyo Trading Session: 7:00 PM - 4:00 AM (EDT)

Tokyo is the first market to open and many large participants use the trade momentum there to develop their strategies and as a gauge for future market dynamics. Approximately 6% of the world's FX transactions are enacted in the Tokyo Trading Session.

London Trading Session: 3:00 AM - 12:00 PM (EDT)

London is the largest and most important trading center in the world, with about a 34% market share of the daily FX volume. Most of the world's largest banks keep their dealing desks in London because of that market share. The large number of participants in the London FX market and the high value of the transactions makes the London session more volatile than the other two sessions.

New York Trading Session: 8:00 am - 5:00 pm (EDT)

The second largest trading market, New York handles approximately 16% of the world's FX transactions. The majority of the transactions in New York occurs during the US/Europe overlap; with transactions slowing as liquidity dries up and European traders exit the market. Since California has never served as a bridge between the US and Asia, there is a 50% drop in activity by midday. As a result, market developments in the afternoon during the New York session do not garner as much attention. The New York session is heavily influenced by the US equity and bond markets and pairs will often move closely in tandem with these capital markets.

Interest Rates:

Usually the most important factor in the value of a currency is the interest rate environment in that country. Higher interest rates usually lead to a higher currency value while lower interest rates usually lead to a lower currency value. When the interest rates are rising in one country, investors from around the world will buy that country's currency to invest in the bond market to lock in those higher interest rates. This flow of money has a great influence on the value of that country's currency as the buying interest pushes up the value of that currency.

Rollover:

Rollover is the interest paid or earned for holding an FX position overnight. Each currency has an interest rate associated with it, and because FX is traded in pairs, every trade involves not only two different currencies, but their two different interest rates. If the interest rate on the currency you bought is higher than the interest rate of the currency you sold, then you will earn rollover (positive roll). If the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover (negative roll). Rollover can add a significant extra cost or profit to your trade. Traders who look to take advantage of this rollover interest are referred to as carry traders. These carry traders also have a big influence on the value of currencies as those pairs that pay the most in interest generate the most buying interest which in turn, pushes the value of those currencies with higher interest rates even higher.

Trading FX:

Trading the FX markets is the same as other financial markets. A quote consists of a buy price which is the offer and a sell price which is the bid. The difference between the two prices is referred to as the spread. High volume pairs like the EUR/USD will typically have tighter spreads than other pairs that don't generate as much trading volume. If you think that the EUR is going to strengthen against the USD, you would buy the EUR/USD. If you think that the EUR will weaken against the USD, you would sell the EUR/USD. This later trade is referred to as shorting the market and involves no additional costs or restrictions in the FX market. Since the direction of interest rates in a country does not change that often, the FX markets are known for their long trending moves.

Margin:

The margin deposit is not a down payment on a purchase of equity, as many perceive it to be in the stock markets, but rather a performance bond, or good faith deposit to ensure against trading losses. The margin requirement allows traders to hold a position much larger than their account value. Margin at FX firms can by as high as 200:1 which is much higher than the 2:1 the stock market may offer or the currency futures market which can offer leverage as high as 40:1. This additional leverage can result in high profits with a relatively small move in the FX markets, but can also result in large losses.

Conclusion:

The interest in trading the Currency Markets has grown dramatically in recent years. Increased government regulation meant to protect traders along with a low initial investment required to trade live are but two of the reasons for this new interest. Traders also find that the FX markets move on the same fundamental reasons that other financial markets move. This includes the stock market, bond market and other financial futures markets. The result has been that many speculators who try trading FX find that the move to trading currencies is fairly easy and worth the effort.

Take a bow Sir! you explained almost the whole forex market through a couple of paras only! you are the Summerizer King!

Originally Posted by nancee

Take a bow Sir! you explained almost the whole forex market through a couple of paras only! you are the Summerizer King!

Welcome to the Forums and FXCM Nancee ! Please let me know if you have any questions or concerns regarding our educational material.

I am trying to learn to use the daily fx trading signals can you please tell me where to read on this as well. There is so much info out there I dont know where to turn. Already have live accounts but need to learn more about trading before i put them back into play. There are several different stops and limit order on here and i am just trying to know when to use what, as well as learning the systems and market as a whole. please advise.

thnx

Here is a link to a presentation Jeremy gave on the signals in Las Vegas about two weeks ago.
9/11 Trading the DailyFX Plus Trading Signals - Jeremy Wagneron FXCM Currency Trading Expo - live streaming video powered by Livestream

Hi ,

Am new to forex. I would like to know that for a micro lot what would be the Roll over charges. Now since I cant log in to trade station post closing on friday ( though I wonder why since this prevents me going over my charts on the weekend !!) I cant tell you the exact percentage for E/U pair.

So lets assume I have a long position in the E/U pair and the Roll over buy is at 2%. So what will that cost me in USD terms post 1700EST for one micro lot.

Originally Posted by Walker England

Welcome to the Forums and FXCM Nancee ! Please let me know if you have any questions or concerns regarding our educational material.

Originally Posted by Simr

Hi ,

Am new to forex. I would like to know that for a micro lot what would be the Roll over charges. Now since I cant log in to trade station post closing on friday ( though I wonder why since this prevents me going over my charts on the weekend !!) I cant tell you the exact percentage for E/U pair.

So lets assume I have a long position in the E/U pair and the Roll over buy is at 2%. So what will that cost me in USD terms post 1700EST for one micro lot.

What do you mean Rollover buy is at 2%?

Rollover changes each day based on the overnight libor rate differential of BOTH currencies involved in a currency pair.

You can view this from the 'Simple Dealing Rates,' window of the Trading Station platform, under 'RollS,' or 'RollB.'

Wow that was informative. You explained a lot in only a few paras. Bravo

Originally Posted by rony21

Wow that was informative. You explained a lot in only a few paras. Bravo

Please let me know if you have any questions in regards to the material. We would be happy to help you out.