What is the Foreign Exchange Market?

The Foreign Exchange market, also referred to as the “Currency,” "Forex" or "FX" market, is the largest financial market in the world, with a daily average turnover of approximately US$3.5 trillion. The foreign exchange market exists wherever one currency is traded for another. It includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. Individual retail traders are a small fraction of this market and participate indirectly through brokers.
Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange. Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.

Foreign exchange has developed into an asset class (a type of investment such as stocks or bonds). This is partly because it is uncorrelated to any other asset class. As the world's largest over-the-counter market, foreign exchange is attractive to investors due to its deep liquidity, volatility, and low-cost per trade.

What are Currency Pairs and How Do They Work?

Foreign Exchange trading involves the simultaneous buying of one currency and the selling of another. The world's currencies are on a floating exchange rate and are always traded in pairs, for example Euro/Dollar or Dollar/Yen.
Currency Pairs are traded against each other, meaning that the value of one currency is determined by its comparison to another currency. Currency Pairs are traditionally noted in the internationally recognized three-letter codes for the currencies involved: XXX/YYY. Forex trades involve the simultaneous buying of one currency and selling of another, but each pair of currencies constitutes an individual product that is itself bought and sold on the Foreign Exchange market. For instance, a price quote for EUR/USD gives the price of the Euro expressed in US dollars, as in 1 euro = 1.3045 dollar. The internationally recognized symbols for some of the most commonly traded currencies are:

EUR Euros

USD United States dollar

CAD Canadian dollar

GBP British pound

JPY Japanese yen

AUD Australian dollar

CHF Swiss franc.

If you buy a Currency Pair, you buy the base currency and sell the quote currency. The bid (sell price) represents how much of the quote currency is needed for you to get one unit of the base currency. Conversely, when you sell a Currency Pair, you sell the base currency and receive the quote currency. The ask (buy price) for the Currency Pair represents how much you will get in the quote currency for selling one unit of base currency.

For example, if the USD/EUR Currency Pair is quoted as being USD/EUR = 1.5 and you purchase the pair, this means that for every 1.5 euros that you sell, you purchase (receive) US$1. If you sold the Currency Pair, you would receive 1.5 euros for every US$1 you sell. The inverse of this currency quote is EUR/USD, and the corresponding price would be EUR/USD = 0.667, meaning that US$0.667 would buy 1 euro

Where is the Central Location of the Foreign Exchange Market?

FX Trading is not centralized on an exchange or clearing house, as are the stock and futures markets. The Foreign Exchange market is considered an Over the Counter (OTC) or “inter bank” market, because these that transactions are conducted between two counterpartys over the telephone or an electronic network.
The biggest geographic Foreign Exchange trading centre is the United Kingdom , primarily London . Other large centres include the United States , Japan and Singapore . Most of the remainder is accounted for by trading in Germany , Switzerland , Australia , Canada , France and Hong Kong .

When is the Foreign Exchange Market Open for Trading?

The Foreign Exchange market is a true 24-hour market. Trading begins each day in Sydney , and moves around the globe as the business day begins in each financial center, first to Tokyo , then London , and New York . Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.

What are the Most Commonly Traded Currencies in the FX Markets?

The most often traded or 'liquid' currencies are those of countries with stable governments, respected central banks, and low inflation. Today, over 85% of all daily Foreign Exchange transactions involve the major currencies, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and the Australian Dollar.

Is Foreign Exchange Trading Capital Intensive?

No. LANCEBANK requires a minimum deposit of $100. The margin we grant is 1:100 and in certain instances we grant 1:500 margin. However, it is important to remember that while this type of leverage allows investors to maximize their profit potential, the potential for loss is equally great.

What is Margin?

Margin is the amount of cash or other eligible collateral that LANCEBANK requires in a customer's account to open or to maintain an open Foreign Exchange position. If the customer's open position worsens and his or her account does not have funds equal to or more than the required margin amount, LANCEBANK will initiate a margin call. When this occurs, the customer must either deposit more money into the account or close out the position. The LANCEBANK trading system will automatically calculate margin requirements for current open positions and check for margin availability before allowing the execution of a new trade.

What does it mean have a 'long' or 'short' position?

In trading parlance, a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. In this scenario, the trader benefits from a rising market. A short position is one in which the trader sells a currency in anticipation that it will depreciate. In this scenario, the trader benefits from a declining market. However, it is important to remember that every Foreign Exchange position requires a trader to go long in one currency and short the other.

What is the difference between an “intra-day” and an “overnight” position"?

Intra-day positions are all positions opened anytime during the 24 hour period AFTER the close of LANCEBANK 's normal trading hours at 4:30pm EST. Overnight positions are positions that are still on at the end of normal trading hours (4:30pm EST), which are automatically rolled over by LANCEBANK at competitive rates (based on the currencies interest rate differentials) to the next day's prices.

How are Currency Prices Determined?

As mentioned above, currency prices are determined primarily by supply and demand factors. See, “What Is The Foreign Exchange Market?” above. These factors are controlled and affected by a variety of economic and political conditions, most importantly interest rates, inflation and political stability. Moreover, governments sometimes participate in the Foreign Exchange market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price. This is known as Central Bank intervention. Other such factors include the flow of imports and exports in a particular country, a country's trade balance, the flow of capital into and out of a country, relative inflation rates, governmental policies aimed at limiting a currency's exchange rate fluctuations, the difference in interest rates between countries (known as the yield differential), and rates of inflation. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and volume of this market makes it impossible for any one entity to "drive" the market for any length of time.

How do I Manage Risk?

The most common risk management tools in Foreign Exchange trading are the limit order and the stop loss order. A limit order places restriction on the maximum price to be paid or the minimum price to be received. A stop loss order ensures a particular position is automatically liquidated at a predetermined price in order to limit potential losses should the market move against a trader's position.

What kind of Trading Strategy Should I Use?

Currency traders make typical decisions using both technical and fundamental analysis Technical traders use charts, trend lines, support and resistance levels, and numerous patterns and mathematical analyses to identify trading opportunities, whereas fundamentalists predict price movements by interpreting a wide variety of economic information, including news, government-issued indicators and reports, and even rumor. The most dramatic price movements however, tend to occur when unexpected events happen. Such events can range from a Central Bank raising domestic interest rates to the outcome of a political election or even an act of war. Often enough it is the expectation of an event, rather than the event itself, that drives the market.