The history of this market dates to the decade of the 70s of the 20th century in the United States, when the Bretton-Wood agreements were signed in order to establish the price of the American Dollar against an ounce of gold, and to start trading the other world currencies against the Dollar.
This market is not organized in the same way as the common stock market. It is rather an informal network of trading relationships between participants from all over the world, which includes governments from different countries, central and commercial banks, financial institutions, pension funds, insurance companies, brokers, dealers, individual investors etc. Meanwhile, the main role in this market belongs to the banks that is why they are called “market makers”, since they are the ones that carry out most transactions in the market, offering buy and sell of the currencies to their clients.
All currencies of the world are traded in the Forex market. However, there is a group of currencies (strong currencies) that is more popular for trading and has higher intraday sales volumes:
USD – United States Dollar
EUR – Euro
GBP – Pound Sterling (cable)
CHF – Swiss Franc
JPY – Japanese Yen
CAD – Canadian Dollar
AUD – Australian Dollar
NZD – New Zealand Dollar
These currencies form the main currency pairs, which are traded on the FX:
EUR / USD
GBP / USD
EUR / GBP
USD / JPY
EUR / JPY
GBP / JPY
USD / CHF
USD / CAD
AUD / USD
The price of each currency traded in the market is measured in points, or “pips”, which represent a minimum price change.
Currencies are never traded alone. They always form currency pairs, which reflects the price of one currency through the other. The buy and sell of the currency in a currency pair is executed at different prices or quotes.
The sell is executed at the sale price (Bid), and the buy at the purchase price (Ask). It is worth mentioning that Ask is always greater than Bid.
For example, the price of the currency pair EUR/USD can be 1.3040/1.3045, which means that at the moment you can sell EUR for 1.3040 USD, and buy it at the price of 1.3045. This difference between the two prices is called “spread”.
The Forex market is one of the most dynamic markets in the world. It is open 24 hours a day (on weekends it is also open, but there is very little movement and volume of transactions), with certain peaks of activity that coincide with the start of the three most important trading sessions in the world (Asian session, European and American). The total of all daily made transactions reaches almost 3 trillion US Dollars.
How to operate in FOREX
All operations in the FX market are carried out by applying financial leverage (ratio of own capital to capital loaned to carry out the operation).
It happens due to the market volumes themselves and helps to increase the volume of profits in case of positive closing of the operation, although it can also increase losses in the case of a negative result of the transaction.
The leverage can be variable (1:5, 1:10, 1:50, 1:100, 1:200 and etc.) and depends on the requirements and profile of the investor at the time of performing the operation.
Unlike with traditional stock exchange, the FX market allows us to make two types of trading transactions:
• Buy (long operation, or “long”)
• Sell (short operation, or “short”)
This means that it is possible to profit, or to speculate with the prices of currencies both in a bull market (market with an upward trend, “bull market “), and in a bear market (market with a downward trend, “bearish market”).
Let’s see an example of an operation with a leverage of 1:200 in a transaction with the EUR/USD pair.
We put 1,000 USD of our own money in the operation, in other words, we will operate with a volume of 200,000 USD (1,000 x 200).
After a careful analysis of market trends, we decided to open a sell position of EUR/USD. The quote is at the level of 1.3040/1.3045, so we open the position with the price of 1.3040.
The market continued showing a bearish trend, and the quote of EUR/USD is at 1.3020/1.3025, which gives us points in favor and allows us to close the position with a profit. We decided to close our position at the current price of 1.3025. We earn 15 points from the operation, which is equal to about 300 USD of profit (200,000 x 0.0015).
In this example we do not apply “commissions”, charged by the broker for carrying out the operation. These normally consist of a spread, which is already integrated in prices reflected in the trading platform and is applied to the opening prices of each operation.
Click here to see our spreads table.
If you wish to receive more information about the Forex market, please contact our specialists.