The Forex market, established in 1971, was created when floating exchange rates began to materialize. The Forex market is not centralized, like in currency futures or stock markets. Trading occurs over computers and telephones at thousands of locations worldwide.
The Forex market, which is the exchange of one currency to another, is the largest market in the world trading up to $2 trillion in one single day, to put this number into perspective the New York Stock Exchange trades on average less than 28 billion a day. In dollar volume the Forex market can trade in one week what the New York Stock Exchange trades in one year!
The largest foreign exchange activity is the spot exchange (i.e.., Immediate) between the US dollar and four other major currencies: British Pound, Japanese Yen, Eurodollar and the Swiss Franc. These four currencies are bought and sold against the US dollar.
Up until 1998 this was the exclusive market of the banks and large institutions that traded currencies among themselves, reaping huge profits. Wonder why the Banks and Insurance companies have the biggest buildings downtown?…currency trading.
In a recent article in the Wall Street Journal, Daimler Chrysler made more money in one quarter trading foreign currency than selling cars. Think of it, if the big companies are doing it, it is definitely the trend to follow. Now thanks to the Internet it is possible for fund managers to be involved in the same trading, at their own level…with low risk.
The global marketplace has changed dramatically over the past several years. New investment strategies are becoming more important in order to minimize risk, as well as to maintain high portfolio returns. Among the most rewarding of the markets opening up to traders is the Foreign Exchange market. Identifiable trading patterns, as well as comparatively low margin requirements, have rewarding trading opportunities for many.
In contrast to the world’s stock markets, foreign exchange is traded without the constraints of a central physical exchange. Transactions are instead conducted via telephone or online. With this transaction structure as its foundation, the Foreign Exchange Market has become by far the largest marketplace in the world. Average volume in foreign exchange exceeds $1.5 trillion per day. This high volume is advantageous from a trading standpoint because transactions can be executed quickly and with low transaction costs (i.e., a small bid/ask spread).
As a result, foreign exchange trading has long been recognized as a superior investment opportunity by major banks, multinational corporations and other institutions. Today, this market is more widely available to the individual trader than ever before.
Spot foreign exchange is always traded as one currency in relation to another. So a trader who believes that the dollar will rise in relation to the Euro, would sell EURUSD. That is, sell Euros and buy US dollars. Forex-Training.com has compiled the following guide for quoting conventions: