Forex Trading – How You Can Profit From This $3.5 Trillion Market and How to Read a Forex Quote
It’s the world’s largest financial market, trading a whopping $3.5 trillion every day! It is also the most liquid market in the world and is growing at an exponential growth. It’s a level playing field out there with everyone from hedge funds to central and commercial edges to retail investors vying for a proportion of the pie!
And unlike other trades where you buy or sell products and sets and make money out of it, here you trade money itself. To top it off there is no central marketplace this trading is done, it is conducted over-the-counter via phone or electronic networks. Welcome to the world of foreign exchange or forex or simply FX!
How Forex works
Forex involves the trading of currencies of different countries. In other words, you buy one money and simultaneously sell another money. The exchange rate of a money is determined at the rate at which it is exchanged for another money. This depends on many factors like the social, economic and political scenario in the respective countries of the currencies traded.
The forex market works round the clock from Sunday 5 PM ET to Friday 5 PM ET and begins in Sydney before moving on to Tokyo and to London and finally to New York. Almost 85% of the forex trade is done on the major money pairs, which are considered the most liquid. These are the US Dollar, Japanese Yen, Euro, and British Pound, Canadian dollar, Australian dollar and Swiss Franc. The other currencies make up the remaining 15% of all trades.
How to read Forex quotes
The exchange of currencies is usually done in pairs, for example the Euro and US Dollar (EUR/USD) or US Dollar and Japanese Yen (USD/JPY). The money listed on the left of the pair is the base money and its value is always 1. The money on the right is called the counter money. Excepting the British Pound, the Australian Dollar and the Euro, for all other money pairs the US Dollar is considered the base money.
Every forex quote involves two sides: the bid and ask. When you bid, it is the price at which you sell the base money. And when you ask, it is the price at which you buy the base money.
In the case of USD/JPY, the base money is the USD and the quote tells you what a US dollar is worth in JPY. For example, if EUR/USD is 1.2377, then it method that 1 euro is equivalent to 1.2377 US dollars. Similarly, GBP/USD = 1.4364 should be read as 1 GBP is equivalent to 1.4364 US dollars.
In money pairs where the USD is the base money like the USD/JPY, for example, an increase in the quote method the USD has strengthened in value which clearly method the counter money has weakened. In other words you can buy more of the counter money than before.
In money pairs where the USD is the counter money like EUR/USD, for example, an increase in the quote method that the USD has weakened in value and you can buy with it only less of the base money. The same rule applies to cross currencies or money pairs where the USD is not involved.