The purpose of this e-book is to introduce the forex market to you. As with many
markets, there are many derivatives of the central market such as futures, options and
forwards. For the purpose of this book we will only be discussing the main market
sometimes referred to as the Spot or Cash market.
The word FOREX is derived from Foreign Exchange and is the largest financial market
in the world. Unlike many markets, the FX market is open 24 hours per day and has an
estimated $1.5 Trillion in turnover every day. This tremendous turnover is more than the
combination of all the worlds' stock markets on any given day. This tends to lead to a
very liquid market and thus a desirable market to trade.
Unlike many other securities (any financial instrument that can be traded) the FX market
does not have a fixed exchange. It is primarily traded through banks, brokers, dealers,
financial institutions and private individuals. Trades are executed through phone and
increasingly through the Internet. It is only in the last few years that the smaller investor
has been able to gain access to this market. Previously, the large amounts of deposits
required precluded the smaller investors. With the advent of the Internet and growing
competition it is now easily in the reach of most investors.
You will often hear the term INTERBANK discussed in FX terminology. This originally,
as the name implies, was simply banks and large institutions exchanging information
about the current rate at which their clients or themselves were prepared to buy or sell a
currency. INTER meaning between and Bank meaning deposit taking institutions
normally made up of banks, large financial institutions, brokers or even the government.
The market has progressed to such a degree that the term interbank now means anybody
who is prepared to buy or sell a currency. It could be two individuals or your local travel
agent offering to exchange Euros for US Dollars. You will, however, find that most of the
brokers and banks use centralized feeds to insure reliability of quote. The quotes for Bid
(buy) and Offer (sell) will all be from reliable sources. These quotes are normally made
up of the top 300 or so large institutions. This insures that if they place an order on your
behalf that the institutions they have placed the order with is capable of fulfilling the
order.
Now although we have spoken about orders being fulfilled, it is estimated that anywhere
from 70%-90% of the FX market is speculative. In other words, the person or institution
that bought or sold the currency has no intention of actually taking delivery of the
currency. Instead, they were solely speculating on the movement of that particular
currency.
Source: Bank For International Settlements HYPERLINK "http://www.bis.org/"http:
//www.bis.org. Extract From The Triennial Central Bank Survey of Foreign Exchange
and Derivatives Market Activity.
As you can see from the above table over 90% of all currencies are traded against the US
Dollar. The four next most traded currencies are the Euro (EUR), Japanese Yen (JPY),
Pound Sterling (GBP) and Swiss Franc(CHF). As currencies are traded in pairs and
exchanged one for the other when traded, the rate at which they are exchanged is called
the exchange rate. These four currencies traded against the US Dollar make up the
majority of the market and are called major currencies or the majors.