Basic: Intro to The Market

What's Forex?

"Forex" stands for foreign exchange; it's also known
as FX. In a forex trade, you buy one currency while simultaneously selling another
- that is, you're exchanging the sold currency for the one you're buying. The
foreign exchange market is an over-the-counter market.
Currencies trade in pairs, like the Euro-US Dollar (EUR/USD) or US Dollar /
Japanese Yen (USD/JPY). Unlike stocks or futures, there's no centralized exchange
for forex. All transactions happen via phone or electronic network.

Who trades currencies, and why?
Daily turnover in the world's currencies comes from two sources:

• Foreign trade (5%). Companies buy and sell products in
  foreign countries, plus convert profits from foreign sales into domestic currency.


• Speculation for profit (95%).

Most traders focus on the biggest, most liquid currency pairs. "The Majors"
include US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian
Dollar and Australian Dollar. In fact, more than 85% of daily forex trading
happens in the major currency pairs.

The world's most traded market, trading 24 hours a day

With average daily turnover of US$3.2 trillion, forex is the most traded market
in the world.


A true 24-hour market from Sunday 5 PM ET to Friday 5 PM ET, forex trading begins
in Sydney, and moves around the globe as the business day begins, first to Tokyo,
London, and New York.

Unlike other financial markets, investors can respond immediately to currency
fluctuations, whenever they occur - day or night.
More Info
"All About the Foreign Exchange Markets in the United States", from
the Federal Reserve Bank of New York.

Understanding Forex Quotes

Reading a foreign exchange quote is simple if you remember two things:

1. The first currency listed is the base currency


2. The value of the base currency is always 1.

As the centerpiece of the forex market, the US dollar is usually considered
the base currency for quotes. When the base currency is USD, think of the quote
as telling you what a US dollar is worth in that other currency.

When USD is the base currency and the quote goes up, that means USD has strengthened
in value and the other currency has weakened. Rising quotes mean a US dollar
can now buy more of the other currency than before.

Majors not based on the US dollar
The three exceptions to this rule are the British pound (GBP), the Australian
dollar (AUD) and the Euro (EUR). For these pairs, where USD is not the base
currency, a rising quote means the US dollar is weakening and buys less of the
other currency than before.
In other words, if a currency quote goes higher, the base currency is getting
stronger. A lower quote means the base currency is weakening.

Cross currencies
Currency pairs that don't involve USD at all are called cross currencies, but
the premise is the same.

Bids, asks and the spread
Just like other markets, forex quotes consist of two sides, the bid
and the ask:

The BID is the price at which you can SELL
base currency.

The ASK is the price at which you can BUY
base currency.

What's a pip?
Forex prices are often so liquid, they're quoted in tiny increments called
pips, or "percentage in point". A pip refers to the fourth decimal
point out, or 1/100th of 1%.

For Japanese yen, pips refer to the second decimal point.
This is the only exception among the major currencies.

Source : http://au.biz.yahoo.com