Forex
Foreign Exchange is the exchange of one nation's currency for that of
another. It is also the largest and most liquid financial market in the
world, with a daily turnover of over US $1.5 trillion. In comparison,
the New York Stock Exchange daily volume is only US $30 billion. Retail
currency trading-by individuals and organizations attempting to profit
from constantly changing currency prices-accounts for up to a quarter of
Forex volume. Other transactions include currency swaps by major
corporations and central banks to convert profits or hedge against
currency price movements.
Retail Forex trading occurs over the counter, without a centralized
exchange, allowing financial institutions, governments, and individuals
to trade currencies 24 hours a day from anywhere in the world. In Retail
Forex, the two currencies being traded (one against the others) are
shown as pairs of conventional abbreviations, such as USDGBP for the
U.S. Dollar against the British Pound, or JPY/EUR for the Japanese Yen
against the Euro.
Traders exchange currencies for many reasons, including liquidity,
volatility, and availability. The most common and most liquid currencies
are those of relatively stable countries with advanced economies such
as the G7. Currency pairs are always the instruments, as one currency is
always exchanged for another. The idea behind Retail Forex trading is
simple: to buy or sell a currency in a currency pair and hold that
position until the price of that currency changes. The position is
liquidated and if the price of the purchased currency increased more
than the cost of the transaction, profit is taken.
Trading decisions are made based on both "Fundamental" and "Technical"
analysis of the currency markets. Technical analysis is the use of
mathematics to identify trends and predict movements in currency prices.
Technical analysts use tools such as charts, trend lines, averages, and
many others. Fundamental analysis attempts to understand currency price
movements by examining the economy behind the currency as well as other
information, such as economic and trade indicators, news and opinions.
The most successful traders know how to use both techniques in concert.