Imagine a trading market opening on Sunday in the evening and closing on Friday.
It sounds good, doesn't it?
This 24-hour market is not a dream, it is real and has got a name: Forex.
It stands for Foreign Exchange, also known under the acronym FX.
It refers to the evaluation system of a currency into another: such value is called ‘exchange rate'
and the FX-market is the virtual market where currencies are traded.
Obviously there is neither a physical place nor a centralized exchange for FX trading.
This is one of the most relevant differences (and advantages) in comparison with futures or stocks: each
transaction happens via internet, electronic network or telephone, traders can immediately react
to market fluctuations whenever they happen and they can also determine the actual ask/bid price
independently from international networks' indications.
FX originated because of the need to exchange currencies for each transaction involving traders of
different countries.
But at the present the role of foreign trade in FX market is minimal: more than 90% of FX trades
are only speculations.
Each transaction happens between two parts: each trader sells his own currency and buys the other's.
The ask/bid price is determined by an agreement of both parts in the light of the general
market situation: only currency fluctuations will say who of them gains.
This kind of exchange is usually carried out in the major currencies, which means US Dollar, Canadian
Dollar, Euro, British Pound, Japanese Yen, Swiss Franc and Australian Dollar: these represent more
than 85% of FX trades.
Usually US Dollar is considered as the base currency to compare but there are three important
exceptions: Euro, Pound and Australian Dollar.
Each pair not including the US Dollar as base currency is called ‘cross pair'.
And now let's see an example of how a FX trade works:
let's put we want to invest in the pair euro/dollar and the ask price (sell) is 1.000 while the bid
one (buy) is 1.003.
We decide to place a buy order, that is, we buy euros and at the same time we sell dollars.
If after a while we notice that the quote rises to 1010 it means we have gained 7 points, called "pips"
(percentage in points) and we can choose to continue or not.
In the same example, if we had decided to place a sell order, such quote rise would have meant a loss for us.
On the contrary, in order to gain pips with a sell order we have to hope that the base currency weakens.