An Intern Learns – Why trade Forex?
The other night I caught a taxi home to avoid the heavy bustle of the evening tube. This was a great idea, nothing like a private ride home all to yourself! The taxi driver was a chatty guy and on the ride home we spoke about various bits and bobs. He asked me what work I did and I told him how I had recently started working for a foreign exchange company. He was intrigued to know more. He himself dabbled in the stock market but didn’t realize that you could trade currency too. I began to explain it to him and told him how people all over the world trade currency in the forex market. One of the most interesting aspects of it is how each country’s own currency has it’s own characteristics and will fluctuate to it’s own rhythm. Most people trade the stock market without realizing that the forex market has some distinct benefits, such as the fact that it’s open 24 hours a day. This means that you can choose when you want to trade.
The foreign exchange market is also incredibly large, and with so many people all over the world dealing in foreign exchange, this market is incredibly liquid. Now this does sound rather an odd term to describe a market, but there are no aquatics happening here. A market is described as liquid (or having high liquidity) when there is an abundance of supply and demand of a particular asset. The forex market is described as such and all this trade has in fact lead it be being the largest financial market in the world with some experts putting its daily trading volume at an astounding $5 Trillion! That is a whole heap of money. The forex market is open 5 days a week, 24 hours a day, and starts Monday morning Sydney time. Trading continues as the day travels west through Japan, London and New York with the highest liquidity (or amount of trading) happening when the time zones overlap, i.e. when most people are awake at the same time.
So you may be wondering how all this trading actually happens. As I touched on in my first blog, the basic concept is that we are speculating one currency’s worth in comparison to another. We are venturing whether currency X will strengthen or weaken against currency Y, and by strategically placing our trades we could we generate a profit.
These trades are always viewed in pairs. And you will see these on all forex platforms. It will look something like this: EUR/USD 1.27750 / 1.27758. This is a currency pair and shows their spread. A currency is always represented by three capital letters. In this example it’s quite obvious: EUR represents Euro’s and USD represents USA (American) Dollars. A little sneaky fact on the side here, the US Dollar is the base currency of the world as is easily the most traded currency. Over 80% of all trades involve the USD!
Getting back to currency pairs: the first of the pair (on the left of EUR/USD) is always referred to as the base currency and the second currency is the quote currency. These correspond with the numbers you saw above; 1.27750 is the base or bid price and the number on the right is called the offer price. In this example, to buy 1 Dollar will cost you 1.27758 Euros.
Phew ok lots to get our heads around, but I want to leave with one last and particularly important term; the difference between these two numbers is the spread, and when the spread is the smallest, or tightest, this is when the trading potential is it’s best. The spread is measured in Pips and in this case there is a spread of 0.8 pips (note, not all FX platforms offer spreads as tight at MahiFX!).
We’re getting knee deep in terminology now and in the next blogs we will slowly begin piecing together a much bigger picture of what trading is all about, and how different currencies all interact with each other. And just like the people in the countries they represent, some are consistent and punctual and some are quite all over the show.