Introduction to Foreign Exchange Trading

Introduction to Foreign Exchange Trading

Foreign Exchange is when you buy a particular currency from someone, for instance the British Pound (GBP). In order to buy this currency, you must sell them something in exchange, for instance you will pay for it with US Dollars (USD).

If you travel from the US to England you will need the local currency to pay for transportation, food, and so on. So when you get to the airport you go to the foreign exchange counter and give them your US Dollars and they give you the equivalent in British Pounds. In this example, you sold the USD and bought the GBP while the foreign exchange counter bought the USD and sold the GBP. The prices at which you buy and sell currencies at are known as the exchange rate. This rate or price fluctuates based on demand, political, and economic events surrounding each country.

This example illustrated how the Foreign Exchange market is used by world travelers, however, the market is also utilized by each country's central bank (i.e., America's Federal Reserve), investment and commercial banks, fund management firms (mutual funds and hedge funds), major corporations, and individual investors or speculators. Utilization by so many parties is why the Foreign Exchange market is the world's largest financial market, with a daily dollar volume exceeding $1.9 trillion ($1,900,000,000,000). This mind boggling volume is probably what led you to this site in the first place.

Now let's put the market's trading volume in perspective. Did you know that in all of 2003 the reported trading volume for the NYSE (New York Stock Exchange) was a mere $9.6 trillion and topped out at $10.2 trillion for all of 2002? This is probably why so many fund managers and Fortune 500 companies invest heavily in this highly liquid market. Unlike other financial markets, the foreign exchange market operates 24 hours a day, 5.5 days a week (6:00 PM EST on Sunday until 4:00 PM on Friday EST) through an electronic network of banks, corporations and individual traders. Forex trading begins every day in Sydney, moves to Tokyo, followed by Europe and finally the Americas.

It is important to note that retail traders, such as yourself, will be accessing the Forex Exchange market via an FCM or broker. You will not be trading in the actual Interbank market itself. Your access to the total market will be determined by your chosen brokers limitations.