Tuesday, 14 August 2018
Bitcoin

Forex In A Nutshell

Foreign Currency Exchange, or Forex is a super-liquid highly available financial market. It is in fact the largest financial market in the world, connecting all of the worlds largest banks into a single, large exchange. Unlike most other financial markets the forex exchange operates in a kind of concentric circle, spaning out from the most elite inner-circle of traders, generally the inter-bank market made up of the worlds largest investment banks and spanning out the to the retail exchanges to that you and I are likely to trade on. The major difference between each level of the circle is how much you pay or are paid when you buy into or out of any of the available currency pairs.

When you trade on the Forex you are buying or selling currency pairs. The five most commonly traded treaties are (in no particular order):

  • USD (US Dollar)
  • EUR (Euro)
  • JPY (Japanese Yen)
  • GBP (British Pound Sterling)
  • CHF (Swiss Franc)

These are traded in pairs that define the exchange rate between one and the other. The most common pairs then are (not necessarily in order):

  • EUR / USD
  • USD / JPY
  • USD / GBP
  • USD / CHF
  • EUR / GBP

And many more.

When you trade a currency pair you are buying one and selling the other at the price quoted by your broker. Generally there will not be a commission paid and the prices quoted by the broker include a small amount that they keep, which leads us to the spread. The spread is the difference in cost of buying or selling the pair. For example, your broker may be quoting EUR / USD at 1.4404 / 1.4407, this means there is a spread of 0.0003 point spread. Somewhere in there is what they keep, and the real price the broker is paying for the liquidity from another level closer to the center of that mystical concentric circle is probably closer to 1.44055 / 1.44063, or a spread of just 0.00008. That is assuming, of course that your broker even has to buy liquidity at all. Some of the larger firms have no such need and their only costs are infrastructure related.

This is just a primer on what the Forex market is and how it, kind of, works. It is the largest financial market in the world. It connects all major countries in the world together. Naturally there are a lot more details that what are outlined here.


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