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Introduction to
FOREX
http://wwwmyedollarscom
Stock Trading ebooks
Dscamer
Thsebook soreducatonalpurposesony. Itsnotntended orshoud be
construed asadvce regardng nvestmentsn any way. Investmentscan go down
aswelasup and pastperormance sno guarantee ofuture perormance. Any
materalmentoned n the book sorustraton purposesony and shoud not
be nterpreted asadvce.
Introducton to the FOREX
Table ofContents
A Little History ............................................................................................. 3
Market Mechanics ........................................................................................ 5
More on Market Mechanics......................................................................... 7
Leverage......................................................................................................... 9
Rollovers ...................................................................................................... 11
Accounts....................................................................................................... 13
Statements.................................................................................................... 15
The Main Players ........................................................................................ 18
What Next .................................................................................................... 22
Page 2 of24
Introducton to the FOREX
A Little History
The purpose ofthsebook sto ntroduce the Forex marketto you. Aswth many
marketsthere are many dervatve ofthe centralmarketsuch asutures, optons
and orwards. Forthe purpose ofthsbook we wlony be dscussng the man
marketsometme reerred to asthe SpotorCash market.
The word FOREX sderved rom Foregn Exchange and sthe argestnancal
marketn the word. Unke many marketsthe FX marketsopen 24 hoursper
day and hasan estmated $1.2 Tron n turnoverevery day. Thstremendous
turnoversmore than the combned turnoverofalthe wordsstock marketson
any gven day. Thstendsto ead to a very qud marketand thusa desrabe
marketto trade.
Unke many othersecurtes(any nancalnstrumentthatcan be traded)the FX
marketdoesnothave a xed exchange. Itsprmary traded through banks,
brokers, deaers, nancalnsttutonsand prvate ndvduas. Tradesare
executed through phone and ncreasngy through the Internet. Itsony n the
astew yearsthatthe smaernvestorhasbeen abe to gan accessto ths
market. Prevousy the arge amountsofdepostsrequred precuded the smaer
nvestors. Wth the adventofthe Internetand growng competton tsnow
easy n the reach ofmostnvestors.
You wloten hearthe term INTERBANK dscussed n FX termnoogy. Ths
orgnay, asthe name mpeswassmpy banksand arge nsttutons
exchangng normaton aboutthe currentrate atwhch thercentsor
themseveswere prepared to buy orsela currency. INTER meanng between and
Bank meanng deposttakng nsttutonsnormay made up ofbanks, arge
nsttuton, brokersoreven the government. The markethasmoved on to such a
degree now thatthe term nterbank now meansanybody who sprepared to buy
orsela currency. Itcoud be two ndvduasoryourocaltravelagentoerng to
exchange EurosorUS Doars. You wlhowevernd thatmostofthe brokers
Page 3 of24
Introducton to the FOREX
and banksuse centrazed eedsto nsure reabty ofquote. The quotesorBd
(buy)and Oer(se)wlalbe rom reabe sources. These quotesare normay
made up ofthe top 300 orso arge nsttutons. Thsnsuresthatfthey pace an
orderon yourbehafthatthe nsttutonsthey have paced the orderwth s
capabe ofung the order.
Now athough we have spoken aboutordersbeng ued, tsestmated that
anywhere rom 70%-90% ofthe FX marketsspecuatve. In otherwordsthe
person ornsttuton thatboughtorsod the currency hasno ntenton ofactuay
takng devery ofthe currency. Instead they were soey specuatng on the
movementofthatpartcuarcurrency.
Source: Bank ForInternatonalSettement
shttp://www.bs.org
ExtractFrom The TrennalCentralBank Survey ofForegn Exchange and
DervatvesMarketActvty.
Currency 1989 1992 1995 1998 2001
US Doar 90 82.0 83.3 87.3 90.4
Euro 37.6
Japanese Yen 27 23.4 24.1 20.2 22.7
Pound Sterng 15 13.6 9.4 11.0 13.2
SwssFranc 10 8.4 7.3 7.1 6.1
Asyou can see rom the above tabe over90% ofalcurrencesare traded aganst
the US Doar. The ournextmosttraded currencesare the Euro (EUR),
Japanese Yen (JPY), Pound Sterng (GBP)and SwssFranc(CHF). Ascurrences
are traded n parsand exchanged one orthe otherwhen traded, the rate at
whch they are exchanged scaed the exchange rate. These ourcurrences
traded aganstthe US Doarmake up the maorty ofthe marketand are caed
maorcurrencesorthe maors.
Page 4 of24
Introducton to the FOREX
Market Mechanics
So now we know thatthe FX marketsthe argestn the word and thatyour
brokerornsttuton thatyou are tradng wth scoectng quotesrom a
centrazed eed orndvdualquotescomprsng ofnterbank rates. So how are
these quotesmade up. We, aswe prevousy mentoned currencesare traded n
parsand are each assgned a symbo. Forthe Japanese Yen tsJPY, orthe
PoundsSterng tsGBP, orEuro tsEUR and orthe SwssFrank tsCHF.
So, EUR/USD woud be Euro-Doarpar. GBP/USD woud be poundsSterng-
Doarparand USD/CHF woud be Doar-SwssFrancparand so on. You wl
awayssee the USD quoted rstwth ew exceptonssuch asPoundsSterng,
EuroDoar, Austraa Doarand New Zeaand Doar. The rstcurrency quoted
scaed the base currency. Have a ook beow orsome exampe.
Currency Symbol Currency Par
EUR/USD Euro / US Doar
GBP/USD PoundsSterng/ US Doar
USD/JPY US Doar/ Japanese Yen
USD/CHF US Doar/ SwssFranc
USD/CAD US Doar/ Canadan Doar
AUD/USD Austraan Doar/ US Doar
NZD/USD New Zeaand Doar/ US Doar
When you see FX quotesyou wlactuay see two numbers. The rstnumbers
caed the bd and the second numberscaed the oer(sometmescaed the
ASK). Ifwe use the EUR/USD asan exampe you mghtsee 0.9950/0.9955 the
rstnumber0.9950 sthe bd prce and sthe prce tradersare prepared to buy
Eurosaganstthe USD Doar. The second number0.9955 sthe oerprce and s
the prce tradersare prepared to selthe Euro aganstthe US Doar. These
quotesare sometmesabbrevated to the asttwo dgtsofthe currency such as
50/55. Each brokerhastsown conventon and some wlquote the ulnumber
and otherswlshow ony the asttwo. You wlaso notce thatthere sa
Page 5 of24
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