FOREX- Foreign Exchange Market

The Foreign Exchange market, also referred to as the "Forex" or "FX" market is the largest financial market in the world, with a daily average turnover of US$3.2 trillion.

"Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation.

For speculators, we believe the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

A true 24-hour market from Sunday 5:00 PM ET to Friday 5:00PM ET, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.

The FX market is considered an Over The Counter (OTC) or 'InterBank - interdealer' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets.

Understanding Forex Quotes:

Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.

The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 120.55 means that one U.S. dollar is equal to 120.55 Japanese yen.

When the U.S. dollar is the base unit and currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 125.05, the dollar is stronger because it will now buy more yen than before.

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.9988, meaning that one British pound equals 1.9988 U.S. dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.

In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 150.75 signifies that one Euro is equal to 150.75 Japanese yen.

When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'ask':
The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency).
The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).


What is a pip?

In the Forex market, prices are quoted in pips. Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th of 1%.

In EUR/USD, a 1 pip spread is quoted as 1.3500/1.3501

Among the major currencies, the only exception to that rule is the Japanese yen. In USD/JPY, the quotation is only taken out to two decimal points (i.e. to 1/100 th of yen, as opposed to 1/1000th with other major currencies).

In USD/JPY, a 1 pip spread is quoted as 125.00/125.01


No Debit Balances

At GIB, your risk is only limited to funds on deposit. Because there are no margin calls in forex trading, for your protection we will automatically close out all of your open positions if your account equity falls below the required margin level. Think of this as a final, automatic stop.

Leverage & Margin

The leverage available in forex trading is one of main attractions of this market for many traders. Leveraged trading, or trading on margin, simply means that you are not required to put up the full value of the position. Forex provides more leverage than stocks or futures. In forex trading, the amount of leverage available can be up to 200 times the value of your account. There are several reasons for the higher leverage that is offered in the forex market. On a daily basis, the volatility of the major currencies is less than 1%. This is much lower than an active stock, which can easily have a 5-10% move in a single day. With leverage, you can capture higher returns on a smaller market movement. More importantly, leverage allows traders to increase their buying power and utilize less capital to trade. Of course, increasing leverage increases risk.


Margin Trading: Stocks vs Forex & CFDs

The word "margin" means something very different in FOREX & CFDs than it does in stocks.

With stocks, trading on margin means that a trader can borrow up to 50% of a stock's value to buy that stock. This can be a costly move because the investor must pay interest to the brokerage firm on the amount borrowed. This is not the case in forex & CFDs trading.

In forex & CFDs, margin is the minimum required balance to place a trade. When you open a forex & CFDs trading account, the money you deposit acts as collateral for your trades. This deposit, called margin, in Forex is between 1% - 5% of the value of the position and in CFDs is between 5% - 10% depending on the underline security.

It is very important to remember that increasing leverage increases risk. You should monitor your account balance on a regular basis and utilize stop-loss orders on every open position in an attempt to limit downside risk.