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and exports products. Generally, nations use their own currency to buy products from other countries. Whether it's a trader looking to profit by trading a foreign currency, an American restaurant buying French wine, a Swedish furniture maker buying bolts from South Korea, or a tourist on vacation, each needs to trade currencies for any transaction to occur. These practical uses for currency trading create a fluid market for the forex speculator. However, unlike other types of trading, forex is a fairly new phenomenon. The forex market is relatively new, only forming in the 1970s when countries gradually shifted to floating exchange rates. Until the 1970's, and for the previous 100 years, the value of a currency was tied in some way to the value of gold. In 1944 the Gold Standard was abolished and replaced by the Bretton Woods Agreement which valued the United States Dollar against gold, and all other currencies against the US dollar. In 1975 that agreement fell apart and a system of floating exchange rates was widely adopted. Despite formation of the forex market in the 1970s, access to the forex market by small speculators was very limited until the late 1990s, when widespread access to Internet technologies made market access practical. Today, individual speculators form a large part of the market, which had previously been accessible only by large commercial institutions. What currencies are traded? While all currencies are included in the forex market, the vast majority of trades (90%) include just 14 currencies, while just 4 currencies, the United States Dollar, the Euro, the Japanese Yen and the British Pound, are used in approximately 77% of all trades. The currencies most traded, commonly abbreviated to the country name and the currency name, are the United States Dollar (USD), the Euro (EUR), the Japanese Yen (JPY), the Great Britain Pound (GBP), the Swiss Franc (CHF), the Canadian Dollar (CAD), the New Zealand Dollar (NZD), and the Australian Dollar (AUD). Forex always involves two currencies: one currency being bought, in exchange for another currency. Together, the two currencies are called a currency pair. The most popular forex currency pairs traded are: Rank 1 2 3 4 5 6 7 8 9 10 Currency Names Euro / US Dollar US Dollar / Japanese Yen British Pound / US Dollar US Dollar / Swiss Franc Euro / British Pound Euro / Japanese Yen Euro / Swiss Franc Australian Dollar / US Dollar US Dollar / Canadian Dollar Symbol EUR/USD USD/JPY GBP/USD USD/CHF EUR/GBP EUR/JPY EUR/CHF AUD/USD USD/CAD
The order of the currencies in the pair is significant and important to understand. When buying a currency pair, the first currency of the pair (the base currency) is being purchased, and the second currency (the quote currency) is being sold. As an example, if you buy EUR/USD you are actually buying Euros and selling US Dollars at the same time. You would profit if the Euro increased in value as compared with the US Dollar. If you thought instead, that the Euro was likely to decrease in value, you would sell the EUR/USD. That trade would actually consist of a sale of Euros and purchase of US Dollars. Note that you could not simply buy the currency pair in the 'opposite' order. USD/EUR simply does not trade or is not offered on trading platforms. Currency pairs therefore have a common or preferred order. As mentioned above, EUR/USD is the preferred order for that trade, and is offered on trading platforms. However, the pair USD/EUR is not offered or available to
trade. This seeming arbitrary choice of order does not in any way restrict trading possibilities. The trader just needs to remember that he can buy or sell any pair at any time (i.e. a pair that is not owned can be sold, and the purchased later).
Trading Hours
With only a short break on the weekend, forex trading takes place 24 hrs per day. With the increased use of global high speed Internet connections and 24 hour trading, the forex market is an almost constant activity centre.
The terms Bid and Ask make best sense when considered from the perspective of the Market. The Bid price is the price at which others are willing to purchase a particular currency pair, while the ask price is the price at which others are willing to sell the currency pair. To restate this important concept in terms of base and quote currencies, the Bid price is the amount the market is offering to buy the base currency, while the Ask is the amount that the market is asking to sell the base currency (in a price denominated by the quote currency). Forex prices sometimes express both Bid and Ask values in the form Bid/Ask. For example, a USD/CAD forex quote might be expressed as 1.0180/83. This price indicates that the Bid is 1.0180, and the Ask price is 1.0183. Spread Spread is the difference between the Bid and Ask prices. In the case of the USD/CAD forex quote mentioned 1.0180/83, the spread is .0003, often expressed as "3 pips". Forex brokerages often set the spread of currency pairs offered at fixed amounts. For the forex trader, this fixed spread allows for better pricing consistency from trade to trade. For an example of how this information is used when calculating profit and loss in forex trading, please see the Mechanics of Forex Trading section. Leverage and Margin Leverage Leverage allows a large amount of currency to be bought with a small investment. The amount of leverage available to a trader varies with the broker, for example 100:1, meaning that currency trades worth $100,000 can be made with an investment of $1,000. The word "leverage" originally meant the effect of using a lever to move a much larger object. In forex terms, leverage allows the use of credit to buy more currency with just a small amount of money on deposit. That deposit money is usually called "margin". Margin Margin refers to money actually deposited into a forex trading account. A trader must have a certain amount of money, the "margin" in their account before they can trade in the forex market. The amount required relates directly to the amount of leverage available. For example, if a margin account has a value of $1000 and leverage is 100:1, the trader can trade up to $100,000 in foreign currencies. Note that the amount of available margin will increase or decrease as the value of the forex currencies actively traded increase and decrease in value, through a process named "marked to market", through which profits and losses are immediately credited to or deducted from the trader's margin account. Marked-to-Market Changes in the value of a trader's open trades (positions) are normally reflected in the trader's account balance. This accounting, called "mark to market" can occur continuously in some trading platforms, or once per day in other platforms. The term refers to the days before computers, when the value of an asset was recorded, or marked, on a balance sheet at the end of each trading day. This practice continues today, electronically, and can have a noticeable impact on the account balance.
Glossary
For more trading terms, please browse through our extensive online glossary of forex trading terminology. What is traded? While almost any currency can be traded in the forex market, the most frequently traded currencies are referred to as the Major Currencies. Currencies are commonly abbreviated to a three-letter currency symbol. Major currencies include: the United States Dollar (USD), the Euro (EUR), the Japanese Yen (JPY), the Great Britain Pound (GBP), the Swiss Franc (CHF), the Canadian Dollar (CAD), the New Zealand Dollar (NZD), and the Australian Dollar (AUD). Other currencies can be considered to be Minor Currencies, sometimes referred to as "Exotic" or "Emerging" currencies