Foreign Exchange: it is also known as FX or Forex. It is the buying and selling of currencies. Unlike stocks or futures, there is no centralized exchange for Forex. All transactions happen via phone or electronic network. Because of this, Forex is among the most liquid of trading instruments. In fact, the daily trading volume of currencies is $ 3.2 Trillion – which is more than all other world market exchange trading combined!
More than 85% of Forex trading volume occurs in the “Major” currencies: US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.
Reading a foreign exchange quote is simple if you remember two things:
1. The first currency listed is the base currency
2. The value of the base currency is always 1
A currency pair quote is comprised of a bid/ask price expressed in the following format:
EUR/USD: 1.3036 / 1.3038 or EUR/USD: 1.3036/38
The first number in the series represents the bid price, the cost of selling the Euro against the Dollar, or going ‘short' on the Euro. The second number represents the ask price, the cost of buying the Euro against the dollar, or going ‘long’ on the Euro.
The difference between the ask price and the bid price is called the pip spread.
A pip (or “percentage in point”) is the smallest unit of measure for any currency. In most currencies, this is the fourth digit after the decimal point and is equal to 1/100th of 1% or .0001 (or .01 for Japanese Yen as the only exception among the major currencies). So, using the example above (EUR/USD: 1.3036 1.3038), the spread is 2 pips (38 – 36).
AB
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