What is Forex?

  • Foreign exchange, also known as FX or Forex, is the simultaneous buying of one currency and selling of another at an agreed exchange price on the over-the-counter market.   

    Forex is the world's largest financial market, with an average volume of US$ 4 trillion per day. Compare this to the New York Stock Exchange, which has a daily turnover of US$50 billion, and it’s easy to see how the worldwide forex market is the biggest financial market in the world. 

    What makes FX attractive?

    FX markets and prices are mainly influenced by international trade and investment flows. To a lesser extent, FX prices are also influenced by economic and political conditions, such as interest rates, inflation, and political instability (the same factors that influence the equity and bond markets). This means that currency prices are constantly fluctuating in value against each other, offering multiple trading opportunities.

    Economic and political conditions usually have only a short-term impact, which makes FX attractive as it offers some of the diversification necessary to protect against adverse movements in the equity and bond markets. 

    Pricing 

    All forex is quoted in terms of one currency versus another. Each currency pair has a ‘base’ currency and a ‘counter’ currency. The base currency is the currency on the left of the currency pair and the counter currency is on the right. For example, in EUR/USD, EUR is the ‘base’ currency and USD the ‘counter’ currency.  

    Forex price movements are triggered by currencies either appreciating in value (strengthening) or depreciating in value (weakening). If the price of EUR/USD for example was to fall, this would indicate that the counter currency (US dollars) was appreciating, whilst the base currency (euros) was depreciating. Find out how you can profit from fluctuating currency prices with City Index.   

    'Bid' and 'Ask'

    All FX prices, or quotes, include a 'Bid' and 'Ask' similar to other financial products: 

    • Bid is the price at which you can sell currency 
    • Ask is the price at which you can buy currency

     

    Spread 

    The difference in the BID/ASK of the currency pairs is referred to as the 'spread'. An example would be EUR/USD dealing at 1.41800/1.41808 (in this case the spread is 0.8 pips or 0.00008). The exceptions to this are the JPY pairs which are quoted to just 2 decimal places. A USD/JPY price of 76.41/76.44 displays a 3 pip 'spread'. 

    Point or 'pip'

    Pip stands for Percentage in Points. Most of our currency pairs are quoted to 5 decimal places with the change from the 4th decimal place (0.0001) in price commonly referred to as a ‘pip'. For example, if the price of the EUR/USD forex pair moved from 1.41800 to 1.41920, it is said to have climbed by 12 ‘pips’ (92-80=12).

    Commonly traded currencies in the FX market 

    The most popular currencies and their symbols are shown below:  

     Symbol 

    Currency 

     USD 

      United States Dollar 

     EUR 

      Euro (EUR/USD) 

     JPY 

      Japanese Yen (USD/JPY) 

     GBP 

      British Pound or Sterling (GBP/USD, or STG/USD) 

     CHF 

      Swiss Franc (USD/CHF) 

     CAD 

      Canadian Dollar (USD/CAD) 

     AUD 

      Australian Dollar (AUD/USD) 

     NZD 

      New Zealand Dollar (NZD/USD) 

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