Introduction to Forex

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What do you mean by forex? Does the word forex excites you? Certainly, it does excite me. Forex i.e. FX means foreign exchange, exchange of one currency against another. Whenever you go for holidays to another country then you have to exchange local currency to the foreign currency and unknowingly you get involved with forex.
The forex market is a unique market and we always know we create value only when we create a difference. Forex is quite different from other markets like capital market, money market etc. The major difference is that the Forex market is the biggest market in the world. The total combined volume of New York, Tokyo and London exchange is $ 49 billion a day however forex market alone trades around $ 5 trillion a day, almost 100 times of the combined volume of all three global exchanges. Capital and money market instruments like shares, bonds, commercial papers etc. are traded on specific exchanges like the DJIA, NASDAQ, HANG-SENG, NIKKEI, and FTSE etc. however foreign exchange is traded over the counter (OTC) online all over the globe.
The other unique feature of forex is that it is available 24×7, 5 days a week so anyone can become a part of this market. You don’t have to trade at any specific time, you can trade as per your convenience. The Forex market starts with New Zealand and closes with the US market. First New Zealand market opens trading, after few hours Australian and Japanese market opens, by the time New Zealand and Australian markets are on verge of closing European and UK market opens, after few hours of closing of the Japanese market US market opens. This particular feature attracts huge amount of retail investors as awareness about forex market and its benefits have been continuously spreading globally.
The other unique feature of forex is that it is available 24×7, 5 days a week so anyone can become a part of this market. You don’t have to trade at any specific time, you can trade as per your convenience. The Forex market starts with New Zealand and closes with the US market. First New Zealand market opens trading, after few hours Australian and Japanese market opens, by the time New Zealand and Australian markets are on verge of closing European and UK market opens, after few hours of closing of the Japanese market US market opens. This particular feature attracts huge amount of retail investors as awareness about forex market and its benefits have been continuously spreading globally.
Fundamental aspect of the countries and economics also play a very important role in the forex market.

Interest Rate: Changes in the interest rate of countries can move the market up or down. Central bank of each country changes interest rate as per economic and monitory condition. High interest rate yield high return and low interest rate yield low return. If economic situation is better and risk appetite is higher then investors prefer to buy a currency pair with high rate of interest in order to take advantage of interest spread.


Country surplus/Deficit: Long term price movement of currency pairs depends upon factors like capital flow, trade balance, and economic outlook.


Economic Outlook: A country that has a robust economic outlook and the public sentiment about the country is positive then it appreciates the value of currency.

Capital Flow: A country that generates capital flow from outside in from of FDI, FII, portfolio investment and ECB etc., improve its reserve balance and appreciates the value of currency.

Trade Balance: A positive trade balance means country’s export is more than import and creates positive surplus. Positive surplus shows country’s strength and everybody gets interested in investigating in the currency. More investment creates more demand and more demand with the less supply appreciates the value of currency.


TOP Executive speech: Forex market moves when a top executive of Central Bank speaks about the economic outlook, monitory and economic condition and future course of action etc. A dovish statement undermines the currency pair of a particular country, a hawkish statement appreciates the value of currency. A lot of volatility can be seen in the forex market before and after a major speech by a Central Bank’s chief.


Data and News: Data and economic news affects the market and creates volatility in the forex market. Data like GDP, Housing sales, unemployment, interest rate change etc. makes a ripple effect in the market. Even before the release of major data market moves with several pips.
Leverage is a double edge sword that makes the Forex market differ from other trading markets. It gives traders or investors a huge amount of exposure as compared to his margin. Leverage in forex market varies from broker to broker and ranges between 100:1 and 1000:1. What does it mean? It means if you put 1 $ (in case of 100:1) then broker provides you another $ 99 and your trading profit and loss will be on $ 100. If the market goes in your favor then you make profit on $ 100 rather than on $ 1 however as mentioned earlier it is a double edge sword, if the market goes against you then your losses will be on $ 100 and it can wipe out your deposits also, if you don’t manage your risk properly.
The forex market is a highly volatile market. It links to economic, political, sentiments of countries, global environment and the outlook of the global economy. Any negative news or sentiment can drag the market in downward spiral within minutes. The forex market is highly volatile to economic news like change in interest rate of countries, central governments monitory and fiscal policy decisions, political unrest, consumer and business outlook towards government or economy, data related to increase or decrease in the balance of payment (difference between export and import), Central bank chief’s speech etc.
As we know forex market is a highly volatile market, now the question arises who moves the market up or down. Initially only Commercial Banks, Central Banks, Investments Banks or Hedge Funds were the main driver of the forex market but now due to online trading platforms forex trading is spreading across the globe. Retail investors with their hard earned money are also becoming part of it.

Following are the major forex market movers-

Speculators: Speculators like George Soros can make or break the market. Speculators are a company, a person or a firm who predicts and speculates on the market to make profit from it. Forex is a zero sum game, if one wins then another loses. Speculator makes profit by predicting market on others fate.

Hedger: Hedger is normally a company or a bank that is exposed to currency fluctuation risk and wants to mitigate the risk by hedging. For Example: A US company is exposed to export revenue in EURO. Suppose EURO depreciates against the dollar at the time of receiving the payment, the US company will receive less US $ as compared to earlier. In order to mitigate the risk the company buys US $ in future date at current prices to insulate themselves from currency fluctuation risk.
Currency pairs are traded in the forex market. There are 8 major currencies and several minor currencies. Following are the major currencies-

EUR- EURO
USD – US Dollar
GBP- Great Britain Pound
AUD- Australian Dollar
NZD- New Zealand Dollar
JPY – Japanese Yen
CAD- Canadian Dollar
CHF- Swiss Franc


Few minor currencies are


CNH- Chinese yuan
SGD- Singaporean Dollar
INR- Indian Rupees
KRW- South Korean Won
Currencies are always traded in pairs, when you buy one currency it means you are selling another currency at the same time. Example-USD/JPY – If you buy 1 standard lot of USD (100,000) means at the same time you are selling 1 standard lot of the JPY. The position will be squaring off when you close the transaction. Closing transaction means you are buying 1 lot of JPY and selling 1 lot of USD.
One of the biggest challenges for new entrants is to understand currency quotes. Initially you will find it a bit difficult but over the period of time you will become a master in understanding quotes.
USD/CAD- 1.0250
In the example USD is the base currency and CAD is a quote currency. The base currency is always treated as 1 unit, 1 USD is equal to 1.0250 CAD. In other words with 1 US $ you can buy 1.0250 Canadian $. There are two types of quotes Direct and Indirect.
The direct quote is a quote in which base currency is a domestic currency, in USD/CAD case USD is the base currency 1 USD = 1.0250 CAD
In an indirect quote foreign currency becomes base currency like CAD/USD- 0.9756. If we reverse the above example then CAD ( foreign currency) becomes base currency and USD becomes quote currency and value of 1 CAD = 0.9756 USD.
Normally in forex market USD has always been a base currency except in the cross – currency quotes and a few other exceptions like GBP, AUD, EURO and NZD.
Cross currency quote is a quote in which USD doesn’t involve. These types of currencies are not traded in a large amount but slowly the trading volumes of these currencies are also increasing. Following are the few cross-currency quotes.
GBP/JPY, EUR/JPY, EUR/CHF, AUD/CHF
Currency Spread: There is always a difference in buying price (ask) and selling price (bid) of a currency pair and this difference is called spread. Majority of forex brokers make their profit with the spread between the ask price and bid price. Ask price is always higher than the selling price.
GBP/USD – 1.5180/1.5182
In the above example right hand side price is a ask price (buying price) and left hand side price is the bid price (selling price). When you buy 1 lot of GBP means you are buying GBP @ 1.5182 and selling USD @ 1.5180. A difference of 2 pips is the broker’s commission. Higher spread is good for brokers and lower spread is good for traders.
Once you know all the above basic information about forex then the time comes to know more about it, how to calculate profits, though you are not going to use it, your broker will do it for you automatically but being a professional trader you must know this. It is good to know how profit/ loss are calculated and how much risk you can tolerate when the market goes against you.
I am explaining it with an example –
GBP/USD – 1.5178/1.5180
You buy 1 standard lot of GBP means your exposure to the market is 100,000 * 1.5180 = 151800, suppose after few hours the price moved to GBP/USD – 1.5220/1.5222, now if you sell your position of 1 lot (100,000) @ 1.5220 (bid price), 100,000* 1.5220 = 152200
Your profit = 152200- 151800 = $ 400
If we reverse the scenario and say if the price goes down to GBP/USD – 1.5150/1.5152 then you would have suffered loss of- 151800-151500 = $ 300