The biggest market in the world is the Forex trading market and it is one that never closes. It is active throughout the day as the close of one market can be the start of the next in a different time zone. This keeps the market active as trading and settlements happen through the year. Daily, there is over 1.5 trillion dollars worth of transactions, globally and as there is no central, physical location for the Forex market, it is not possible to pin point a center or a building like the stock market.
Can You Earn Huge Profits with Currency Pairs Making Small Movements?
Trading is done by agents in the major Forex trading posts around the world and these agents can be private trading houses or even banks. Trades happen on five days of the week between 2200 GMT Monday, starting Sydney and closes 2200 GMT Friday, ending New York.
How does currency work
Currency, or money, is the official legal tender of a country that is backed with and guaranteed by its government. As long as the gold standard was in place, value was simple to calculate as they were based on a physical substance. Since the gold standard got abolished, the only way to calculate how much a certain currency was worth was to hold it in relation to another currency. The US dollar is the most powerful currency in the world and is the base for the rest of the world. This is where 'currency pairs' come to play. All currencies are paired with other currencies and their value is determined by simple ratio, division. For example, as of Jan 1 2014, Euro was valued at 0.7265, meaning 1 Euro was worth 1.3765 Dollars. This is represented as EUR/USD 1.3765, similarly every currency will be valued in comparison to the USD and the USD can be valued in reverse the same way.
Movement in pairs
Almost all trades that happen in the Forex market involve the USD. In fact, this number stands at over 85%. The most traded pairs in the Forex market are EUR/USD, USD/JPY, USD/GBP, USD/CAD, USD/CHF, USD/AUD. The first currency is the base currency and the second is the quote currency. The movement between these pairs is one of the basis of trade in the Forex market.
Every currency is denoted with four decimal points and the movement on an everyday basis is normally at the last two points, this movement is called a Pip. A Pip is 1/100th of a percentage point and is also called 1 base point. The value of a Pip is what gives profit or loss. It can be calculated by dividing one Pip, (0.0001) with the exchange rate and multiply this value with the notional amount specified in the trade. This will cause the pairs like EUR/USD where the base currency is not the dollar to vary as the currency changes. For the pairs that use the USD as the base, a Pip will always be $10.
These slight movements in pairs can become larger numbers as the value of currency traded gets bigger, so a small change has a ripple effect and can spell either profits or losses. For a trade to happen, there has to be a Bid and Ask price that concerns the current exchange rate. This means that a broker is willing to sell a currency at a price that will be slightly higher than the exchange rate this is the Ask, and the price that an investor is willing to sell the same currency is the Bid price. As a principle, the Bid is always less than the Ask and the difference between them is the spread. The trade will normally happen in the spread rate. Once the two parties can agree on a price, the settlement happens. This process is repeated when the investor wants to sell the currency.
Not all trades happen directly with money nor do the settlements happen every day. This is why there are securities that have been created to make this transaction simpler. There are Options, Futures, Forwards, Spots and Swaps used as instruments in the trade of currency. They each have their own ways of settling and carry their own risks and returns.