Tip:
Highlight text to annotate it
X
Welcome to this introduction to foreign exchange. The first thing to understand about the FX
market is that it is what we call an over-the-counter market or OTC. In other words, there is no
central exchange that all the trades pass through. Now, this means it can be very difficult
to work out exactly how much volume is passing through the market.
However, the Bank for International Settlements conducts a survey once every three years.
This is called the Triennial Central Bank Survey. And, the latest report released in
2010 estimates that the daily turnover in the foreign exchange market is around US $4
trillion, every single day. Now, this is many times larger than the volume
of all of the world’s equity exchanges combined. In fact, the Euro-Dollar alone has more money
flowing through on a daily basis than all of the world’s equity exchanges.
If we look at this image it shows the market share of various different currency pairs
and you can see by looking at this that the top three currency pairs alone – so this
is EUR/USD, USD/JPY and GBP/USD – those three currency pairs alone make up more than
half of all of that turnover in the FX market. Now because it is an over the counter market
and there is no central exchange through with all the trades have to pass the FX market
trades 24 hours a day, five and a half days a week. Trading kickoffs in New Zealand on
Monday morning and then continues around the clock until Friday afternoon in New York.
Access for retail traders is usually via an FX provider such as IBFX. The benefits of
using a company like IBFX includes the fact that you’ve got an online trading platform
which allows you to trade from just about anywhere, wherever it suits you.
Another benefit that you have as a retail FX trader is access to a significant amount
of leverage. This means that with only a small deposit in your account, you can actually
control a fairly large amount of money. Retail traders also enjoy tight spreads which
means that costs of trading FX are very, very low. And with modern trading platforms the
speed of execution is also very fast. Execution time with IBFX is about three milliseconds.
Currency prices move in what we call pips. If you have a look at the quote here for Euro
against US dollars on the right hand side, you can see that the price marked in red as
the sell price. It’s 1.37950 and the price marked in green as the buy price is 1.37974.
The difference between the 950 and 973 is 2.4. This is what we call 2.4 pips. So, you
can see that the last decimal place represents a fraction of a pip.
Whenever you look at currency prices you’ll generally see two prices quoted. This is the
bid and the ask. So, to continue with our example of EUR/USD,
if you want to buy Euros and sell US Dollars then you’ll be paying the asking price.
So, you’ll pay 1.37974. If on the other hand you want to sell Euros
and buy US dollars, you’ll be able to see your Euros at 1.37950.
Another thing to be aware of when you’re trading currencies is the size of the contract.
Now, with IBFX the standard size contract means that one full lot is the equivalent
of 100,000 units of the currency on the left hand side of the pair. This is what we call
the base currency. IBFX also offer a mini account where one lot is the equivalent of
10,000 units of the base currency. You don’t have to trade a whole lot at IBFX,
in fact, you can trade as little as 1% of a whole lot or 0.01. So, the smallest trade
you can actually take with IBFX is 0.01 of a mini lot and this has a face value of 100
units of the currency on the left. Well, we hope, you’ve enjoyed this very
quick introduction to trading foreign exchange with IBFX. If you have any questions whatsoever,
please don’t hesitate to contact our global trade support team. They are standing by 24
hours a day while the market is open, really to answer your questions.