What is FX?

Foreign exchange (FX) trading is the simultaneous buying of one currency and selling of another.

Examples of currency trading pairs are Euro/US Dollar (EUR/USD) and US Dollar/Japanese Yen (USD/JPY).

Most currency transactions involve the "majors" - US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

How the FX market operates

Unlike most financial markets, the FX market has no physical location and no central exchange. The FX market operates through an electronic network of banks, corporations and individual traders. FX trading begins every day in Sydney, and then moves to Tokyo, followed by London and then New York.

FX prices

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).

What makes FX attractive?

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.

"Bid", "Ask" and "Spread"

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

Bid: the price at which dealer is willing to buy and traders can sell currency

Ask: the price at which dealer will sell and traders can buy currency.

The difference between the Bid and Ask is called the "Spread", which is the trader's cost of the transaction.

Point or "pip"

Currencies are usually quoted to four decimal places, such as the Euro/US Dollar trading at 1.2400/1.2403, with the last decimal place referred to as a point or "pip". A pip for most currencies is 0.0001 of an exchange rate; the exception to this is all pairs that we offer with a JPY denominator have pips of 0.01.

Predicting FX market movements

In trying to predict FX market movements, traders generally fall into two camps. Technical analysis traders use charts, trend lines, support and resistance levels, mathematical models and other means to identify opportunities and drive trading decisions.

Other traders use fundamental analysis, identifying trading opportunities by analyzing economic information, such as interest rates, money supply and political/economical macroeconomic factors.

Additionally, some traders take short-term positions and trade frequently while others are long-term, buy and hold traders.