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The Forex Market
Unlike other financial markets, the foreign exchange (Forex) market has no central location. There is no stock exchange and there are no set market hours. Rather, the Forex market is an electronic network of approximately 5,000 banks around the world that exchange money through electronic trading systems. It is a global market and, as such, operates 24 hours a day, from Sunday through Friday, corresponding with the opening and closing of financial centers around the world. Any time, day or night, there should be buyers and sellers somewhere in the world.
The 24 hour market means that exchange rates and market conditions can change at any time in response to developments that can take place at any time. Traders must be alert to the possibility that a sharp move in an exchange rate can occur during an off hour, elsewhere in the world.
Forex Trading
A large portion of all foreign exchange deals are done in the spot Forex market and that is where GFS Forex & Futures operates. A spot transaction represents a direct exchange of one currency for another at the current rate. It is important to know that when buying currencies in the spot market, you are not actually purchasing a big pile of cash or coins, rather you are purchasing a bank deposit denominated in the particular currency at a bank in the particular country.
The term "Foreign Exchange" refers to the simultaneous buying of one currency and selling of another, which is why currencies are always quoted and traded in pairs. An example would be Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY). In order to buy a particular amount of the first (or base) currency, you must sell a certain amount of the second (or terms) currency. That certain amount of the second currency you must sell is determined by the exchange rate. The forces of supply & demand in the market determine the exchange rate. Every currency pair has a different unique exchange rate.
In the foreign exchange market there are always two prices for every currency - one price at which sellers of that currency want to sell, and one price at which buyers of the currency want to buy. The buying price is called the bid and the selling price is called the ask. The difference between the bid and ask prices is called the spread. A market maker must quote both a bid and an ask price for any currency for which he is making a market.
All Forex transactions involve two currencies. You are simultaneously buying one currency and selling the other in the pair. The first currency in any given pair (e.g. EUR/USD) is called the base currency and the second is called the quote currency. A trader always buys or sells a fixed amount of the base currency, in standard lots of 100,000 units. For example, if a trader buys EUR/USD, he is buying 100,000 Euros and selling the necessary amount of US Dollars as prescribed by the current exchange rate. When speaking, the base currency is always stated first. For example, a quote for "Dollar-Yen" means that the Dollar is the base currency in the pair. Traders always think in terms of how much it costs to buy or sell the base currency, so bid and offer quotes are always for the base currency.
The Traded Currencies
The Dollar, Euro, Yen, and Pound are the most traded currencies. They combine for a huge bulk of the trading transactions in any given day. Corporations and banks have known this for years, and have often used Forex for hedging purposes. With the increase in global trade, multinational corporations have used the Forex market to manage their risk in changes in currency rates. The most common currency pairs are EUR/USD, USD/JPY, GBP/USD, and USD/CHF, which together totals 63 % (two-thirds) of all Forex spot trades.
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