Forex Trading Basics

Currencies and Currency Pairs

Most Traded Currencies (Forex symbol)

1. U.S. dollar (USD)
2. Euro (EUR)
3. Japanese yen (JPY)
4. Pound sterling (GBP)
5. Swiss franc (CHF)
6. Australian dollar (AUD)
7. Canadian dollar (CAD)
8. Swedish krona (SEK)
9. Hong Kong dollar (HKD)
10. Norwegian krone (NOK)
11. New Zealand dollar (NZD0)
12. Mexican Peso (MEX)

Major Currency Pairs

The “majors” as they are called are the currency pairs that are most traded. “Majors” trades account for roughly 90 percent of the volume of Forex trading.

The Majors are:

AUD/USD “Aussie”
EUR/USD “Euro”
GBP/JPY “Geppy”
GBP/USD “Cable”
NZD/USD “Kiwi”
USD/CAD “Loonie”
USD/CHF “Swissy”
USD/JPY “Gopher”

Top Currency Traders (Share of the market before economic shakedown in fall ’08)

1. Deutsche Bank 21.70%

2. UBS AG 15.80%
3. Barclays Capital 9.12%
4. Citi 7.49%
5. Royal Bank of Scotland 7.30%
6. JPMorgan 4.19%
7. HSBC 4.10%
8. Goldman Sachs 3.47%
9. Morgan Stanley 2.86%

Financial Instruments

Spot (Single Payment Option Transaction)

A Spot transaction is a direct exchange between two currencies. Based on volume, Spots are the most widely used financial instrument in the Forex market. This is due to the fact that it is processed and delivered in just 2 days. Along with the timeframe of the transaction, two other benefits of Spot transactions are: there is no interest used in the transaction, and it is a cash transaction without the need for a contract.

Forward

A Forward is a transaction in which money does not change hands until a specific, previously agreed upon future date. This transaction locks in the price at which an investor can buy or sell a currency on a future date. In a forward contract, the contract holders are required to buy or sell the currency at a specified price, at a specified quantity and on a specified future date. These contracts are not transferable.

Future

Futures are forward transactions with a specified period of delivery and contract size. The average term of a Futures contract is 3 months. Futures are standardized, include an interest amount, and are traded on an exchange.

Currency Swap

A Currency Swap is the exchange of principal and interest in one currency for the same in another currency. It is the most widespread type of forward transaction. I contrast to futures contracts, currency swaps are not standardized and not traded on an exchange.

Exchange Traded Fund

An ETF is a security that tracks an index, like the S&P 500 and the stock market, but trades like a stock on an exchange. New to the Forex market in 2005, ETFs are open-ended investment companies that can be traded at any time of the day.