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FX Markets Background

Dealing in FX is somewhat different to dealing in shares or indices. Firstly there is no physical location or major exchange where currency trading takes place. Trading takes place courtesy of a vast network of large banks and dealers who deal directly with one another with no need to deal via either an exchange or use brokers. In addition to this there is a second tier of market participants who offer FX trading to retail clients.  Such retail operations are often offshoots of large banks and trading institutions.

Secondly all FX contracts are traded in pairs such as $A/$US or $US/¥, this means is that when you go long one currency you are automatically going short its counterpart. For example if I thought that the $A was going to strengthen against the $US I would buy the $A/$US pair. So my instruction would be to buy x number of contracts of the $A/$US pair; or the Aussie as it is sometimes referred to.

Conversely if I thought the $A was going to weaken against the $US, my instruction would be to sell x contracts of $A/$US. It is impossible to trade currencies without reference to another currency. The first currency in the pair is referred to as the base currency and is the currency you are either buying or selling. The second is known as the counter or quote currency. So in this example the $A is the base currency and the $US is the counter or quote currency. So a quote for this pair of 0.7100 means that one $A is worth $US 0.71.

It is extremely important to make certain you understand the quoting conventions of FX trading before you place an order. A failure to understand how quotes are structured could lead you to either buy or sell the wrong currency. And in the financial world there is no sympathy for such mistakes.

Pairs Examples.

The following are a few examples of major pairs and the differing impact of buy and sell orders.

EUR/USD 

BUY if the $US in a bear market and the Euro is going to go up against the $US. SELL if you expect the $US to recover from its bear market to climb against the Euro.

USD/JPY

BUY if you expect the ¥ to weaken. SELL if you expect the ¥ to rise.

GBP/USD

BUY if you expect the GBP to strengthen. SELL if expecting the Pound to weaken against the $US.

EUR/CHF

BUY if you expect the Swiss franc to slip in value. SELL if your expectations are for a drop in the value of the Euro.

Below are some examples of common pairs.

Symbol Currency Pair Trading Terminology
GBPUSD British Pound / US Dollar “Cable”
EURUSD Euro / US Dollar “Euro”
USDJPY US Dollar / Japanese Yen “Dollar Yen”
USDCHF US Dollar / Swiss Franc “Dollar Swiss”, or “Swissy”
USDCAD US Dollar / Canadian Dollar “Dollar Canada”
AUDUSD Australian Dollar / US Dollar “Aussie Dollar”
EURGBP Euro / British Pound “Euro Sterling”
EURJPY Euro / Japanese Yen “Euro Yen”
EURCHF Euro / Swiss Franc “Euro Swiss”
GBPCHF British Pound / Swiss Franc “Sterling Swiss”
GBPJPY British Pound / Japanese Yen “Sterling Yen”
CHFJPY Swiss Franc / Japanese Yen “Swiss Yen”
NZDUSD New Zealand Dollar / US Dollar “Kiwi”
USDZAR US Dollar / South African Rand “Dollar Zar” or “South African Rand

 

Majors, Minors and Exotics

Currency trading is traditional delineated into what are referred to as major, minor and exotic currencies. Majors include the $US, Japanese ¥, Euro, British Pound, Swiss Franc, Canadian Dollar and the Australian Dollar.

Minor currencies include the Singapore Dollar and the South African Rand whereas exotics are currencies such as the Mexican Peso, the Brazilian Real and the Thai Baht.

Most of the worlds transactions are concentrated into $US/Euro, $US/¥ and GBP/$US with the balance being split across other major currencies. It may seem that if three major pairings absorb the majority of the world’s trade that liquidity might be a problem for traders. Fortunately the last problem traders will have in the FX market is one of liquidity. The average daily turnover of the FX market is variously estimated at approximately $US1,000 billion to $US1,500 billion. The market capitalisation of the entire Australian sharemarket is only $A800 billion, so in a single night the FX market could absorb the entire ASX, lock stock and barrel.

General Advice Warning

The Trading Game Pty Ltd – as trustee for the Trading Game Unit Trust (ACN: 099 576 253) is an Authorised Representative of Weather Pro Pty Ltd, Rep No. 418664, AFSL 419155. This information is correct at the time of publishing and may be not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.