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. So there is no 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.
The following are a few examples of major pairs and the differing impact of buy and sell orders.
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.
BUY if you expect the ¥ to weaken. SELL if you expect the ¥ to rise.
BUY if you expect the GBP to strengthen. SELL if expecting the Pound to weaken against the $US.
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.